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Large accelerated filer ¨	Accelerated filer x	Non-accelerated filer ¨	Smaller reporting company ¨
		(Do not check if a smaller reporting company)

			Page
	PART I
ITEM 1.	BUSINESS		2
ITEM 1A.	RISK FACTORS		15
ITEM 1B.	UNRESOLVED STAFF COMMENTS		34
ITEM 2.	PROPERTIES		34
ITEM 3.	LEGAL PROCEEDINGS		34
ITEM 4.	MINE SAFETY DISCLOSURE		34
	PART II
ITEM 5.	MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES		34
ITEM 6.	SELECTED FINANCIAL DATA		35
ITEM 7.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		35
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISLOSURE ABOUT MARKET RISK		43
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA		43
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE		43
ITEM 9A.	CONTROLS AND PROCEDURES		43
ITEM 9B.	OTHER INFORMATION		44
	PART III
ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE		45
ITEM 11.	EXECUTIVE COMPENSATION		45
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS		45
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE		45
ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES		45
	PART IV
ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES		45
	SIGNATURE PAGE		49

 

·

whether our clinical human trials relating to the use of autologous cell therapy applications, in particular, for restrictive burn scars, vocal cord scars and genetically-modified orphan indications, and such other indications as we may identify and pursue can be conducted within the timeframe that we expect, whether such trials will yield positive results, or whether additional applications for the commercialization of autologous cell therapy can be identified by us and advanced into human clinical trials;

·

our ability to meet requisite regulations or receive regulatory approvals in the United States, our ability to retain any regulatory approvals that we may obtain and the absence of adverse regulatory developments in the United States;

·

our dependence on one facility in Exton, Pennsylvania for our research, development and manufacturing operations, and the potential that such facility is damaged or if we are otherwise required to discontinue production at such facility;

·

new entrance of competitive products or further penetration of existing products in our markets;

·

the effect on us from adverse publicity related to our products or the company itself;

·

any adverse claims relating to our intellectual property; and

·

our dependence on physicians to correctly follow our established protocols for the safe and optimal administration of our product.

	1

	2

	3

·

Intrexon’s UltraVector® technology is designed to facilitate the assembly and delivery of the necessary target gene constructs for delivery to autologous fibroblasts.  Access to this platform allows Fibrocell a rapid method to screen and construct the best genetic therapeutic solutions for rare and serious skin diseases.

·

In certain therapeutic applications with the Protein Expression Product Engine, Fibrocell will also deploy Intrexon’s proprietary RheoSwitch Therapeutic System® technology, which is a biologic switch activated by a small molecule ligand that provides the ability to control level and timing of protein expression in those diseases where such control is critical.

Clinical and Pre-Clinical Development Programs 

	4

Program		Indication		Status
azficel-T sBLA		Restrictive Burn Scarring		Phase II Clinical Trial
azficel-T sBLA		Vocal Cord Scarring		Phase II Clinical Trial
Rare Disease		Recessive Dystrophic Epidermolysis Bullosa ("RDEB")		Pre-Clinical
Rare Disease		Morphea Profunda /  Linear Scleroderma		Pre-Clinical
Rare Disease		Cutaneous Eosinophilias		Pre-Clinical
Rare Disease		Ehlers-Danlos Hypermobility Type (Tenascin-X Deficiency)		Pre-Clinical

	5

	6

On May 3, 2012, the Company entered into an exclusive license agreement with The Regents of the University of California, under which the Company acquired the rights to commercially apply discoveries resulting from the scientific collaboration between the University of California, Los Angeles (“UCLA”) and Fibrocell Science, Inc.  Under the terms of the license agreement, the Company agreed to pay UCLA a non-refundable initial license fee of $10,000 thirty days post execution of the agreement and the Company also agreed to pay UCLA an annual license maintenance fee of a percentage of product royalties, and milestone payments based on our achievement of certain clinical and regulatory related milestones for these rights.  The Company’s ability to meet the milestones is dependent on a number of factors including final approvals by regulatory agencies and the continued enforceability of patent claims.  

	7

	8

·

completion of pre-clinical laboratory tests or trials and formulation studies;

·

submission to the FDA of an Investigational New Drug (“IND”) application for a new drug or biologic, which must become effective before human clinical trials may begin;

·

performance of adequate and well-controlled human clinical trials to establish the safety and efficacy of the proposed drug or biologic for its intended use;

·

detailed information on product characterization and manufacturing process; and

·

submission and approval of a New Drug Application (“NDA”) for a drug, or a Biologics License Application (“BLA”) for a biologic.

	9

·

Phase I: The product is usually first introduced into healthy humans or, on occasion, into patients, and is tested for safety, dosage tolerance, absorption, distribution, excretion and metabolism;

·

Phase II: The product is introduced into a limited subject population to:

·

assess its efficacy in specific, targeted indications;

·

assess dosage tolerance and optimal dosage; and

·

identify possible adverse effects and safety risks.

·

Phase III: These are commonly referred to as pivotal studies.  If a product is found to have an acceptable safety profile and to be potentially effective in Phase II clinical trials, new clinical trials will be initiated to further demonstrate clinical efficacy, optimal dosage and safety within an expanded and diverse subject population at geographically dispersed clinical study sites; and

·

If the FDA does ultimately approve the product, it may require post-marketing testing, including potentially expensive Phase IV studies, to confirm or further evaluate its safety and effectiveness.

	10

	11

	12

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	14

	15

•

delays in obtaining regulatory approvals to commence a study;

•

delays in identifying and reaching agreement on acceptable terms with prospective clinical trial sites;

•

delays or failures in obtaining approval of our clinical trial protocol from an institutional review board, or IRB, to conduct a clinical trial at a prospective study site;

•

delays in the enrollment of subjects;

•

manufacturing difficulties;

•

failure of our clinical trials and clinical investigators to be in compliance with the FDA’s Good Clinical Practices, or GCP;

•

failure of our third-party contract research organizations, clinical site organizations or other clinical trial managers, to satisfy their contractual duties, comply with regulations or meet expected deadlines;

•

lack of efficacy during clinical trials; or

•

unforeseen safety issues.

	16

•

labeling and advertising requirements, restrictions or limitations, including the inclusion of warnings, precautions, contraindications or use limitations that could have a material impact on the future profitability of our product candidates;

•

testing and surveillance to further evaluate or monitor our future products and their continued compliance with regulatory standards and requirements;

•

submitting products for inspection; or

•

imposing a risk evaluation and mitigation strategy, or REMS, to ensure that the benefits of the drug outweigh the risks.

	17

Pursuant to our exclusive channel collaboration with Intrexon, we are responsible for future research and development expenses of product candidates developed under such collaboration, the effect of which we expect will increase the level of our overall research and development expenses going forward. Although all manufacturing, preclinical studies and human clinical trials are expensive and difficult to design and implement, costs associated with the manufacturing, research and development of biologic product candidates are generally greater in comparison to small molecule product candidates. We have added personnel and expect to add additional personnel, either directly or through consulting arrangements, to support our exclusive channel collaboration with Intrexon. 

 

Because our collaboration with Intrexon is relatively new, we have only recently assumed development responsibility and costs associated with such program. In addition, because development activities are determined pursuant to a joint steering committee comprised of Intrexon and ourselves and we have limited experience, future development costs associated with this program may be difficult to anticipate and exceed our expectations. Our actual cash requirements may vary materially from our current expectations for a number of other factors that may include, but are not limited to, unanticipated technical challenges, changes in the focus and direction of our development activities or adjustments necessitated by changes in the competitive landscape in which we operate. If we are unable to continue to financially support such collaboration due to our own working capital constraints, we may be forced to discontinue the collaboration or delay our activities.

We may not be able to retain the exclusive rights licensed to us by Intrexon.

Under the Channel Agreement, we are using Intrexon’s technology in connection with various of our product candidates.  The Channel Agreement grants us a worldwide license to use patents and other intellectual property of Intrexon in connection with the research, development, use, importing, manufacture, sale, and offer for sale of products within a pre-defined “field” that we set forth above in the “Item 1. Business – Intrexon Collaboration”.    

The Channel Agreement may be terminated by Intrexon if we fail to exercise diligent efforts in developing products through the collaboration or if we elect not to pursue the development of a therapy in the “field” identified by Intrexon that is a “Superior Therapy” as defined in the Channel Agreement.  Upon such termination, the products covered by the Channel Agreement in active and ongoing Phase II or III clinical trials or later stage development through the Channel Agreement shall be entitled to be continued by us with a continuation of the related royalties for such products, and all rights to products covered by the Channel Agreement still in an earlier stage of development shall revert to Intrexon.

 

There can be no assurance that we will be able to successfully perform under the Channel Agreement and if the Channel Agreement is terminated it may prevent us from achieving our business objectives.

 

	18

⋅     availability or contamination of raw materials and components used in the manufacturing process, particularly those for which we have no other source or supplier;

⋅     the performance of our information technology systems;

⋅     compliance with regulatory requirements;

⋅     inclement weather and natural disasters;

⋅     potential facility contamination by microorganisms or viruses;

⋅     updating of manufacturing specifications; and

⋅     product quality success rates and yields.

	19

·

FDA clinical trials and regulatory approvals;

·

our collaborations with Intrexon;

·

our investigation of the automation of manufacturing and our future expansion of manufacturing capabilities;

	20

·

the commercialization of LAVIV®;

·

research and development;

·

personnel costs; and

·

development of relationships with strategic business partners, including physicians who might use our future products.

·

the timing, implementation and cost of our clinical studies;

·

expenses in connection with our exclusive channel collaboration arrangement with Intrexon;

·

the level of demand and profitability of LAVIV®;

·

the timely and successful implementation of improved manufacturing processes;

·

our ability to attract and retain personnel with the necessary strategic, technical and creative skills required for effective operations;

·

the amount and timing of expenditures by practitioners and their patients;

·

introduction of new technologies;

·

product liability litigation, class action and derivative action litigation, or other litigation;

	21

 

·

the amount and timing of capital expenditures and other costs relating to the expansion of our operations;

·

the state of the debt and/or equity markets at the time of any proposed offering we choose to initiate;

·

our ability to successfully integrate new acquisitions into our operations;

·

government regulation and legal developments regarding LAVIV® and our product candidates in the United States and in the foreign countries in which we may operate in the future; and

·

general economic conditions.

·

administrative or judicial enforcement actions;

·

changes to advertising;

·

failure to obtain marketing approvals for our product candidates;

·

revocation or suspension of regulatory approvals of products;

·

product seizures or recalls;

·

court-ordered injunctions;

·

import detentions;

·

delay, interruption or suspension of product manufacturing, distribution, marketing and sales; or

·

civil or criminal sanctions.

	22

 

·

incurring substantial expenses, including fines, penalties, legal fees and costs to comply with the FDA’s requirements;

·

changes in the methods of marketing and selling products;

·

taking FDA mandated corrective action, which may include placing advertisements or sending letters to physicians rescinding previous advertisements or promotions; or

·

disruption in the distribution of products and loss of sales until compliance with the FDA’s position is obtained.

