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NEOSTEM, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.(Edgar Glimpses Via Acquire Media NewsEdge) The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Cautionary Note Regarding Forward-Looking Statements" herein and under "Risk Factors" in our annual report on Form 10-K for the year ended December 31, 2013, and in our Current Report on Form 8-K filed on May 8, 2014. The following discussion should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this quarterly report and in our annual report on Form 10-K for the year ended December 31, 2013. Overview NeoStem, Inc. ("we," "NeoStem" or the "Company") is a leader in the emerging cellular therapy industry. We are pursuing the preservation and enhancement of human health globally through the development of cell based therapeutics that prevent, treat or cure disease. We have multiple cell therapy platforms that work to address the pathology of disease using a person's own cells 24 -------------------------------------------------------------------------------- Index to amplify the body's natural repair mechanisms including enhancing the destruction of cancer initiating cells, repairing and replacing damaged or aged tissue, cells and organs and restoring their normal function. We believe that cell therapy will play a large role in changing the natural history of diseases as more breakthrough therapies are developed, ultimately lessening the overall burden of disease on patients and their families as well as the economic burden that these diseases impose upon modern society. Our business includes the development of novel proprietary cell therapy products, as well as a revenue-generating contract development and manufacturing service business that we leverage for the development of our therapeutics while providing services to other companies in the cell therapy industry. The combination of our own therapeutic development business and a revenue-generating service provider business provides the Company with unique capabilities for cost effective in-house product development and immediate revenue and future cash flow to help underwrite our internal development programs. This business model enables the Company to be opportunistic in growing its pipeline as evidenced by the Company's acquisition in May 2014 of California Stem Cell, Inc. ("CSC"), a cell biotechnology company located in Irvine, California. Since our acquisition of the CSC business, we are developing cellular immunotherapies for cancer, an area we view to be one of the most promising sub-sectors in biotechnology. Our lead product candidate in our immunotherapy pipeline is NBS20, also referred to as DC/TC (dendritic cell/tumor cell), and is targeting malignant melanoma initiating cells. This immunotherapy designed to treat Stage IV or recurrent Stage III metastatic melanoma, which has been granted fast track and orphan designation by the Food and Drug Administration ("FDA"), also has a Phase 3 protocol that is the subject of a Special Protocol Assessment ("SPA"). The SPA indicates that the FDA is in agreement with the design, clinical endpoints, and planned clinical analyses of the Phase 3 trial that could serve as the basis for a Biologics License Application ("BLA") that would be filed with the FDA requesting marketing approval of this therapeutic candidate. This protocol calls for enrolling 250 evaluable patients and in the fourth quarter of 2014 we began activating clinical sites. Patient enrollment is expected to begin in the first quarter of 2015. We are evaluating other clinical indications into which we may advance this program, including liver, ovarian and lung cancers. We are also currently developing therapies to address ischemia utilizing CD34 cells. Ischemia occurs when the supply of oxygenated blood in the body is restricted. We seek to improve oxygen delivery to tissues through the development and formation of new blood vessels. NBS10, also referred to as AMR-001, is our most clinically advanced product candidate in our ischemic repair program and is being developed to treat damaged heart muscle following an acute myocardial infarction (heart attack) ("AMI"). In December 2013, the Company completed enrollment in its 160 patient PreSERVE AMI study. PreSERVE AMI is a randomized, double-blinded, placebo-controlled Phase 2 clinical trial testing NBS10, an autologous (donor and recipient are the same) adult stem cell product for the treatment of patients with left ventricular dysfunction following acute ST segment elevation myocardial infarction (STEMI). The Company anticipates releasing data from the PreSERVE AMI study on November 17, 2014 at the American Heart Association's Scientific Sessions and will release sooner if available. If approved by the FDA and/or other worldwide regulatory agencies following successful completion of further trials, NBS10 would address a significant medical need for