•

whether our clinical human trials relating to the use of autologous cell therapy applications, in particular, for burn scars and vocal cord scars, and such other indications as we may identify and pursue can be conducted within the timeframe that we expect, whether such trials will yield positive results, or whether additional applications for the commercialization of autologous cell therapy can be identified by us and advanced into human clinical trials;

•

whether our collaboration with Intrexon can be advanced with positive results within the timeframe and budget that we expect;

•

changes in laws or regulations applicable to our products or product candidates, including but not limited to clinical trial requirements for approvals;

•

unanticipated serious safety concerns related to the use of our products or product candidates;

•

a decision to initiate a clinical trial, not to initiate a clinical trial or to terminate an existing clinical trial;

•

our ability to increase our manufacturing capacity and reduce our manufacturing costs through the improvement of our manufacturing process, our ability to validate any such improvements with the relevant regulatory agencies and our ability to accomplish the foregoing on a timely basis, if at all;

•

adverse regulatory decisions;

•

the introduction of new products or technologies offered by us or our competitors;

•

the inability to effectively manage our growth;

•

actual or anticipated variations in quarterly operating results;

•

the failure to meet or exceed the estimates and projections of the investment community;

•

the perception of the pharmaceutical industry by the public, legislatures, regulators and the investment community;

•

the overall performance of the U.S. equity markets and general political and economic conditions;

•

announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors;

•

disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies;

•

additions or departures of key personnel;

•

the trading volume of our common stock; and

•

other events or factors, many of which are beyond our control.

·

diversion of management’s time and attention;

·

expenditure of large amounts of cash on legal fees, expenses and payment of damages;

·

decreased demand for our products or any of our future products and services; or

·

injury to our reputation.

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	·	Others may be able to make compounds that are the same as or similar to LAVIV or our product candidates, but that are not covered by the claims of the patents that we own or have exclusively licensed;
	·	We or our licensors or any strategic partners might not have been the first to make the inventions covered by the issued patents or pending patent applications that we own or have exclusively licensed;
	·	We or our licensors might not have been the first to file patent applications covering certain of our inventions;
	·	Others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectual property rights;
	·	It is possible that our pending patent applications will not lead to issued patents;
	·	Issued patents that we own or have exclusively licensed may not provide us with any competitive advantages, or may be held invalid or unenforceable as a result of legal challenges;

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	·	Our competitors might conduct research and development activities in the U.S. and other countries that provide a safe harbor from patent infringement claims for certain research and development activities, as well as in countries where we do not have patent rights and then use the information learned from such activities to develop competitive products for sale in our major commercial markets;
	·	We may not develop additional proprietary technologies that are patentable; and
	·	The patents of others may have an adverse effect on our business.

     

During 2012, we had outstanding shares of our Series D and Series E preferred stock.  All of these shares were converted into common stock on October 9, 2012.  Prior to such conversion, these preferred shares were entitled to certain dividends.  There were no cash payments for Series D and Series E preferred stock dividends for 2013 and approximately $0.5 million in cash payments for 2012.

 

Recent Sales of Unregistered Securities

 

All information regarding our issuance of unregistered securities during 2013 have been previously disclosed in current reports we have filed on Form 8-K or in quarterly reports we have filed on Form 10-Q.

 

On January 10, 2014, we and Intrexon entered into a second amendment (“Second Amendment”) to the parties’ Exclusive Channel Collaboration Agreement dated October 5, 2012. In connection with the execution of the Second Amendment, on January 10, 2014, we entered into a Supplemental Stock Issuance Agreement with Intrexon pursuant to which we issued Intrexon 1,024,590 shares of our common stock.  The closing of the transaction occurred on January 24, 2014. The shares were issued in a transaction exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), in reliance on Section 4(2) thereof.  Intrexon represented that it was an “accredited investor” as defined in Regulation D of the Securities Act.  For additional information see Note 17 in the accompanying Notes to the Consolidated Financial Statements included in this Form 10-K. 

 

Purchases of Equity Securities

 

We did not repurchase any of our equity securities during the year ended December 31, 2013.

 

Item 6.  Selected Financial Data

 

Not applicable. 

 

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion of our consolidated financial condition and results of operations should be read in conjunction with the consolidated financial statements and the related notes thereto included elsewhere in this Form 10-K.  The matters discussed herein contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, which involve risks and uncertainties. All statements other than statements of historical information provided herein may be deemed to be forward-looking statements.  Without limiting the foregoing, the words “believes”, “anticipates”, “plans”, “expects” and similar expressions are intended to identify forward-looking statements.  Factors that could cause actual results to differ materially from those reflected in the forward-looking statements include, but are not limited to, those discussed in “Item 1A. Risk Factors” and elsewhere in this report and the risks discussed in our other filings with the SEC.  Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis, judgment, belief or expectation only as of the date hereof.  We undertake no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof.

 

 

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General

 

We are an autologous cell therapy company primarily focused on developing first-in-class treatments for skin diseases and conditions with high unmet medical needs.  Based on our proprietary autologous fibroblast technology, we are pursuing breakthrough medical applications of azficel-T for restrictive burn scarring and vocal cord scarring.  Driving Fibrocell’s innovative therapies is its Personalized Biologics platform, which embraces two product engines: the Azficel-T Autologous Fibroblast Product Engine and the Protein Expression Product Engine.  These two product engines enable Fibrocell to harness the favorable characteristics of fibroblasts to develop new therapies for diseases and conditions of the skin and connective tissues where there are limited or no treatment options.  The Azficel-T Autologous Fibroblast Product Engine is developing biologic solutions for the treatment of serious and debilitating scarring conditions.  The Protein Expression Product Engine is creating biologic products by genetically modifying fibroblasts to express target proteins that are inactive or missing from patients with rare genetic skin and tissue disorders.  

  

Our collaboration with Intrexon, a leader in synthetic biology, includes using genetically-modified fibroblasts for treating orphan skin diseases for which there are no currently approved products and exploring the localized treatment of the most common autoimmune skin disease, moderate-to-severe psoriasis.  This collaboration with Intrexon is discussed in more detail below.  Additional collaborations with the University of California, Los Angeles (“UCLA”) and the Massachusetts Institute of Technology (“MIT”) focus on skin-derived stem cells.

 

Critical Accounting Policies

 

The following discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”).  However, certain accounting policies and estimates are particularly important to the understanding of our financial position and results of operations and require the application of significant judgment by our management or can be materially affected by changes from period to period in economic factors or conditions that are outside of the control of management.  As a result they are subject to an inherent degree of uncertainty.  In applying these policies, our management uses their judgment to determine the appropriate assumptions to be used in the determination of certain estimates.  Those estimates are based on our historical operations, our future business plans and projected financial results, the terms of existing contracts, our observance of trends in the industry, information provided by our customers and information available from other outside sources, as appropriate.  The following discusses our critical accounting policies and estimates.

 

Intangible Assets:  Intangible assets are research and development assets related to our primary study that was recognized upon emergence from bankruptcy.  Amortization commenced in the first quarter of 2012 with the recognition of revenue from the sale of LAVIV®.

 

Intangibles are tested for recoverability whenever events or changes in circumstances indicate the carrying amount may not be recoverable.  The impairment test consists of a comparison of the fair value of the intangible asset to its carrying amount. If the carrying amount exceeds the fair value, an impairment loss is recognized equal in amount to that excess.

 

Warrant Liability:  Warrants are measured at fair value and liability-classified under the Financial Accounting Standards Board Accounting Standard Codification (“ASC”) 815, Derivatives and Hedging (“ASC 815”) because certain of our warrants contain “down-round protection” and therefore, do not meet the scope exception for treatment as a derivative under ASC 815.  Since “down-round protection” is not an input into the calculation of the fair value of the warrants, the warrants cannot be considered indexed to our common stock which is a requirement for the scope exception as outlined under ASC 815.  We utilized the Monte Carlo simulation valuation method to value the liability-classified warrants until September 30, 2012 when we concluded that the Black-Scholes option pricing model was an appropriate valuation method due to the assumption that no future financing would be expected at a price lower than the current exercise price and the majority of the warrants were converted to equity-classified warrants on October 9, 2012.  The fair value is affected by changes in inputs to that model including our stock price, expected stock price volatility, the contractual term, and the risk-free interest rate.  We will continue to classify the fair value of the warrants as a liability until the warrants are exercised, expire or are amended in a way that would no longer require these warrants to be classified as a liability.

 

 

	36

 

Revenue Recognition:  We recognize revenue over the period LAVIV® is shipped for injection in accordance with ASC 605, Revenue Recognition (“ASC 605”).  In general, ASC 605 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services rendered, (3) the fee is fixed and determinable and (4) collectability is reasonably assured.

  

Cost of Sales:  Cost of sales includes the costs related to the processing of cells for LAVIV®, including direct and indirect costs.  These direct costs include the majority of costs incurred in our manufacturing, facility, quality control, and quality assurance operations along with an allocation of overhead costs.  The principal reason for the relatively small level of revenue as compared to the cost of sales is that we changed corporate strategy in 2013 to de-emphasize sales of azficel-T into the aesthetic markets, and strategically transition to focus on high-value therapeutic applications for treatment of unmet medical conditions of the skin and connective tissue.

 

Research and Development Expenses:  Research and development costs are expensed as incurred and include salaries and benefits, costs paid to third-party contractors to perform research, conduct clinical trials, develop and manufacture drug materials and delivery devices, and a portion of facilities cost. Clinical trial costs are a significant component of research and development expenses and include costs associated with third-party contractors. Invoicing from third-party contractors for services performed can lag several months. We accrue the costs of services rendered in connection with third-party contractor activities based on our estimate of management fees, site management and monitoring costs and data management costs. Actual clinical trial costs may differ from estimated clinical trial costs and are adjusted for in the period in which they become known.

 

Stock Based Compensation: We account for stock-based awards to employees using the fair value based method to determine compensation for all arrangements where shares of stock or equity instruments are issued for compensation.  In addition, we account for stock-based compensation to nonemployees in accordance with the accounting guidance for equity instruments that are issued to other than employees.  We use a Black-Scholes option-pricing model to determine the fair value of each option grant as of the date of grant for expense incurred.  The Black-Scholes model requires inputs for risk-free interest rate, dividend yield, volatility and expected lives of the options.  Expected volatility is based on historical volatility of our common stock and our peer companies.  The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.  The expected lives for options granted represents the period of time that options granted are expected to be outstanding and is derived from the contractual terms of the options granted.  We estimate future forfeitures of options based upon expected forfeiture rates.

 

Income Taxes:  An asset and liability approach is used for financial accounting and reporting for income taxes.  Deferred income taxes arise from temporary differences between income tax and financial reporting and principally relate to recognition of revenue and expenses in different periods for financial and tax accounting purposes and are measured using currently enacted tax rates and laws.  In addition, a deferred tax asset can be generated by net operating loss (“NOL”) carryover.  If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized. 

 

Basis of Presentation

 

The following discussion should be read in conjunction with the Consolidated Financial Statements and the accompanying Notes to the Consolidated Financial Statements included in this Form 10-K.

 

 

	37

 

Results of Operations

 

Comparison of Years Ending December 31, 2013 and 2012

 

Revenue and Cost of Sales.  Revenue and cost of sales were comprised of the following:

 

		Year ended December 31,						Increase (Decrease)
($ in thousands)		2013			2012			$			%
Total revenue		$	200		$	153		$	47		31	%
Cost of sales			8,052			8,355			(303)		(4)	%
Gross loss		$	(7,852)		$	(8,202)		$	350		(4)	%

 

Revenue was approximately $0.2 million for each of the years ended December 31, 2013 and 2012.  Revenue is booked based on the shipment of cells to the patients for injection of LAVIV®.

 

Cost of sales was approximately $8.1 million and $8.4 million for the years ended December 31, 2013 and 2012, respectively. Cost of sales includes the costs related to the processing of cells for LAVIV®, including direct and indirect costs.  The cost of sales for the year ended December 31, 2013 was comprised of approximately $3.4 million of compensation and related expense, $3.0 million of laboratory supplies and other related expenses and $1.6 million of rent, utilities, depreciation and amortization.  The cost of sales for the year ended December 31, 2012 was comprised of approximately $3.8 million of compensation and related expense, $3.0 million of laboratory supplies and other related expenses and $1.5 million of rent, utilities, depreciation and amortization.  Cost of sales decreased mainly due to a reduction in compensation and related expense of $0.3 million coinciding with the reduction of manufacturing personnel employed. 

 

The principal reasons for the relatively small level of revenue as compared to the cost of sales are: (1) We changed corporate strategy in 2013 to de-emphasize sales of azficel-T into the aesthetic markets, and strategically transition to focus on high-value therapeutic applications for treatment of unmet medical conditions of the skin and connective tissue; (2) Manufacturing capacity – our current manufacturing capacity is limited by the FDA to no more than twenty biopsies a week; (3) Charging for biopsies and injections – we offered complimentary and reduced price biopsies and injections throughout 2012 and 2013; and (4) Manufacturing complexity and quality control and assurance criteria.  We currently have adequate manufacturing capacity to meet clinical demand and the limited commercial demand we expect for 2014.  We believe that cost of sales will remain at or above product revenue for the foreseeable future and, thus, we anticipate that we will continue to report gross losses from sales of LAVIV® for the aesthetic indication for the foreseeable future.

 

Selling, General and Administrative Expense.  Selling, general and administrative expense was comprised of the following:

 

		Year Ended December 31,						Increase (Decrease)
		2013			2012			$			%
($ in thousands)
Compensation and related expense		$	3,841		$	4,336		$	(495)		(11)	%
External services – consulting			935			914			21		2	%
Marketing expense			295			2,203			(1,908)		(87)	%
License fees			698			664			34		5	%
Facilities and related expense and other			4,304			4,050			254		6	%
Total selling, general and administrative expense		$	10,073		$	12,167		$	(2,094)		(17)	%

 

Selling, general and administrative expense decreased by approximately $2.1 million, or 17%, to $10.1 million for the year ended December 31, 2013 as compared to $12.2 million for the year ended December 31, 2012.  Compensation and related expense decreased $0.5 million due to reduced salary and related expense of $0.7 million offset by an increase in severance costs of $0.2 million which were incurred with the reduction of sales and marketing personnel employed.  Marketing expense decreased $1.9 million as there was increased spending for the initial launch of LAVIV® during the year ended December 31, 2012.   Facilities and related expense and other increased $0.3 million due to an increase of $0.5 million in office costs offset by a decrease in travel costs of $0.2 million.  External services – consulting and license fees remained relatively constant year over year.

 

 

	38

 

Research and Development Expense.

 

For each of our research and development programs, we incur both direct and indirect expenses. Direct expenses include third party costs related to these programs such as contract research, consulting, pre-clinical and clinical development costs.  Indirect expenses include regulatory, lab costs, personnel, facility, stock compensation and other overhead costs that are not attributable to any one program.  We expect research and development costs to continue to be significant for the foreseeable future as a result of our clinical trials and our collaboration with Intrexon. 

 

Research and development expense was comprised of the following:

 

		Year Ended						Increase
		December 31,						(Decrease)
($ in thousands)		2013			2012			$			%
Direct costs:
Restrictive Burn Scarring		$	344		$	163		$	181		111	%
Vocal Cord Scarring			322			158			164		104	%
Recessive Dystrophic Epidermolysis Bullosa			1,773			6,979			(5,206)		(75)	%
Morphea Profunda/ Linear Scleroderma			3,570			-			3,570		-
Cutaneous Eosinophilias			3,570			-			3,570		-
azficel-T			1,555			293			1,262		431	%
Other			631			554			77		14	%
Total direct costs			11,765			8,147			3,618		44	%
Indirect costs:
Regulatory costs			290			357			(67)		(19)	%
Indirect lab costs			241			170			71		42	%
Compensation and related expense			270			323			(53)		(16)	%
Other indirect costs			12			24			(12)		(50)	%
Total indirect costs			813			874			(61)		(7)	%
Total research and development expense		$	12,578		$	9,021		$	3,557		39	%

 

Total research and development expense increased $3.6 million to $12.6 million for the year ended December 31, 2013 as compared to $9.0 million for the year ended December 31, 2012.  The increase is due primarily to a $3.7 million increase in consulting fees related to research and development costs incurred in the year ended December 31, 2013 in connection with our collaboration with Intrexon offset by a $0.2 million decrease in other spending. 

 

Direct research and development expense by major clinical and pre-clinical development program were as follows: 

 

Restrictive Burn Scarring (“RBS”) – Costs to date on this program are approximately $0.5 million.  These funds have been utilized to author and review clinical trial protocols, hire a Contract Research Organization (“CRO”), recruit investigator sites and initiate recruitment.  Going forward, RBS research and development investments will support execution of the Phase II clinical trial, clinical product manufacturing, statistical analyses, report generation and future clinical development.

 

Vocal Cord Scarring (“VCS”) – Costs to date on this program are approximately $0.5 million.  These funds have been utilized to author and review clinical trial protocols, hire a CRO, recruit investigator sites and initiate recruitment.  Going forward, VCS research and development investments will support execution of the Phase II clinical trial, clinical product manufacturing, statistical analyses, report generation and future clinical development.

 

Recessive Dystrophic Epidermolysis Bullosa (“RDEB”) – Costs to date on this program are approximately $8.8 million and include the $6.9 million cost of the 2012 stock issuance in connection with the Channel Agreement with Intrexon.  In addition, there were approximately $1.9 million in costs associated with product and assay development.  Going forward, RDEB research and development investments will support additional product and assay development, pre-clinical trial execution, key opinion leader development, pre-IND and DNA Recombinant Advisory Committee (“RAC”) meeting preparation and design and execution of the Phase I clinical trial protocol.

 

 

	39

 

Morphea Profunda / Linear Scleroderma (“MP / LS”) and Cutaneous Eosinophilias (“CE”) - Costs to date on these programs, which are being co-developed, include the $6.4 million cost of the 2013 supplemental stock issuance in connection with the First Amendment to the Channel Agreement with Intrexon and approximately $0.8 million in early stage pre-clinical development.  Going forward, MP / LS and CE research and development investments will support product and assay development, pre-clinical trial execution, key opinion leader development, pre-IND and DNA RAC meeting preparation and design and execution of the Phase I clinical trial protocol.

 

Azficel-T - Costs to date on this program of approximately $1.8 million represent the costs of process improvements for the production of azficel-T.  These process improvements include rapid mycoplasma assay, media optimization, raw material selection assays, cryo-preservative analysis and alternate disassociation enzymes.

 

Interest Expense.  We incurred no interest expense in 2013 as compared to $1.1 million for the year ended December 31, 2012. Our interest expense for the year ended December 31, 2012 was related to our 12.5% notes.  The 12.5% notes were either paid or converted into common stock with the close of the financing we completed in October 2012.

 

Loss on Extinguishment of Debt.  On June 1, 2012, we entered into an exchange agreement with existing note holders pursuant to which we agreed to repay half of each holder’s 12.5% promissory notes due June 1, 2012  and exchange the balance of each holder’s original note, for (i) a new 12.5% note with a principal amount equal to such balance, and (ii) a five-year warrant to purchase a number of shares of common stock equal to the number of shares of common stock underlying such note on the date of issuance.  As a result of the exchange agreement on June 1, 2012, we recorded a loss on extinguishment of the 12.5% notes of $4.4 million in the consolidated statement of operations due to a significant restructuring of the original debt in June 2012.  The details of the loss included recording the fair value of the embedded conversion option of $1.2 million and the fair value of liability-classified warrants of $3.2 million.  

 

Change in Revaluation of Warrant Liability.  During the years ended December 31, 2013 and 2012, respectively, we recorded non-cash expense of $0.1 million and non-cash income of $8.7 million for warrant revaluation in our statements of operations due to a change in the fair value of the warrant liability as a result of a change in the contractual life of the warrants.  As a result of the October 2012 offering, a significant portion of outstanding warrants that were previously liability-classified warrants were reclassified to equity-classified warrants due to the removal of the “down-round protection,” and therefore a smaller number of warrants are subject to revaluation. 

 

Change in Revaluation of Derivative Liability. During the year ended December 31, 2012, we recorded non-cash expense of less than $0.1 million, for derivative revaluation expense in our statements of operations due to the change in the fair value of the derivative liability related to the Series D and E preferred stock financings.  In October 2012, this preferred stock was converted to common stock and the related derivative liability was reclassified to stockholders deficit as it no longer required liability classification and accordingly, we did not incur a non-cash expense in 2013 related to the revaluation of the derivative liability.

 

Deferred Tax Benefit. During the year ended December 31, 2012, we recorded a deferred tax benefit of $2.5 million due to the favorable impact to the computation of the valuation allowance recorded against our net deferred tax asset as a result of the reclassification of the intangible assets recognized upon emergence from bankruptcy as a finite-lived intangible asset. The reclassification freed-up the related deferred tax liability by allowing it to offset our net deferred tax asset before applying the valuation allowance.  There was no deferred tax benefit recorded for the year ended December 31, 2013.

 

Loss from Discontinued Operations.   The net loss from discontinued operations for the year ended December 31, 2012 relates to Agera which was sold in the 3^rd quarter of 2012.

 

Gain on Sale of Discontinued Operations. On August 31, 2012 we sold all of the shares of common stock of Agera we held for approximately $1.0 million.  As a result of the sale we recorded a gain of approximately $0.4 million, net of tax.

 

 

	40

 

Net Loss.  Net loss increased $7.4 million to $30.6 million for the year ended December 31, 2013, as compared to $23.2 million for the year ended December 31, 2012.  The increase is primarily due to the change in the warrant revaluation of approximately $8.8 million, as more fully described above, offset by the $0.3 million decrease in cost of sales and the $1.0 million decrease in interest expense.

  

Liquidity and Capital Resources

 

We have experienced losses since our inception. As of December 31, 2013, we have an accumulated deficit of $102.7 million. The process of developing and commercializing our product candidates requires significant research and development work and clinical trial work, as well as significant manufacturing and process development efforts. These activities, together with our selling, general and administrative expenses, are expected to continue to result in significant operating losses for the foreseeable future.

 

The following table summarizes our cash flows from operating, investing and financing activities:

 

		Year Ended December 31,
($ in thousands)		2013			2012
Statement of Cash Flows Data:
Total cash provided by (used in):
Operating activities		$	(20,075)		$	(22,575)
Investing activities			(360)			509
Financing activities			49,122			42,613

 

Operating Activities.  Cash used in operating activities during the year ended December 31, 2013 amounted to $20.1 million, a decrease of $2.5 million over the year ended December 31, 2012.  The decrease in our cash used in operating activities over the prior year is primarily due to a$2.0 million increase in operating cash inflows from changes in operating assets and liabilities, mostly related to accounts payable.

 

Investing Activities.  Cash used in investing activities during the year ended December 31, 2013 amounted to $0.4 million due to the purchase of property and equipment.  Cash provided by investing activities during the year ended December 31, 2012 amounted to $0.5 million due to the proceeds from the sale of Agera in the third quarter of 2012 offset by the purchase of property and equipment.