which there is currently no effective treatment, potentially improving longevity and quality of life for those suffering a STEMI, and positioning the Company to capture a meaningful share of this worldwide market. We are evaluating other clinical indications into which we may advance this program. Another platform technology we are developing utilizes T Regulatory Cells ("Tregs") to treat diseases caused by imbalances in an individual's immune system. Collaborating with the University of California, San Francisco, we are utilizing the technology platform of our majority-owned subsidiary, Athelos Corporation ("Athelos"), to restore immune balance by enhancing Treg cell number and function. Tregs are a natural part of the human immune system and regulate the activity of T effector cells, the cells that are responsible for protecting the body from viruses and other foreign antigens. When Tregs function properly, only harmful foreign materials are attacked by T effector cells. In autoimmune disease it is thought that deficient Treg activity permits the T effector cells to attack the body's own tissues, while in allergic diseases, like asthma, it is thought that the immune system overreacts to harmless foreign substances. We plan to initiate in the first half of 2015, subject to review and approval of the protocol by the appropriate regulatory authorities, a Phase 2 study of NBS03D, a Treg based therapeutic, in the treatment of type 1 diabetes. We plan to initiate in the fourth quarter of 2015, subject to review and approval of the protocol by the appropriate regulatory authorities, a Phase 1 study in Canada of NBS03A, a Treg based therapeutic, in support of our steroid resistant asthma development program. Regenerative medicine holds the promise of improving clinical outcomes and reducing overall healthcare costs. We have two pre-clinical assets including our VSEL TM (Very Small Embryonic Like) Technology regenerative medicine platform and our dermatological program. We are working on a Department of Defense funded study of VSELsTM for the treatment of chronic wounds and exploring macular degeneration with the Schepens Eye Research Institute, an affiliate of Harvard Medical School. As part of our dermatological program, we are pursuing partnering arrangements to fund further development and distribution. 25 -------------------------------------------------------------------------------- Index Progenitor Cell Therapy, LLC ("PCT") is a revenue generating contract manufacturing and development organization in the cellular therapy industry. This wholly owned subsidiary, which we acquired in 2011, is recognized around the world as an industry leader of high quality manufacturing capabilities, support and innovative engineering solutions to developers of cell-based therapies, enabling improved efficiencies and profitability, while reducing the capital investment required for these development activities. Since its inception more than 15 years ago, PCT has provided pre-clinical and clinical current Good Manufacturing Practice ("cGMP") development and manufacturing services to more than 100 clients. PCT has experience in advancing regenerative medicine product candidates from product inception through rigorous quality standards all the way through to human testing, BLA filing and FDA product approval. PCT's core competencies in the cellular therapy industry include manufacturing of cell therapy-based products, manufacturing development through its engineering and innovation services, analytical development, cell and tissue processing, regulatory support, storage, distribution and delivery, and consulting services. PCT has three cGMP compliant facilities in Allendale, NJ, Mountain View, CA and Irvine, CA. PCT's state-of-the art cell therapy research, development, and manufacturing facilities serve the cell therapy community with integrated and regulatory compliant distribution capabilities. The Company is pursuing commercial expansion of our manufacturing operations both in the U.S. and internationally. Strategic acquisitions have been the cornerstone of NeoStem's growth and have been selected in order to provide value to stockholders by taking advantage of the infrastructure we have created which includes strong development, regulatory and manufacturing expertise. By adding NBS20, our DC/TC product candidate and a late stage novel proprietary cancer cell therapy into our pipeline, we look to further advance towards our goal of delivering transformative cell based therapies to the market to help patients suffering from life-threatening medical conditions. Coupled with our strong manufacturing capability, we believe the stage is set for us to realize meaningful clinical development and manufacturing efficiencies, further positioning NeoStem to lead the cell therapy industry. Results of Operations Three and Nine Months Ended September 30, 2014 Compared to Three and Nine Months Ended September 