 

Financing Activities.  There were $49.1 million cash proceeds provided by financing activities during the year ended December 31, 2013, as compared to $42.6 million provided by financing activities during the year ended December 31, 2012.  During the year ended December 31, 2013, we had net proceeds of $47.1 million from the issuance of common stock related to our October 2013 financing, and received $2.0 million from a common stock subscription receivable.  During the year ended December 31, 2012, we raised cash of $52.1 million from the issuance of common stock, preferred stock and warrants, offset primarily by principal debt payments of $4.8 million and dividend payments of $0.5 million.  Of the $52.1 million received in 2012, we received $43.0 million in gross proceeds from the October 2012 offering.  The remaining $9.1 million was received during May, June and July of 2012 when we sold to accredited investors in a private placement Series E Convertible Preferred Stock.

 

Working Capital

 

As of December 31, 2013, we had cash and cash equivalents of $60.0 million and working capital of $58.3 million. We expect to have sufficient cash to operate for at least the next twelve months.  In addition, we expect we will require additional financing prior to our business achieving significant net cash from operations. We would likely raise such additional capital through the issuance of our equity or equity-linked securities, which may result in dilution to our investors, or by entering into strategic partnerships. Our ability to raise additional capital is dependent on, among other things, the state of the financial markets at the time of any proposed offering. To secure funding through strategic partnerships, it may be necessary to partner one or more of our technologies at an earlier stage of development, which could cause us to share a greater portion of the potential future economic value of those programs with our partners. There is no assurance that additional funding, through any of the aforementioned means, will be available on acceptable terms, or at all. If adequate capital cannot be obtained on a timely basis and on satisfactory terms, our operations could be materially negatively impacted.

 

 

	41

 

Factors Affecting Our Capital Resources

 

Inflation did not have a significant impact on our results during the year ended December 31, 2013 or 2012.

 

Off-Balance Sheet Transactions

 

We do not engage in material off-balance sheet transactions.

 

Contractual Obligations

 

The following table summarizes our contractual obligations as of December 31, 2013:

 

($ in thousands)		Payments due by period
		Total			2014			2015 and 2016			2017 and 2018			2019 and thereafter
License fee obligations(1)		$	895		$	525		$	290		$	40		$	40
Operating lease obligations(2)		$	12,251		$	1,081		$	2,465		$	2,509		$	6,196
Total		$	13,146		$	1,606		$	2,755		$	2,549		$	6,236

 

(1)

Obligations for license agreement with the University of California, Los Angeles (UCLA) and sponsored research agreement with the Massachusetts Institute of Technology (MIT).  The amounts in the table assume the foregoing agreements are continued through their respective terms.  The agreements may be terminated at the option of either party.  In such event, our obligation would be limited to costs through the date of such termination.

 

(2)

Operating lease obligations are stated based on the amended lease agreement for the office, warehouse and laboratory facilities executed in February 2012.

 

Historically we have entered into agreements with academic medical institutions and contract research  organizations to perform research and development activities and with clinical sites for the treatment of patients under clinical protocols.  Such contracts expire at various dates and have differing renewal and expiration clauses.

 

Collaboration with Related Party

 

Intrexon is an affiliate of our largest shareholder, NRM VII Holdings I, LLC.  In addition, two of our seven directors are also affiliates of NRM VII Holdings I, LLC.  On October 5, 2012, we entered into an Exclusive Channel Collaboration Agreement (“Channel Agreement”) with Intrexon that governs a “channel collaboration” arrangement.  The Channel Agreement grants us an exclusive license to use proprietary technologies and other intellectual property of Intrexon to develop and commercialize certain products in the United States.  As consideration for our Channel Agreement and related amendments, we issued shares of our common stock to Intrexon.  For additional details, see Note 13 in the accompanying financial statements included as part of this Annual Report on Form 10-K.

 

Recently Issued Accounting Pronouncements

 

There have been no recently issued accounting pronouncements that we believe will have a material impact on our consolidated results of operations, cash flows or financial position upon adoption.

 

 

	42

 

Item 7A. Quantitative and Qualitative Disclosure about Market Risk

 

The primary objective of our investment activities is to preserve our capital until it is required to fund operations.  As of December 31, 2013, we had cash and cash equivalents $60.0 million.  Our exposure to market risk is confined to cash and cash equivalents, which consist of instruments having original maturities of three months or less.  Our cash flow and earnings are subject to fluctuations due to changes in interest rates in our investment portfolio.

 

Item 8. Financial Statements and Supplementary Data

 

The financial statements, including the notes thereto and report of the independent registered public accounting firm thereon are included in this report as set forth in the "Index to Financial Statements." See F-1 for Index to Consolidated Financial Statements.

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

 

Not applicable.

 

Item 9A. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our management, including our principal executive officer and principal financial officer, evaluated the disclosure controls and procedures related to the recording, processing, summarization and reporting of information in the periodic reports that we file with the SEC. These disclosure controls and procedures have been designed to ensure that (a) material information relating to us, including our consolidated subsidiaries, is made known to management, including these officers, by our other employees, and (b) this information is recorded, processed, summarized, evaluated and reported, as applicable, within the time periods specified in the SEC’s rules and forms. As of December 31, 2013, the officers (the principal executive officer and principal financial officer) concluded that our disclosure controls and procedures were effective.

 

Management’s Report on Internal Control over Financial Reporting

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in the Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

 

	43

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Based on our evaluation under the framework in the Internal Control — Integrated Framework (1992), the chief executive officer and chief financial officer concluded that our internal control over financial reporting was effective as of December 31, 2013. The effectiveness of our internal control over financial reporting as of December 31, 2013 has been audited by BDO USA, LLP, an independent registered public accounting firm, as stated in their report included in this Annual Report on Form 10-K in the accompanying Consolidated Financial Statements.

 

Changes in Internal Controls

 

Remediation of Prior Year Material Weakness

 

In Item 9A of the Company’s Annual Report on Form 10K for the fiscal year ended December 31, 2012, management reported a material weakness in its internal control over financial reporting.

 

Specifically, when the Company emerged from bankruptcy in September 2009, an intangible asset was recorded in respect of our primary clinical study on LAVIV®, and the related deferred tax liability was also recorded.  In the first quarter of 2012, the Company commercially launched LAVIV®, and commenced generating revenue.  As a result, the intangible asset was considered a finite-lived intangible asset and the Company commenced amortizing it over 12 years, and also initiated the amortization of the related deferred tax liability over the same period.  In connection with the finalization of our audit for the year ended December 31, 2012, it came to management’s attention that the accounting treatment adopted for the deferred tax liability related to the intangible asset in the first quarter of 2012 and for the subsequent second and third quarters of 2012 was incorrect.  Rather than the deferred tax liability being a permanent timing difference for the calculation of deferred tax, we concluded that it would have been more appropriately treated as a temporary timing difference.  The impact of this adjustment is that the full deferred tax liability of $2.5 million should have been released to the Consolidated Statement of Operations in the first quarter of 2012.

 

As a result of this adjustment, it was determined that a control deficiency that constituted a material weakness in the design and operation of our internal control over financial reporting in connection with deferred tax liability relating to the intangible asset was present.

 

Management’s remediation plan to address the material weakness described above was initiated in 2013 and included the following steps taken to strengthen the Company’s internal control over financial reporting:

 

In the past, management has utilized external accounting and taxation advisors to assist us.  However, notwithstanding that the specific issue that caused the material weakness no longer exists as a result of the adjustment noted above, due to the fact that an adjustment was still required, management reconsidered the appropriate selection of our external advisors that we utilize for these advisory services.  Management selected and engaged a new taxation advisor in 2013.   

 

Other Changes in Internal Control Over Financial Reporting

 

Other than the internal control improvement discussed above, there have been no changes in our internal control over financial reporting during the fourth quarter ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B. Other Information

 

None.

 

 

	44

 

Part III

 

Item 10. Directors, Executive Officers and Corporate Governance

 

                The information required under this Item 10 is incorporated herein by reference to our definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of our fiscal year ended December 31, 2013. 

 

                Code of Ethics.  We have adopted a written code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller and any persons performing similar functions. The code of ethics is on our website at www.fibrocellscience.com. We intend to disclose any future amendments to, or waivers from, the code of ethics within four business days of the waiver or amendment through a website posting or by filing a Current Report on Form 8-K with the SEC.

 

Item 11. Executive Compensation

 

                The information required under this Item 11 is incorporated herein by reference to our definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of our fiscal year ended December 31, 2013. 

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

                The information required under this Item 12 is incorporated herein by reference to our definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of our fiscal year ended December 31, 2013. 

 

Item 13. Certain Relationships and Related Transactions, and Director Independence

 

                The information required under this Item 13 is incorporated herein by reference to our definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of our fiscal year ended December 31, 2013. 

 

Item 14. Principal Accountant Fees and Services

 

                The information required under this Item 14 is incorporated herein by reference to our definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of our fiscal year ended December 31, 2013. 

 

Part IV

 

Item 15. Exhibits and Financial Statement Schedule

 

(a)(1)  Financial Statements.

 

·      Report of Independent Registered Public Accounting Firm

 

·      Consolidated Balance Sheets as of December 31, 2013 and 2012

 

·      Consolidated Statements of Operations for the years ended December 31, 2013 and 2012

   

·      Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 2013 and 2012

 

·      Consolidated Statements of Cash Flows for the years ended December 31, 2013 and 2012

 

 

	45

 

·      Notes to Consolidated Financial Statements

 

                (a)(2)  Financial Statement Schedule.

 

                All schedules are omitted because of the absence of conditions under which they are required or because the required information is presented in the Financial Statements or Notes thereto.

 

                (a)(3)  The exhibits listed under Item 15(b) are filed or incorporated by reference herein.

 

                (b)  Exhibits.        

 

                The following exhibits are filed as part of this annual report:

 

EXHIBIT NO.		IDENTIFICATION OF EXHIBIT
2.1		Debtors’ First Amended Joint Plan of Reorganization dated July 30, 2009 and Disclosure Statement (incorporated by reference to as Exhibit 10.2 to the Company’s Form 10-Q for quarter ended June 30, 2009, filed on August 12, 2009 and as Exhibit 99.1 to our Form 8-K filed September 2, 2009)
3.1		Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to our Form 8-K filed December 13, 2012)
3.2		Certificate of Amendment of the Restated Certificate of Incorporation filed April 26, 2013 (incorporated by reference to Exhibit 3.1 of the Form 8-K filed on April 29, 2013)
3.3		Certificate of Amendment to the Company’s Restated Certificate of Incorporation, as amended, filed July 19, 2013 (incorporated by reference to Exhibit 3.1 of the Form 8-K filed on July 22, 2013)
3.4		Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to our Form 8-K filed September 2, 2009)
4.1		Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to our Form 10-Q filed November 23, 2009)
4.2		Form of Class A/B Common Stock Purchase Warrant issued in October 2009 offering (incorporated by reference to Exhibit 4.1 to our Form 8-K filed October 14, 2009)
4.3		Form of Placement Agent Warrant issued in November 2009 offering (incorporated by reference to Exhibit 4.2 to our Form 10-Q filed November 23, 2009)
4.4		Form of Common Stock Purchase Warrant issued in March 2010 offering (incorporated by reference to Exhibit 4.1 to our Form 8-K filed March 3, 2010)
4.5		Form of Common Stock Purchase Warrant issued in July 2010 Series B Preferred Stock offering (incorporated by reference to Exhibit 4.1 to our Form 8-K filed July 20, 2010)
4.6		Form of Placement Agent Warrant issued in July 2010 Series B Preferred Stock offering (incorporated by reference to Exhibit 4.2 to our Form 8-K filed July 20, 2010)
4.7		Form of Common Stock Purchase Warrant used for Series B Preferred Stock offering (incorporated by reference to Exhibit 4.1 of the Form 8-K filed October 22, 2010).
4.8		Form of Common Stock Purchase Warrant used for the Series D Preferred Stock offering (incorporated by reference to Exhibit 4.1 of the Form 8-K filed February 15, 2011).
4.9		Form of Common Stock Purchase Warrant issued in August 2011 offering (incorporated by reference to Exhibit 4.1 to our Form 8-K filed August 4, 2011)
4.10		Form of Amended and Restated Common Stock Purchase Warrant issued to our prior 12.5% Note holders (incorporated by reference to Exhibit 10.5 of the Form 8-K filed October 9, 2012).
10.1		Securities Purchase Agreement dated October 13, 2009 between the Company and the Series A Preferred Stock Purchasers (incorporated by reference to Exhibit 10.1 to our Form 8-K filed October 14, 2009)

 

 

	46

 

**10.2		2009 Equity Incentive Plan, as amended (incorporated by reference to Exhibit 10.1 to our Form 10-Q filed November 14, 2012)
10.3		Lease Agreement between Isolagen, Inc and The Hankin Group dated April 7, 2005 (incorporated by reference to Exhibit 10.1 to our Form 8-K filed on April 12, 2005)
10.4		Purchase Option Agreement between Isolagen, Inc and 405 Eagleview Associates dated April 7, 2005 (incorporated by reference to Exhibit 10.2 to our Form 8-K filed on April 12, 2005)
10.5		Intellectual Property Purchase Agreement between Isolagen Technologies, Inc., Gregory M. Keller, and PacGen Partners (incorporated by reference to Exhibit 10.13 to the company’s amended Form S-1, as filed on October 24, 2003)
10.6		Securities Purchase Agreement dated March 2, 2010 (incorporated by reference to Exhibit 10.1 to our Form 8-K filed March 3, 2010)
10.7		Registration Rights Agreement dated March 2, 2010 (incorporated by reference to Exhibit 10.2 to our Form 8-K filed March 3, 2010)
10.8		Registration Rights Agreement between the Company and the Series A Preferred Stock Purchasers, dated October 13, 2009 (incorporated by reference to Exhibit 10.2 to our Form 8-K filed October 14, 2009)
10.9		Securities Purchase Agreement between the Company and Series B Preferred Stock Purchasers (incorporated by reference to Exhibit 10.1 to our Form 8-K filed July 20, 2010)
10.10		Form of Registration Rights Agreement between the Company and Series B Preferred Stock Purchasers (incorporated by reference to Exhibit 10.2 to our Form 8-K filed July 20, 2010)
10.11		Form of Securities Purchase Agreement between the Company and Series B Preferred Stock Purchasers (incorporated by reference to Exhibit 4.1 of the Form 8-K filed October 22, 2010).
10.12		Securities Purchase Agreement dated August 3, 2011 (incorporated by reference to Exhibit 10.1 to our Form 8-K filed August 4, 2011)
10.13		Registration Rights Agreement dated August 3, 2011 (incorporated by reference to Exhibit 10.2 to our Form 8-K filed August 4, 2011)
10.14		Amendment to Lease Agreement between Fibrocell Science, Inc. and The Hankin Group dated February 17, 2012 (incorporated by reference to Exhibit 10.17 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011)
10.15		Securities Purchase Agreement dated October 5, 2012 (incorporated by reference to Exhibit 10.1 to our Form 8-K filed October 9, 2012)
10.16		Registration Rights Agreement dated October 5, 2012 (incorporated by reference to Exhibit 10.2 to our Form 8-K filed October 5, 2012)
10.17		Stock Issuance Agreement dated October 5, 2012 between the Company and Intrexon Corporation (incorporated by reference to Exhibit 10.3 to our Form 8-K filed October 5, 2012)
10.18		Amendment and Conversion Agreement dated October 5, 2012 between the Company and the Holders of the Company’s Notes (incorporated by reference to Exhibit 10.4 to our Form 8-K filed October 5, 2012)
+ 10.19		Exclusive Channel Collaboration Agreement between Intrexon Corporation and Fibrocell Science, Inc. (incorporated by reference to Exhibit 10.21 of the Form 10-K filed on April 1, 2013)
10.20		Employment Transition Letter between Fibrocell Science, Inc. and Declan Daly dated June 28, 2013 (incorporated by reference to Exhibit 10.1 of the Form 8-K filed on June 28, 2013)
10.21		First Amendment to Exclusive Channel Collaboration Agreement between the Company and Intrexon Corporation dated June 28, 2013 (incorporated by reference to Exhibit 10.1 of the Form 8-K filed on July 1, 2013)

 

 

	47

 

10.22		Supplemental Stock Issuance Agreement between the Company and Intrexon Corporation dated June 28, 2013 (incorporated by reference to Exhibit 10.2 of the Form 8-K filed on July 1, 2013)
+ 10.23		Massachusetts Institute of Technology Office of Sponsored Programs Research Agreement (incorporated by reference to Exhibit 10.1 of the Form 10-Q filed on November 14, 2013)
10.24		The Regents of the University of California Research Agreement (incorporated by reference to Exhibit 10.2 of the Form 10-Q filed on November 14, 2013)
** 10.25		Employment Agreement between the Company and Gregory Weaver dated August 26, 2013 (incorporated by reference to Exhibit 10.1 of the Form 8-K filed on August 26, 2013)
** 10.26		Stock Option Agreement between the Company and Gregory Weaver issued pursuant to Employment Agreement between the Company and Gregory Weaver dated August 26, 2013 (incorporated by reference to Exhibit 10.4 of the Form 10-Q filed on November 14, 2013)
**10.27		Employment Agreement between the Company and David Pernock dated November 15, 2013 (incorporated by reference to Exhibit 10.1 to our Form 8-K filed November 18, 2013)
10.28		Second Amendment to Exclusive Channel Collaboration Agreement between the Company and Intrexon Corporation dated January 10, 2014 (incorporated by reference to Exhibit 10.1 of the Form 8-K filed on January 13, 2014)
10.29		Supplemental Stock Issuance Agreement between the Company and Intrexon Corporation dated January 10, 2014 (incorporated by reference to Exhibit 10.2 of the Form 8-K filed on January 13, 2014)
21		List of Subsidiaries. (incorporated by reference to Exhibit 21 of the Form 10-K filed on April 1, 2013)
*23.1		Consent of BDO USA, LLP
*31.1		Certification pursuant to Rule 13a-14(a) and 15d-14(a), required under Section 302 of the Sarbanes-Oxley Act of 2002
*31.2		Certification pursuant to Rule 13a-14(a) and 15d-14(a), required under Section 302 of the Sarbanes-Oxley Act of 2002
*32.1		Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*32.2		Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS		XBRL Instance Document. (1)
101.SCH		XBRL Taxonomy Extension Schema Document. (1)
101.CAL		XBRL Taxonomy Extension Calculation  Linkbase Document. (1)
101.LAB		XBRL Taxonomy Extension Label Linkbase Document. (1)
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document. (1)
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document. (1)

  

---

*              Filed herewith.

 

**           Indicates management contract or compensatory plan or arrangement.

 

+

Confidential treatment has been granted as to certain portions of this exhibit pursuant to Rule 406 of the Securities Act of 1933, as amended, or Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

 

(1)

Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

 

	48

 

SIGNATURES

 

                Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Fibrocell Science, Inc.

 

By:	/s/ David Pernock
	David Pernock
	Chief Executive Officer

 

Date: March 17, 2014

 

                Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.

 

Signature		Title		Date
/s/ David Pernock		Chief Executive Officer and Chairman of the Board of		March 17, 2014
David Pernock		Directors (Principal Executive Officer)
/s/ Gregory Weaver		Chief Financial Officer		March 17, 2014
Gregory Weaver		(Principal Financial and Accounting Officer)
/s/ Kelvin Moore		Director		March 17, 2014
Kelvin Moore
/s/ Marc Mazur		Director		March 17, 2014
Marc Mazur
/s/ Julian Kirk		Director		March 17, 2014
Julian Kirk
/s/ Marcus Smith		Director		March 17, 2014
Marcus Smith
/s/ Christine St. Clare		Director		March 17, 2014
Christine St. Clare
/s/ Douglas J. Swirsky		Director		March 17, 2014
Douglas J. Swirsky

 

 

	49

 

Fibrocell Science, Inc.

 

Index to Consolidated Financial Statements

 

		PAGE
Reports of Independent Registered Public Accounting Firm		F2 - F3
Consolidated Balance Sheets as of December 31, 2013 and 2012		F4
Consolidated Statements of Operations for the years ended December 31, 2013 and 2012		F5
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 2013 and 2012		F6
Consolidated Statements of Cash Flows for the years ended December 31, 2013 and 2012		F7
Notes to Consolidated Financial Statements		F8

 

 

	F1

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of Fibrocell Science, Inc.

Exton, Pennsylvania

 

We have audited the accompanying consolidated balance sheets of Fibrocell Science, Inc. as of December 31, 2013 and 2012 and the related consolidated statements of operations, shareholders’ equity (deficit) and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Fibrocell Science, Inc. at December 31, 2013 and 2012, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Fibrocell Science, Inc.’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 17, 2014 expressed an unqualified opinion thereon.

 

/s/ BDO USA, LLP

Philadelphia, PA

March 17, 2014

 

 

	F2

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of Fibrocell Science, Inc.

Exton, Pennsylvania

 

We have audited Fibrocell Science, Inc.’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Fibrocell Science, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, Fibrocell Science, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on the COSO criteria.

  

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Fibrocell Science, Inc. as of December 31, 2013 and 2012 and the related consolidated statements of operations, shareholders’ equity (deficit) and cash flows for the years then ended and our report dated March 17, 2014 expressed an unqualified opinion thereon.

 

/s/ BDO USA, LLP

Philadelphia, PA

March 17, 2014

 

 

	F3

 

Fibrocell Science, Inc.

Consolidated Balance Sheets

($ in thousands, except per share data)

 

		December 31,			December 31,
		2013			2012
Assets
Current assets:
Cash and cash equivalents		$	60,033		$	31,346
Accounts receivable, net of allowance for doubtful accounts of $5 and     $25, respectively			28			62
Inventory			597			477
Prepaid expenses and other current assets			1,202			1,271
Total current assets			61,860			33,156
Property and equipment, net			1,701			1,658
Intangible assets, net of accumulated amortization of $1,102 and $551, respectively			5,238			5,789
Other assets			215			-
Total assets		$	69,014		$	40,603
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable		$	2,958		$	921
Accrued expenses			487			494
Deferred revenue			148			139
Total current liabilities			3,593			1,554
Warrant liability			210			374
Other long term liabilities			539			344
Total liabilities			4,342			2,272
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares outstanding			-			-
Common stock, $0.001 par value; 100,000,000 and 1,100,000,000 shares authorized,       respectively; 39,832,225 and 26,229,909 shares issued and outstanding, respectively			40			26
Common stock subscription receivable			-			(2,004)
Additional paid-in capital			167,342			112,384
Accumulated deficit			(102,710)			(72,075)
Total stockholders' equity			64,672			38,331
Total liabilities and stockholders’ equity		$	69,014		$	40,603

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

	F4

 

Fibrocell Science, Inc.