30, 2013 Net loss for the three months ended September 30, 2014 was approximately $17.2 million compared to $9.3 million for the three months ended September 30, 2013. Net loss for the nine months ended September 30, 2014 was approximately $43.8 million compared to $26.8 million for the nine months ended September 30, 2013. Revenues For the three months ended September 30, 2014, total revenues were approximately $4.1 million compared to $3.7 million for the three months ended September 30, 2013, representing an increase of $0.4 million, or 11%. Revenues were comprised of the following (in thousands): Three Months Ended September 30, 2014 2013 Clinical Services $ 2,082.8 $ 2,241.0 Clinical Services Reimbursables 976.2 649.9 Processing and Storage Services 1,058.8 816.0 $ 4,117.8 $ 3,706.9 • Clinical Services, representing process development and clinical manufacturing services provided by PCT to its various clients, were approximately $2.1 million for the three months ended September 30, 2014 compared to $2.2 million for the three months ended September 30, 2013, representing a decrease of approximately $0.16 million or 7%. The decrease was primarily due to $0.6 million of lower clinical manufacturing revenue (which is recognized as services are rendered). The decrease was partially offset by $0.4 million of higher process development revenue, such revenue being recognized on a "completed contract" basis. • Process Development Revenue - Process development revenues were approximately $0.7 million for the three months ended September 30, 2014 compared to $0.2 million for the three months ended September 30, 2013. In accordance with our revenue recognition policy, process development revenue is recognized upon contract completion (i.e., when the services under a particular contract are completed). In addition, the number of active process development contracts was approximately double for the three months ended September 30, 2014 26-------------------------------------------------------------------------------- Index compared with the three months ended September 30, 2013, and resulted in approximately $2.6 million of deferred process development revenue as of September 30, 2014. This revenue will be recognized in future periods upon completion of those contracts. Process development revenue will continue to fluctuate from period to period as a result of our process development revenue recognition policy. • Clinical Manufacturing Revenue - Clinical manufacturing revenues were approximately $1.4 million for the three months ended September 30, 2014 compared to $2.0 million for the three months ended September 30, 2013. The decrease is primarily due to a decrease in the number of patients our customers have enrolled and treated in clinical trials, which number varies depending on the stage of the clinical trial. • Clinical Services Reimbursables, representing reimbursement of expenses for certain consumables incurred on behalf of our clinical service revenue clients, were approximately $1.0 million for the three months ended September 30, 2014 compared to $0.6 million for the three months ended September 30, 2013, representing an increase of approximately $0.3 million or 50%. Generally, clinical services reimbursables correlate with clinical services revenues. However, differences in the cost of supplies to be reimbursed can vary greatly from contract to contract based on the cost of supplies needed for each client's manufacturing and development process, and may impact this correlation. In addition, our terms for billing reimbursable expenses do not include a significant mark up in the acquisition cost of such consumables, and as a result, changes in this revenue category have little impact on our gross profit and net loss. • Processing and Storage Services, primarily representing revenues from our oncology stem cell processing, cord blood, and adult stem cell processing and banking activities, were approximately $1.1 million for the three months ended September 30, 2014 compared to $0.8 million for the three months ended September 30, 2013, representing an increase of approximately $0.2 million or 30%. For the nine months ended September 30, 2014, total revenues were approximately $12.7 million compared to $10.6 million for the nine months ended September 30, 2013, representing an increase of $2.1 million, or 20%. Revenues were comprised of the following (in thousands): Nine Months Ended September 30, 2014 2013 Clinical Services $ 7,143.7 $ 6,720.8 Clinical Services Reimbursables 2,823.6 1,436.3 Processing and Storage Services 2,695.0 2,433.1 $ 12,662.3 $ 10,590.2 • Clinical Services were approximately $7.1 million for the nine months ended September 30, 2014 compared to $6.7 million for the nine months ended September 30, 2013, representing an increase of approximately $0.4 million or 6%. The increase was primarily due to $0.5 million of higher process development revenue, whereas