Consolidated Statements of Operations

($ in thousands, except per share data)

 

		Year ended December 31, 2013			Year ended December 31, 2012
Revenue from product sales		$	200		$	153
Cost of sales			8,052			8,355
Gross loss			(7,852)			(8,202)
Selling, general and administrative expenses			10,073			12,167
Research and development expenses			12,578			9,021
Operating loss			(30,503)			(29,390)
Other income (expense):
Warrant revaluation income (expense)			(134)			8,725
Derivative revaluation expense			-			(23)
Interest income (expense)			2			(1,017)
Loss on extinguishment of debt			-			(4,421)
Loss from continuing operations before income taxes			(30,635)			(26,126)
Deferred tax benefit			-			2,500
Loss from continuing operations			(30,635)			(23,626)
Loss from discontinued operations, net of tax			-			(11)
Gain on sale of discontinued operations, net of tax			-			467
Net loss			(30,635)			(23,170)
Net loss attributable to non-controlling interest			-			(24)
Net loss attributable to Fibrocell Science, Inc. common stockholders		$	(30,635)		$	(23,194)
Per share information:
Loss from continuing operations-basic and diluted		$	(1.03)		$	(2.59)
Loss from discontinued operations-basic and diluted			-			-
Net loss per common share—basic and diluted		$	(1.03)		$	(2.59)
Weighted average number of basic and diluted common shares outstanding			29,830,207			8,965,098

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

	F5

 

Fibrocell Science, Inc.

Consolidated Statements of Stockholders’ Equity (Deficit)

($ in thousands)

 

		Common stock					Subscription			Additional			Deficit			Non-controlling			Total Equity
		Shares		Amount			Receivable			paid-in capital			accumulated			Interest			(Deficit)
Balance, December 31, 2011		3,827,132		$	4		$	(550)		$	43,826		$	(49,349)		$	468		$	(5,601)
Proceeds from equity financing, net		18,203,000			18			(2,004)			42,171			-			-			40,185
Preferred stock conversions		2,021,120			2			-			1,348			-			-			1,350
Reclass and exercise of warrants to equity		2,496			-			-			15,065			-			-			15,065
Conversion of notes payable		898,641			1			-			2,384			-			-			2,385
Issuance of common stock		1,317,520			1			-			6,916			-			-			6,917
Cancellation of certificate		(40,000)			-			550			(550)			-			-			-
Stock-based compensation expense		-			-			-			1,224			-			-			1,224
Net loss		-			-			-			-			(22,726)			(468)			(23,194)
Balance, December 31, 2012		26,229,909		$	26		$	(2,004)		$	112,384		$	(72,075)		$	-		$	38,331
Subscription received		-			-			2,004			-			-			-			2,004
Proceeds from equity financing, net		12,311,698			12			-			47,106			-			-			47,118
Issuance of common stock		1,243,781			2			-			6,404			-			-			6,406
Exercise of warrants		46,837			-			-			298			-			-			298
Stock-based compensation expense		-			-			-			1,150			-			-			1,150
Net loss		-			-			-			-			(30,635)			-			(30,635)
Balance, December 31, 2013		39,832,225		$	40		$	-		$	167,342		$	(102,710)		$	-		$	64,672

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

	F6

 

Fibrocell Science, Inc.

Consolidated Statements of Cash Flows

($ in thousands)

 

		Year ended December 31, 2013			Year ended December 31, 2012
Cash flows from operating activities:
Net loss		$	(30,635)		$	(23,194)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss on extinguishment of debt			-			4,421
Gain on sale of Agera			-			(467)
Stock issued for exclusive channel collaboration agreement			6,406			6,917
Stock-based compensation expense			1,150			1,224
Warrant revaluation (income) expense			134			(8,725)
Derivative revaluation expense			-			23
Deferred tax benefit			-			(2,500)
Loss on disposal of property and equipment			5			-
Depreciation and amortization			863			821
Provision for doubtful accounts			(20)			25
Amortization of debt issuance costs			-			146
Change in operating assets and liabilities:
Accounts receivable			54			(60)
Inventory			(120)			(477)
Prepaid expenses			69			(196)
Other assets			(215)			-
Accounts payable			2,037			(966)
Accrued expenses and other liabilities			188			407
Deferred revenue			9			83
Miscellaneous other			-			(57)
Net cash used in operating activities			(20,075)			(22,575)
Cash flows from investing activities:
Purchase of property and equipment			(360)			(493)
Proceeds from the sale of Agera			-			1,002
Net cash (used in) provided by investing activities			(360)			509
Cash flows from financing activities:
Debt issuance costs			-			(46)
Net proceeds from preferred stock			-			7,864
Net proceeds from common stock			47,118			40,185
Subscription received			2,004			-
Payments on insurance loan			-			(97)
Principal payments on note payable			-			(4,823)
Dividends paid on preferred stock			-			(470)
Net cash provided by financing activities			49,122			42,613
Net increase in cash and cash equivalents			28,687			20,547
Cash and cash equivalents, beginning of period			31,346			10,799
Cash and cash equivalents, end of period		$	60,033		$	31,346

 

The accompanying notes are an integral part of these consolidated financial statements.

       

 

	F7

 

Fibrocell Science, Inc.

Notes to Consolidated Financial Statements

 

Note 1. Business and Organization

 

Fibrocell Science, Inc. (“Fibrocell” or the “Company”) is the parent company of Fibrocell Technologies (“Fibrocell Tech”).  Fibrocell Tech is the parent company of Isolagen Europe Limited, a company organized under the laws of the United Kingdom (“Isolagen Europe”), Isolagen Australia Pty Limited, a company organized under the laws of Australia (“Isolagen Australia”), and Isolagen International, S.A., a company organized under the laws of Switzerland (“Isolagen Switzerland”).  The Company’s international activities are currently immaterial.

 

Fibrocell is an autologous cell therapy company primarily focused on developing first-in-class treatments for skin diseases and conditions with high unmet medical needs.  Based on its proprietary autologous fibroblast technology, the Company is pursuing medical applications of azficel-T for restrictive burn scarring and vocal cord scarring.  The Company’s collaboration with Intrexon Corporation (NYSE:XON) (“Intrexon”), a leader in synthetic biology, includes using genetically-modified fibroblasts for treating orphan skin diseases for which there are no currently approved products and exploring the localized treatment of the most common autoimmune skin disease, moderate-to-severe psoriasis.  The Company’s collaboration with UCLA, focusing on skin-derived stem cells and more efficient ways to convert skin cells to other cell types, holds potential for future discovery and development of autologous cell therapeutics.   

 

The Company previously marketed a skin care line with broad application in core target markets through its consolidated subsidiary, Agera Laboratories, Inc. (“Agera”), which was sold on August 31, 2012.  The Company had owned 57% of the outstanding shares of Agera.  As a result of the sale of Agera, the Company operates in one segment and Agera is classified as discontinued operations.  Please refer to Note 16 for more details.

 

The Company transitioned from its development stage to operational activities as of July 1, 2012. As such, the financial statements have been updated to reflect that the Company is no longer a development stage company.

Note 2. Basis of Presentation

 

On April 30, 2013, the Company completed a reverse stock split on the basis of one share of common stock for each currently outstanding 25 shares of pre-split common stock.  All common share and per share data included in these financial statements reflect this reverse stock split.

Note 3. Summary of Significant Accounting Policies

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and notes.  In addition, management’s assessment of the Company’s ability to continue as a going concern involves the estimation of the amount and timing of future cash inflows and outflows.  Actual results may differ materially from those estimates.

 

Principles of Consolidation

 

These consolidated financial statements include the accounts of Fibrocell and its wholly owned subsidiaries.  All intercompany accounts and transactions have been eliminated in consolidation.

 

 

	F8

 

Fibrocell Science, Inc.

Notes to Consolidated Financial Statements (Continued)

 

Note 3. Summary of Significant Accounting Policies (Continued)

 

Cash and Cash Equivalents

 

The Company considers highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.

 

Concentration of Credit Risk

 

As of December 31, 2013, the Company maintains its operating cash with one major U.S. domestic bank and the remainder of its cash as a money market fund with one major global bank. Federal insurance coverage on our operating cash amounted to $250,000 per depositor at each financial institution, and the Company’s non-interest bearing cash balances may exceed federally insured limits.  The terms of these deposits are on demand to minimize risk.  The Company has not incurred losses related to these deposits. 

 

Accounts Receivable and Allowance for Doubtful Accounts

 

Accounts receivable are recorded at the invoiced amount, net of related cash discounts, and do not bear interest.  The Company does not have any off-balance sheet exposure related to the Company’s customers.  The Company maintains an allowance for doubtful accounts related to its accounts receivable that have been deemed to have a high risk of collectability.  Management reviews its accounts receivable on a monthly basis to determine if any receivables will potentially be uncollectible.  Management analyzes historical collection trends and changes in its customer payment patterns, customer concentration and creditworthiness when evaluating the adequacy of its allowance for doubtful accounts.  In its overall allowance for doubtful accounts, the Company includes any receivable balances that are determined to be uncollectible.  Based on the information available, management believes the allowance for doubtful accounts is adequate; however, actual write-offs might exceed the recorded allowance.

 

Inventory

 

Inventories are determined at the lower of cost or market value, with cost determined under specific identification and on the first-in-first-out method.  Inventories consist of raw materials and work-in-process (“WIP”). 

 

Property and Equipment

 

Property and equipment is carried at cost less accumulated depreciation.  Generally, depreciation for financial reporting purposes is calculated using the straight-line method over the estimated useful life of three years, except for leasehold improvements which are depreciated using the straight-line method over the remaining lease term or the life of the asset, whichever is shorter.  The cost of repairs and maintenance is charged to expense as incurred.

 

Intangible Assets

 

Effective January 1, 2012, the Company launched LAVIV® and as a result, the research and development intangible assets related to the Company’s primary study are considered finite-lived intangible assets and are being amortized over 12 years.  For each of the years ended December 31, 2013 and 2012, amortization expense was approximately $0.6 million.  The Company expects to amortize approximately $0.6 million for each of the next five years.

 

 

	F9

 

Fibrocell Science, Inc.

Notes to Consolidated Financial Statements (Continued)

 

Note 3. Summary of Significant Accounting Policies (Continued)

 

Finite-lived intangible assets are recorded at cost, net of accumulated amortization and, if applicable, impairment charges.  Amortization of finite-lived intangible assets is provided over their estimated useful lives on a straight-line basis.  In accordance with Financial Accounting Standards Board Accounting Standard Codification (“ASC”) 360-10-35 Impairment or Disposal of Long-Lived Assets, the Company reviews its finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  There was no impairment expense recognized for either of the years ended December 31, 2013 or 2012.

 

Revenue Recognition

 

The Company recognizes revenue over the period LAVIV® is shipped for injection in accordance with ASC 605 Revenue Recognition (“ASC 605”).  In general, ASC 605 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services rendered, (3) the fee is fixed and determinable and (4) collectability is reasonably assured.  Revenue from the sale of LAVIV® is not recognized until the first shipment for an injection is shipped. 

 

Cost of Sales

 

Cost of sales includes the costs related to the processing of cells for LAVIV®, including direct and indirect costs.  These direct costs include the majority of costs incurred in our manufacturing, facility, quality control, and quality assurance operations along with an allocation of overhead costs.  The principal reason for the relatively small level of revenue as compared to the cost of sales is that we changed corporate strategy in 2013 to de-emphasize sales of azficel-T into the aesthetic markets, and strategically transition to focus on high-value therapeutic applications for treatment of unmet medical conditions of the skin and connective tissue. 

 

Research and Development Expenses

 

Research and development costs are expensed as incurred and include salaries and benefits, costs paid to third party contractors to perform research, conduct clinical trials, develop and manufacture drug materials and delivery devices, and a portion of facilities cost.  Research and development costs also include costs to develop manufacturing, cell collection and logistical process improvements.

 

Clinical trial costs are a significant component of research and development expenses and include costs associated with third party contractors.  Invoicing from third party contractors for services performed can lag several months.  The Company accrues the costs of services rendered in connection with third party contractor activities based on its estimate of management fees, site management and monitoring costs and data management costs.   

 

Warrant Liability 

 

Certain warrants are measured at fair value and liability-classified under ASC 815 Derivatives and Hedging (“ASC 815”) because the warrants contain “down-round protection” and therefore, do not meet the scope exception for treatment as a derivative under ASC 815.  Since “down-round protection” is not an input into the calculation of the fair value of the warrants, the warrants cannot be considered indexed to the Company’s own stock which is a requirement for the scope exception as outlined under ASC 815.  The Company will continue to classify the fair value of certain warrants as a liability until the warrants are exercised, expire or are amended in a way that would no longer require these warrants to be classified as a liability.  For additional discussion on warrants, see Note 7.

 

 

	F10

 

Fibrocell Science, Inc.

Notes to Consolidated Financial Statements (Continued)

 

Note 3. Summary of Significant Accounting Policies (Continued)

 

Stock-based Compensation

 

The Company accounts for stock-based awards to employees using the fair value based method to determine compensation for all arrangements where shares of stock or equity instruments are issued for compensation.  In addition, the Company accounts for stock-based compensation to nonemployees in accordance with the accounting guidance for equity instruments that are issued to other than employees.  The Company uses a Black-Scholes option-pricing model to determine the fair value of each option grant as of the date of grant for expense incurred.  The Black-Scholes model requires inputs for risk-free interest rate, dividend yield, expected stock price volatility and expected life of the options.  Expected stock price volatility is based on historical volatility of the Company’s stock and the stock of the Company’s peer companies.  The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.  The expected life for options granted represents the period of time that options granted are expected to be outstanding and is derived from the contractual terms of the options granted.  The Company estimates future forfeitures of options based upon expected forfeiture rates.

 

Income Taxes

 

An asset and liability approach is used for financial accounting and reporting for income taxes. Deferred income taxes arise from temporary differences between income tax and financial reporting and principally relate to recognition of revenue and expenses in different periods for financial and tax accounting purposes and are measured using currently enacted tax rates and laws.  In addition, a deferred tax asset can be generated by net operating loss (NOLs) carryover.  If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized.

 

In the event the Company is charged interest or penalties related to income tax matters, the Company would record such interest as interest expense and would record such penalties as other expense

in the consolidated statements of operations.  No such charges have been incurred by the Company.  For each of the years ended December 31, 2013 and 2012, the Company had no uncertain tax positions.

 

At December 31, 2013 and December 31, 2012, the Company has provided a full valuation allowance for the net deferred tax assets, the large majority of which relates to the future benefit of loss carryovers.  In addition, as a result of fresh-start accounting, the Company may be limited by section 382 of the Internal Revenue Service Code.  The tax years 2010 through 2013 remain open to examination by the major taxing jurisdictions to which the Company is subject.

 

 

	F11

 

Fibrocell Science, Inc.

Notes to Consolidated Financial Statements (Continued)

 

Note 3. Summary of Significant Accounting Policies (Continued)

 

Loss Per Share Data

 

Basic loss per share is computed by dividing the net loss by the weighted-average number of shares of common stock outstanding during a period.  The diluted earnings per share calculation gives effect to dilutive options, warrants, convertible notes, convertible preferred stock, and other potential dilutive common stock including selected restricted shares of common stock outstanding during the period.  Diluted loss per share is based on the treasury stock method and includes the effect from potential issuance of common stock, such as shares issuable pursuant to the exercise of stock options, assuming the exercise of all in-the-money stock options.  Common share equivalents have been excluded where their inclusion would be anti-dilutive. 

 

The following potentially dilutive securities have been excluded from the computations of diluted weighted-average shares outstanding, as their effect would be anti-dilutive:

 

		For the year ended December 31,
		2013		2012
Shares underlying options outstanding		2,068,720		562,025
Shares underlying warrants outstanding		6,033,050		6,132,050

 

Fair Value of Financial Instruments

 

The carrying values of certain of the Company’s financial instruments, including cash equivalents and accounts payable approximates fair value due to their short maturities.  The fair values of the Company’s long term obligations are based on assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates reflecting varying degrees of risk.  The carrying values of the Company’s long term obligations approximate their fair values.

Note 4. Inventory

 

                Inventories consisted of the following as of:

 

		December 31,			December 31,
($ in thousands)		2013			2012
Raw materials		$	511		$	326
Work-in-process			86			151
Inventory		$	597		$	477

 

 

	F12

 

Fibrocell Science, Inc.
Notes to Consolidated Financial Statements (Continued)

 

Note 5. Property and Equipment

               

Property and equipment consisted of the following as of:

 

($ in thousands)		December 31, 2013			December 31, 2012
Laboratory equipment		$	1,045		$	800
Computer equipment and software			179			178
Furniture and fixtures			15			15
Leasehold improvements			448			338
Construction-in-process			749			761
			2,436			2,092
Less: Accumulated depreciation			(735)			(434)
Property and equipment, net		$	1,701		$	1,658

 

Depreciation expense was approximately $0.3 million for each of the years ended December 31, 2013 and 2012.

Note 6. Accrued Expenses

 

                Accrued expenses consisted of the following as of:

 

		December 31,			December 31,
($ in thousands)		2013			2012
Accrued professional fees		$	194		$	58
Accrued compensation			40			48
Accrued other			253			388
Accrued expenses		$	487		$	494

Note 7. Warrants

 

The Company accounts for stock warrants as either equity instruments or derivative liabilities depending on the specific terms of the warrant agreement.  Stock warrants are accounted for as a derivative in accordance with ASC 815 if the stock warrants contain “down-round protection” and therefore, do not meet the scope exception for treatment as a derivative.  Since “down-round protection” is not an input into the calculation of the fair value of the warrants, the warrants cannot be considered indexed to the Company’s own stock which is a requirement for the scope exception as outlined under ASC 815.  The Company will continue to classify the fair value of the warrants that contain “down-round protection” as a liability until the warrants are exercised, expire or are amended in a way that would no longer require these warrants to be classified as a liability.  The Company utilized the Monte Carlo simulation valuation method to value the liability-classified warrants until September 30, 2012 when the Company concluded that the Black-Scholes option pricing model was an appropriate valuation method due to the assumption that no future financing would be expected at a price lower than the current exercise price and the majority of the warrants were converted to equity-classified warrants on October 9, 2012.

 

 

	F13

 

Fibrocell Science, Inc.

Notes to Consolidated Financial Statements (Continued)

 

Note 7. Warrants (Continued)

 

The following table summarizes outstanding warrants to purchase common stock as of:

 

		Number of Warrants
		December 31, 2013			December 31, 2012				Exercise Price		Expiration Dates
Liability-classified warrants
Issued in Series B Preferred Stock offering			1,320			1,320		$	2.50		Nov. 2015
Issued in Series D Preferred Stock offering			14,800			39,800		$	2.50		Jan.-Feb. 2016
Issued in Series E Preferred Stock offering			60,000			120,000		$	2.50		May 2017
Subtotal			76,120			161,120
Equity-classified warrants
Issued in June 2011 equity financing			6,113			6,113		$	22.50		June 2016
Issued in March 2010 and Preferred Stock offerings			4,209,357			4,209,357		$	6.25-7.50		Oct. 2015 –July 2018
Issued with Convertible Notes			1,125,578			1,125,578		$	2.50		June 2018
Issued to placement agents in August 2011 equity financing			50,123			50,123		$	13.64		August 2016
Issued in August 2011 equity financing			565,759			579,759		$	18.75		August 2016
Subtotal			5,956,930			5,970,930
Total			6,033,050			6,132,050

 

There were 85,000 warrants exercised on a cashless basis for the year ended December 31, 2013, which resulted in the issuance of 46,837 shares of common stock for the year ended December 31, 2013.  There were 5,000 warrants exercised on a cashless basis for the year ended December 31, 2012, which resulted in the issuance of 2,496 shares of common stock for the year ended December 31, 2012.  In addition there were 14,000 warrant cancellations for the year ended December 31, 2012.

 

Modification of Outstanding Warrants

 

Effective upon the completion of the October 2012 Offering, the Company entered into warrant modification agreements with the holders of warrants to purchase 4,209,357 shares of common stock at exercise prices between $6.25 per share and $7.50 per share pursuant to which the parties agreed, among other items: (a) to extend the expiration date of the warrants by one year; and (b) to delete the full-ratchet anti-dilution adjustment provisions contained in the warrants (including with respect to the October 2012 Offering discussed above).  As such, the exercise price and number of shares underlying the foregoing warrants were not modified due to the completion of the October 2012 Offering.

 

Liability-classified Warrants

 

The Company utilized the Monte Carlo simulation valuation method to value the liability classified warrants until September 30, 2012 when the Company concluded that the Black-Scholes option pricing model was an appropriate valuation method due to the assumption that no future financing would be expected at a price lower than the current exercise price and the majority of the warrants were converted to equity-classified warrants on October 9, 2012.  In addition, the warrants issued in connection with the June 2012 12.5% convertible notes as of a result of the October 2012 offering had a modification in the number of warrants and the exercise price was changed from $7.50 to $2.50 per share which increased the number of shares of common stock underlying such warrants by 562,790.  As a result of the October 2012 offering, 5,334,935 of the liability-classified warrants were reclassified to equity-classified warrants due to the removal of the “down-round protection.” On October 9, 2012, approximately $15.0 million was reclassified from warrant liability to equity. For additional discussion on the warrant liability, see Note 3.

 

 

	F14

 

Fibrocell Science, Inc.

Notes to Consolidated Financial Statements (Continued)

 

Note 7. Warrants (Continued)

 

A portion of the warrant holders did not sign the waivers to remove the “down-round protection” in October 2012, consequently the liability-classified warrants exercise price was reset to $2.50 per share and the number of shares of common stock underlying such warrants were increased.

 

The following table summarizes the calculated aggregate fair values, along with the assumptions utilized in each calculation:

 

($ in thousands, except per share data)		December 31, 2013				December 31, 2012				October 9, 2012 (1)
Calculated aggregate value		$	210			$	374			$	15,048
Weighted average exercise price per share of warrant		$	2.50			$	2.50			$	6.25
Closing price per share of common stock		$	4.06			$	3.75			$	5.25
Volatility			91	%			70	%			69	%
Expected term (years)			3.1				4.0				4.8
Risk-free interest rate			0.85	%			0.63	%			0.45	%
Dividend yield			-				-				-

 

(1)

- Calculated fair value after the modification.

Note 8. Debt 

 

Convertible Note Payable

 

On June 1, 2012, the Company entered into an exchange agreement with existing note holders pursuant to which the Company agreed to repay half of each holder’s 12.5% promissory notes due June 1, 2012  and exchange the balance of each holder’s original note, for (i) a new 12.5% note (“Note”) with a principal amount equal to such balance, and (ii) a five-year warrant (“Warrant”) to purchase a number of shares of common stock equal to the number of shares of common stock underlying such note on the date of issuance. The Notes were converted at a conversion price of $6.25 per share. To the extent that holders of the Notes converted any portion of the Notes prior to any such redemption date, the amount of all future redemption payments was reduced by such converted amount on a pro rata basis over the remaining redemption dates. The Notes were extinguished in October 2012 through partial conversions into common stock and partial repayments in cash. For additional discussion on conversion of notes payable, see Note 9. 