clinical manufacturing revenue was unchanged. • Process Development Revenue - Process development revenues were approximately $2.5 million for the nine months ended September 30, 2014 compared to $2.0 million for the nine months ended 2013. In addition, the number of active process development contracts was approximately double for the nine months ended September 30, 2014 compared with the nine months ended September 30, 2013, and resulted in approximately $2.6 million of deferred process development revenue as of September 30, 2014. Process development revenue will continue to fluctuate from period to period as a result of our process development revenue recognition policy. • Clinical Manufacturing Revenue - Clinical manufacturing revenues were approximately $4.6 million for both the nine months ended September 30, 2014 and 2013. • Clinical Services Reimbursables were approximately $2.8 million for the nine months ended September 30, 2014 compared to $1.4 million for the nine months ended September 30, 2013, representing an increase of approximately $1.4 million or 97%. Generally, clinical services reimbursables correlate with clinical services revenues. However, differences in the cost of supplies to be reimbursed can vary greatly from contract to contract based on the cost of supplies needed for each 27-------------------------------------------------------------------------------- Index client's manufacturing and development process, and may impact this correlation. In addition, our terms for billing reimbursable expenses do not include a significant mark up in the acquisition cost of such consumables, and as a result, changes in this revenue category have little impact on our gross profit and net loss. • Processing and Storage Services were approximately $2.7 million for the nine months ended September 30, 2014 compared to $2.4 million for the nine months ended September 30, 2013, representing an increase of approximately $0.3 million or 11%. Operating Costs and Expenses of Revenues For the three months ended September 30, 2014, operating expenses totaled $20.4 million compared to $13.0 million for the three months ended September 30, 2013, representing an increase of $7.4 million or 57%. Operating expenses were comprised of the following: • Cost of revenues were approximately $4.0 million for the three months ended September 30, 2014 compared to $3.0 million for the three months ended September 30, 2013, representing an increase of $1.0 million or 35%. Overall, gross profit for the three months ended September 30, 2014 was $0.1 million or 3%, compared to gross profit for the three months ended September 30, 2013 of $0.7 million or 20%. Gross profit percentages generally will increase as Clinical Service revenue increases. However, gross profit percentages will also fluctuate from period to period due to the mix of service and reimbursable revenues and costs, as well as the timing of our revenue recognition under our revenue recognition policy. • Research and development expenses were approximately $8.5 million for the three months ended September 30, 2014 compared to $4.5 million for the three months ended September 30, 2013, representing an increase of approximately $4.0 million or 89%. Research and development expenses associated with the initiation of the Intus Phase 3 clinical trial for which we began activating clinical sites during the three months ended September 30, 2014 for our lead immunotherapy product candidate NBS20 targeting malignant melanoma initiating cells, were $2.9 million for the three months ended September 30, 2014. The targeted cancer immunotherapy program was acquired in the CSC merger on May 8, 2014. Research and development expenses related to NBS10 including expenses associated with our Preserve AMI Phase 2 clinical trial, decreased by approximately $1.1 million for the three months ended September 30, 2014 compared to the comparable prior year period. The Preserve AMI Phase 2 clinical trial completed patient enrollment in the fourth quarter of 2013. The Company also incurred approximately $1.1 million of additional expense related to evaluating other potential therapeutic indications in its ischemic repair program. Research and development expenses associated with our immune modulation program utilizing T regulatory cells ("Tregs") increased by approximately $1.0 million, and was primarily due to our efforts to develop Tregs for the treatment of type 1 diabetes and steroid resistant asthma. Within the immune modulation program, we continue to focus efforts on initiating a Phase 2 study of NBS03D in type 1 diabetes expected to be initiated in 2015, and a Phase 1 study of NBS03A in Canada in support of a steroid resistant asthma indication expected to be initiated in 2015, in each case subject to review and approval of the protocols by the appropriate regulatory authorities. Research and development associated with engineering and innovation initiatives at PCT to improve scale up, automation, and integration capabilities also increased during the current quarter compared to the prior year quarter. Equity-based compensation included in research and development expenses for the three months ended September 30, 2014 and September 30, 2013 were approximately $0.5 million and $0.3 million, respectively. • Selling, general and administrative expenses were approximately $7.9 million for the three months ended September 30, 2014 compared to $5.6 million for the three months ended September 30, 2013, representing an increase of approximately $2.3 million or 42%. Equity-based compensation included in selling, general and administrative expenses for the three months ended September 30, 2014 was approximately $2.7 million, compared to approximately $1.7 million for the three months ended September 30, 2013, representing an increase of $1.0 million. The increase in equity-based compensation was due to its broader use during the quarter, and in particular, equity awards issued as a bonus for the successful completion of the CSC Acquisition. Equity-based compensation expense will continue to fluctuate in future quarters as equity-linked instruments are used to compensate employees, consultants and other service providers. Non-equity-based general and administrative expenses for the three months ended September 30, 2014 were approximately $5.2 million, compared to approximately $3.8 million for the three months ended September 30, 2013, representing an increase of $1.4 million. The increase was related to higher corporate development activities, expenses associated with the additional CSC operating activities since the acquisition date on May 8, 2014, and increased corporate infrastructure to support our expanded clinical activities. 28-------------------------------------------------------------------------------- Index For the nine months ended September 30, 2014, operating expenses totaled $54.9 million compared to $36.9 million for the nine months ended September 30, 2013, representing an increase of $17.9 million or 49%. Operating expenses were comprised of the following: • Cost of revenues were approximately $11.5 million for the nine months ended September 30, 2014 compared to $9.6 million for the nine months ended September 30, 2013, representing an increase of $1.9 million or 20%. Overall, gross profit for the nine months ended September 30, 2014 was $1.1 million or 9%, compared to gross profit for the nine months ended September 30, 2013 of $1.0 million or 9%. Gross profit percentages generally will increase as Clinical Service revenue increases. However, gross profit percentages will also fluctuate from period to period due to the mix of service and reimbursable revenues and costs, as well as the timing of our revenue recognition under our revenue recognition policy. • Research and development expenses were approximately $19.0 million for the nine months ended September 30, 2014 compared to $11.6 million for the nine months ended September 30, 2013, representing an increase of approximately $7.4 million, or 64%. Research and development expenses associated with the initiation of the Intus Phase 3 clinical trial for which we began activating clinical sites during the three months ended September 30, 2014 for our lead immunotherapy product candidate NBS20 targeting malignant melanoma initiating cells, were $4.8 million for the nine months ended September 30, 2014. The targeted cancer immunotherapy program was acquired in the CSC merger on May 8, 2014. Research and development expenses related to NBS10 including expenses associated with our Preserve AMI Phase 2 clinical trial, decreased by approximately $3.3 million for the nine months ended September 30, 2014 compared to the prior year period. The Preserve AMI Phase 2 clinical trial completed patient enrollment in the fourth quarter of 2013. The Company also incurred approximately $1.8 million of additional expense related to evaluating other potential therapeutic indications in its ischemic repair program. Research and development expenses associated with our immune modulation program that utilizes T regs increased by approximately $3.4 million, and was primarily due to our efforts to develop Tregs for the treatment of type 1 diabetes and steroid resistant asthma. Within the immune modulation program, we continue to focus efforts on initiating a Phase 2 study of NBS03D in type 1 diabetes expected to be initiated in 2015, and a Phase 1 study of NBS03A in Canada in support of a steroid resistant asthma indication expected to be initiated in 2015, in each case subject to review and approval of the protocols by the appropriate regulatory authorities. Research and development associated with engineering and innovation initiatives at PCT to improve scale up, automation, and integration capabilities also increased during the current quarter compared to the prior year quarter. Equity-based compensation included in research and development expenses for the nine months ended September 30, 2014 and September 30, 2013 were approximately $1.4 million and $0.7 million, respectively. • Selling, general and administrative expenses were approximately $24.3 million for the nine months ended September 30, 2014 compared to $15.7 million for the nine months ended September 30, 2013, representing an increase of approximately $8.6 million, or 55%. Equity-based compensation included in selling, general and administrative expenses for the nine months ended September 30, 2014 was approximately $7.3 million, compared to approximately $4.5 million for the nine months ended September 30, 2013, representing an increase of $2.8 million. The increase in equity-based compensation was due to its broader use during the year, and in particular, equity awards issued as a bonus for the successful completion of the CSC Acquisition, as well as changes in option vesting provisions initiated in 2013, which impacted the timing of equity-based compensation expense recognition. Equity-based compensation expense will continue to fluctuate in future quarters as equity-linked instruments are used to compensate employees, consultants and other service providers. Non-equity-based general and administrative expenses for the nine months ended September 30, 2014 were approximately $17.0 million, compared to approximately $11.0 million for the nine months ended September 30, 2013, representing an increase of $6.0 million. The increase was related to higher strategic and corporate development activities, including efforts associated with the acquisition of CSC on May 8, 2014, expenses associated with the additional CSC operating activities since the acquisition date, and increased corporate infrastructure to support our expanded clinical activities. Historically, to minimize our use of cash, we have used a variety of equity and equity-linked instruments to compensate employees, consultants and other service providers. The use of these instruments has resulted in charges to the results of operations, which has been significant in the past. In general, these equity and equity-linked instruments are used to pay for employee and consultant compensation, director fees, marketing services, investor relations and other activities. For example, in August 2014, the Compensation Committee granted equity awards to certain employees for the successful completion of the CSC Acquisition in May 2014. These awards, comprised of 112,244 shares of the Company's common stock and options to purchase 300,000 shares of the Company's common stock, were fully vested upon grant. The equity awards, along with the withholding taxes associated with the common stock awards which were paid by the Company, resulted in compensation charges in the third quarter of 2014 of approximately $2.4 million. 29 -------------------------------------------------------------------------------- Index Other Income (Expense) Other expense, net, for the three and nine months ended September 30, 2014 was approximately $687,000 and $1,063,000, respectively, and primarily relates to the increases in the estimated fair value of our contingent consideration liabilities associated with potential earn out payments on the net sales of our product candidate NBS10 (in the event of and following the date of first commercial sale of NBS10), and potential future milestone payments related to the CSC acquisition. Other income, net, for the three and nine months ended September 30, 2013 was approximately $180,000 and $248,000, respectively, and primarily relates to the revaluation of derivative liabilities. For the three and nine months ended September 30, 2014 interest expense was $183,000 and $384,000, respectively, compared with $99,000 and $208,000, respectively, for the three and nine months ended September 30, 2013. A portion of the interest expense in each period relates to mortgage payables, which were fully repaid in September 2014. In future periods, interest expense will include payments related to the $15.0 million loan from Oxford Finance LLC in September 2014, which bears an annual interest rate of 8.50%, amortization of related debt issuance costs, and accretion of the 8% final payment fee due in September 2018. Provision for Income Taxes The provision for income taxes for the three and nine months ended September 30, 2014 relate to the taxable temporary differences on the goodwill recognized in the PCT acquisition in 2011, which is being amortized over 15 years for tax purposes. A tax provision will continue to be recognized each period over the amortization period, and will only reverse when the goodwill is eliminated through a sale, impairment, or reclassification from an indefinite-lived asset to a finite-lived asset. Noncontrolling Interests In March 2011, we acquired rights to use patents under licenses from Becton, Dickinson and Company ("BD") in exchange for a 19.9% interest in our Athelos subsidiary. Pursuant to the Stock Purchase Agreement signed in March 2011, BD's ownership will be diluted based on new investment in Athelos (subject to certain anti-dilution provisions). As of September 30, 2014, BD's ownership interest in Athelos was decreased to 10.0%, and our ownership increased to 90.0%. For the three and nine months ended September 30, 2014, BD's share of Athelos' net loss totaled approximately $0.2 million and $0.5 million, respectively. For the three and nine months ended September 30, 2013, BD's share of Athelos' net loss totaled approximately $0.2 million and $0.3 million, respectively. Analysis of Liquidity and Capital Resources At September 30, 2014 we had a cash and cash equivalents and marketable securities of approximately $32.8 million, working capital of approximately $29.6 million, and stockholders' equity of approximately $63.0 million. During the nine months ended September 30, 2014, we met our immediate cash requirements through revenue generated from our PCT operations, existing cash balances, the issuance of common stock under our purchase agreement with Aspire, and warrant and option exercises. Additionally, we used equity and equity-linked instruments to pay for services and compensation. Net cash provided by or used in operating, investing and financing activities from continuing operations were as follows (in thousands): Nine Months Ended September 30, 2014 2013 Net cash used in operating activities $ (35,991.2 ) $ (19,737.7 ) Net cash used in investing activities (3,547.4 ) (948.6 ) Net cash provided by financing activities 25,546.1 23,895.1 Operating Activities Our cash used in operating activities in the nine months ended September 30, 2014 totaled approximately $36.0 million, which is the sum of (i) our net loss of $43.8 million, and adjusted for non-cash expenses totaling $11.7 million (which includes 30 -------------------------------------------------------------------------------- Index adjustments for equity-based compensation, depreciation and amortization, and changes in acquisition-related contingent consideration liabilities), and (ii) changes in operating assets and liabilities providing approximately $3.9 million. Our cash used in operating activities in the nine months ended September 30, 2013 totaled approximately $19.7 million, which is the sum of (i) our net loss of $26.8 million, and adjusted for non-cash expenses totaling $6.9 million (which includes adjustments for equity-based compensation and depreciation and amortization), and (ii) changes in operating assets and liabilities providing approximately $0.1 million. Investing Activities During the nine months ended September 30, 2014, we spent approximately $2.9 million for property and equipment, and invested (net) approximately $0.7 million in marketable securities. During the nine months ended September 30, 2013, we spent approximately $0.9 million for property and equipment. Financing Activities During the nine months ended September 30, 2014, our financing activities consisted of the following: • We raised gross proceeds of approximately $15.0 million from loan proceeds from Oxford Finance LLC in September 2014. In connection with the loan, we repaid all outstanding amounts due under two loans from TD Bank, N.A. in the amount of approximately $3.1 million. In addition, debt offering/issuance costs of $0.5 million were paid in connection with the loan. • We raised gross proceeds of approximately $11.2 million through the issuance of approximately 1.7 million shares of Common Stock under the provisions of our Common Stock Purchase Agreement with Aspire. • We raised approximately $0.3 million from the exercise of 48,987 options. • We raised approximately $1.7 million from the exercise of 333,250 warrants. • We received proceeds of $1.8 million from the issuance of notes payable relating to certain insurance policies and equipment financings, less repayments of $0.7 million. During the nine months ended September 30, 2013, our financing activities consisted of the following: • We raised $11.5 million (or $10.5 million in net proceeds after deducting underwriting discounts and commissions and offering expenses) through an underwritten offering of 2.3 million shares of our common stock at a public offering price of $5.00 per share. • We raised gross proceeds of approximately $11.1 million through the issuance of 1.6 million shares of Common Stock under the provisions of our Common Stock Purchase Agreement with Aspire. • We raised approximately $0.1 million from the exercise of 16,369 warrants. • We raised approximately $2.1 million from the exercise of 401,215 warrants. To induce the exercise of certain of these warrants, we provided consideration to the warrant holders in the form of cash. • We received proceeds of $0.7 million from the issuance of notes payable relating to certain insurance policies and equipment financings, less repayments of $0.3 million. Liquidity and Capital Requirements Outlook We anticipate requiring additional capital in order to fund the development of cell therapy product candidates, particularly in our Targeted Cancer Immunotherapy Program, Ischemic Repair Program and Immune Modulation Program, as well as engage in strategic transactions. The most significant funding needs are anticipated to be in connection with the conduct of our Intus Phase 3 clinical trial which is expected to cost approximately $25 million, for which we have just begun activating clinical sites, and other costs related to the targeted cancer immunotherapy operations acquired from CSC in May 2014. In the fourth quarter of 2014 we began activating clinical trial sites for the Intus Phase 3 clinical trial. The acquisition of CSC and the results of our PreSERVE Phase 2 clinical trial could result in our re-prioritizing the development of certain of our other earlier stage clinical 31 -------------------------------------------------------------------------------- Index trials. We also anticipate requiring additional capital to grow the PCT business, including implementing additional automation capabilities and pursuing plans to establish commercial capacity, harmonize across locations and strengthen quality systems and expand internationally. Additionally, we recently completed expansion in the Allendale, New Jersey facility adding laboratory, clean room suites and support facilities, and completed expansion in the Mountain View, California facility adding manufacturing capacity with additional clean rooms, laboratory space and support facilities. To meet our short and long term liquidity needs, we currently expect to use existing cash balances, our revenue generating activities, and a variety of other means. Those other means include the continued use of a common stock purchase agreement with Aspire (the "Aspire Agreement"). We entered into a $30 million common stock purchase agreement with Aspire in March 2014, of which we had $24.4 million remaining available at September 30, 2014. In addition, in September 2014, we entered into a loan and security agreement with Oxford Finance LLC and to date received $15.0 million of a potential $20.0 million in gross proceeds. In connection with the $15.0 million loan, we repaid all outstanding amounts due under two loans from TD Bank, N.A. in the amount of approximately $3.1 million, and paid debt offering/issuance costs and interim period interest, resulting in net proceeds from the loan of $11.7 million. The additional $5.0 million loan may be obtained if we enter into a strategic arrangement with respect to NBS10 and receive an upfront payment of not less than $10.0 million in connection therewith, before September 19, 2015. Other sources of liquidity could include additional potential issuances of debt or equity securities in public or private financings, additional warrant exercises, option exercises, and/or sale of assets. In addition, we will continue to seek as appropriate grants for scientific and clinical studies from the National Institutes of Health, Department of Defense, and other governmental agencies and foundations, but there can be no assurance that we will be successful in qualifying for or obtaining such grants. Our history of operating losses and liquidity challenges, may make it difficult for us to raise capital on acceptable terms or at all. The demand for the equity and debt of small cap biopharmaceutical companies like ours is dependent upon many factors, including the general state of the financial markets. During times of extreme market volatility, capital may not be available on favorable terms, if at all. Our inability to obtain such additional capital could materially and adversely affect our business operations. We believe that our current cash balances and revenue generating activities, along with access to the Aspire Agreement, will be sufficient to fund the business through approximately the next 12 months. While we continue to seek capital through a number of means, there can be no assurance that additional financing will be available on acceptable terms, if at all, and our negotiating position in capital generating efforts may worsen as existing resources are used. Additional equity financing may be dilutive to our stockholders; debt financing, if available, may involve significant cash payment obligations and covenants that restrict our ability to operate as a business; our stock price may not reach levels necessary to induce option or warrant exercises; and asset sales may not be possible on terms we consider acceptable. If we are unable to raise the funds necessary to meet our long-term liquidity needs, we may have to delay or discontinue the acquisition and development of cell therapies, and/or the expansion of our business or raise funds on terms that we currently consider unfavorable. |