 

Loss on Extinguishment of Debt

 

As a result of the June 1, 2012 debt exchange as discussed above, the Company recorded a loss on extinguishment of the 12.5% promissory note of $4.4 million in the consolidated statement of operations for the year ended December 31, 2012 due to the significant modification of the original debt.  The details of the loss included recording the fair value of the embedded conversion option of $1.2 million and the fair value of liability-classified warrants of $3.2 million.  See Note 7 for further discussion of the warrant liability.

 

	F15

 

Fibrocell Science, Inc.

Notes to Consolidated Financial Statements (Consolidated)

 

Note 9. Equity

 

Preferred Stock

 

The Company is authorized to issue 5,000,000 shares of preferred stock in one or more series and to fix the rights, preferences, privileges, and restrictions thereof.  These rights, preferences and privileges could include dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms and the number of shares constituting any series or the designation of such series, any or all of which may be greater than the rights of common stock.  The issuance of the Company’s preferred stock could adversely affect the voting power of holders of common stock and the likelihood that such holders will receive dividend payments and payments upon liquidation.  In addition, the issuance of preferred stock could have the effect of delaying, deferring or preventing a change of control of the Company or other corporate action. 

 

The Company recorded accrued dividends at a rate of 6% per annum on previously issued shares of Series D preferred stock and 8% per annum on previously issued shares of Series E preferred stock.  During 2012, the Company had outstanding shares of our Series D and Series E preferred stock.  All of these shares were converted into common stock on October 9, 2012.  Prior to such conversion, these preferred shares were entitled to certain dividends.  There were no cash payments for Series D and Series E preferred stock dividends for 2013 and approximately $0.5 million in cash payments for 2012. There were no preferred shares issued or outstanding as of December 31, 2013 or 2012.

 

Common stock

 

In October of 2012, the Company closed a private placement transaction (the “Offering”) with certain accredited investors pursuant to which the Company sold securities consisting of 18,000,000 shares of common stock at a purchase price of $2.50 per share.  An additional 203,000 shares were given to placement agents in connection with the Offering.  The Company received net proceeds of $40.2 million, incurred $2.7 million in offering costs and had a subscription receivable of $2.0 million which was subsequently collected in July of 2013.

 

In connection with the execution of the exclusive channel collaboration (the “Channel Agreement”) on October 5, 2012, the Company entered into a Stock Issuance Agreement with Intrexon, who is an affiliate of NRM VII Holdings I, LLC, the Company’s largest shareholder. The Company agreed to issue to Intrexon a number of shares of Company common stock based on a per share value of the price at which the Company sold shares of common stock in the Offering (the “Technology Access Shares”).  The closing took place on October 9, 2012.  The Company recorded a fair value of $6.9 million for 1,317,520 shares, on a per share value of $5.25 based on the closing price of the Company’s common stock on the closing date, issued to Intrexon for the closing of the Stock Issuance Agreement as a research and development expense in the fourth quarter of 2012.  In connection with the issuance of the Technology Access Shares, Intrexon became a party to a Registration Rights Agreement, which provides Intrexon with a demand registration right with respect to the resale of the Technology Access Shares.  See Note 13 for further discussion on the collaboration with Intrexon.

 

On October 5, 2012, the Company entered into an amendment and conversion agreement (the “Debt Agreement”) with the holders of its 12.5% Convertible Notes in the aggregate original principal amount of approximately $3.5 million (the “Notes”).  Pursuant to the Debt Agreement, the Company and the Note holders agreed that the Company would repay approximately $1.7 million of the Notes in cash (representing approximately $1.5 million in principal and $0.2 million in unpaid interest), and the remaining Notes (representing approximately $2.1 million in principal and $0.3 million in unpaid interest) would be converted into shares of common stock at a conversion price of $2.50 per share.  The total number of shares of common stock issued upon the conversion of the Notes was 861,970 shares. There were conversions of notes into 36,671 common shares before the October 2012 offering.

 

 

	F16

 

Fibrocell Science, Inc.

Notes to Consolidated Financial Statements (Continued)

 

Note 9. Equity (Continued)

 

Effective upon the completion of the Offering, the Company entered into warrant modification agreements with the holders of warrants to purchase 4,209,357 shares of common stock at exercise prices of between $6.25 per share and $7.50 per share pursuant to which the parties agreed, among other items: (a) to extend the expiration date of the warrants by one year; and (b) to delete the full-ratchet anti-dilution adjustment provisions contained in the warrants (including with respect to the Offering discussed above). As such, the exercise price and number of shares underlying the foregoing warrants were not modified due to the completion of the Offering.

 

In connection with the execution of the first amendment to the exclusive channel collaboration agreement (the “First Amendment”) on June 28, 2013, the Company entered into a Supplemental Stock Issuance Agreement with Intrexon.  The Company agreed to issue to Intrexon a number of shares of Company common stock based on a per share value of  the closing price of the Company’s common stock on the NYSE MKT on the day prior to execution of the Supplemental Stock Issuance Agreement (the “Supplemental Access Fee Shares”).  The Supplemental Access Fee Shares were issued upon the satisfaction of customary closing conditions, including the approval for the listing of the Supplemental Access Fee Shares on the NYSE MKT.  The closing took place on July 26, 2013.  The Company recorded a fair value of $6.4 million for 1,243,781 shares, on a per share value of $5.15 based on the closing price of the Company’s common stock on the closing date, issued to Intrexon for the closing of the Supplemental Stock Issuance Agreement as a research and development expense in the third quarter of 2013.  See Note 13 for further discussion on the collaboration with Intrexon.

 

In October of 2013, the Company completed an underwritten public offering of 11,000,000 shares of common stock at a public offering price of $4.10 per share.  The net proceeds to the Company, after underwriting discounts and commissions and estimated offering expenses, were approximately $42.1 million.  The underwriters for the public offering of common stock partially exercised their over-allotment option to purchase an additional 1,311,698 shares of common stock at a public offering price of $4.10 per share.  The partial exercise of the over-allotment option increased the aggregate net proceeds to the company, after underwriting discounts and commissions and estimated offering expenses, from approximately $42.1 million to approximately $47.1 million. 

 

Redeemable Preferred Stock

 

On October 5, 2012, upon the approval of the requisite number of holders of the Company’s Series D 6% Cumulative Perpetual Convertible Preferred Stock (the “Series D Preferred Stock”) and Series E 8% Cumulative Convertible Preferred Stock (the “Series E Preferred Stock”), the Company filed amendments, effective on such date, to each of the Certificates of Designation for the Preferred Stock providing that if the Company completed an equity financing pursuant to which the Company received gross proceeds of no less than $35.0 million (a “Qualified Financing”), then immediately prior to the closing of such Qualified Financing each outstanding share of preferred stock shall be automatically converted into that number of shares of common stock determined by dividing the stated value of such share of Series D and Series E preferred stock by $6.25. The Offering discussed above was a Qualified Financing, and as such, the Series D and E preferred stock was automatically converted into 1,917,120 shares of common stock upon completion of the Offering, 454,560 of which were Series D and 1,462,560 of which were Series E. There were 104,000 common shares issued as a result of conversion of Series D preferred shares during 2012 before the automatic conversion of the preferred shares pursuant to the Offering. As of the closing of the Offering, the Company had no shares of preferred stock outstanding.

 

 

	F17

 

Fibrocell Science, Inc.

Notes to Consolidated Financial Statements (Continued)

 

Note 9. Equity (Continued)

 

During 2012 the Company sold to accredited investors in a private placement Series E Convertible Preferred Stock as follows:

 

Date of financing		# of shares of Series E Preferred			Net Proceeds			Warrant Exercise Price			# of Warrants Issued
May 14, 2012			3,353		$	2,843		$	7.50			590,128
May 24, 2012			2,364			2,042		$	7.50			416,064
May 30, 2012			945			822		$	7.50			166,320
June 7, 2012			1,192			1,037		$	7.50			209.792
June 28, 2012			507			441		$	7.50			89,232
July 16, 2012			780			679		$	7.50			137,280
			9,141		$	7,864						1,608,816

 

As a result of the 2012 private placement Series E Convertible Preferred Stock transaction, the net proceeds of $7.8 million was allocated to the fair value of the warrants.  The July 16, 2012 sale represented the final closing of the Series E Offering and effective on such date, the Company closed the Series E Offering.

 

Preferred Stock Series D

 

The Company recorded accrued dividends at a rate of 6% per annum on the Series D and 8% per annum on the Series E Preferred until this preferred stock was converted in October 2012.  There were no cash dividend payments during the year ended December 31, 2013 and approximately $0.5 million in cash dividend payments during the year ended December 31, 2012.  The Series D and Series E Redeemable Preferred stock was converted into common stock in October 2012.

 

Conversion Option of Convertible Note Payable

 

In connection with the issuance of the June 1, 2012 convertible notes, an embedded conversion option was recorded as a derivative liability under ASC 815, Derivatives and Hedging, (“ASC 815”) in the 2012 consolidated balance sheet until October 2012 when the notes were converted to common stock.  The derivative liability was re-measured on the Company’s reporting dates until October 9, 2012 when the convertible notes were converted into common stock resulting in revaluation expense of less than $0.1 million for the year ended December 31, 2012 in the Company’s Consolidated Statement of Operations.  The fair value of the derivative liability was determined using the Black-Scholes option-pricing model and is affected by changes in inputs to that model including the Company’s stock price, expected stock price volatility, the contractual term, and the risk-free interest rate. The convertible notes were reclassified to equity which amounted to $2.4 million. 

 

Conversion Option of Redeemable Preferred stock

 

The embedded conversion option for the Series D Preferred has been recorded as a derivative liability under ASC 815 in the consolidated balance sheet as of December 31, 2011.  The fair value of the derivative liability is determined using the Black-Scholes option-pricing model and is affected by changes in inputs to that model including the Company’s stock price, expected stock price volatility, the contractual term, and the risk-free interest rate. The derivative liability was re-measured resulting in income of $0.1 million for the year ended December 31, 2012 in the Company’s statement of operations until the preferred stock was converted on October 9, 2012 into common stock and $1.4 million was recorded in equity. 

 

 

	F18

 

Fibrocell Science, Inc.

Notes to Consolidated Financial Statements (Continued)

 

Note 10. Fair Value Measurements

 

                The Company adopted the accounting guidance on fair value measurements for financial assets and liabilities measured on a recurring basis.  The guidance requires fair value measurements be classified and disclosed in one of the following three categories:

 

•   Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

 

•   Level 2: Quoted prices in markets that are not active or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability;

 

•   Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

   

                The following fair value hierarchy table presents information about each major category of the Company’s financial assets and liability measured at fair value on a recurring basis as of December 31, 2013 and 2012:

 

		Fair value measurement using
($ in thousands)		Quoted prices in active markets (Level 1)			Significant other observable inputs (Level 2)			Significant unobservable inputs (Level 3)			Total
Balance at December 31, 2013
Assets:
Cash and cash equivalents		$	60,033		$	-		$	-		$	60,033
Liabilities:
Warrant liability		$	-		$	-		$	210		$	210

 

		Fair value measurement using
($ in thousands)		Quoted prices in active markets (Level 1)			Significant other observable inputs (Level 2)			Significant unobservable inputs (Level 3)				Total
Balance at December 31, 2012
Assets:
Cash and cash equivalents		$	31,346		$	-		$	-		$	31,346
Liabilities:
Warrant liability		$	-		$	-		$	374		$	374

 

 

	F19

 

Fibrocell Science, Inc.

Notes to Consolidated Financial Statements (Continued)

 

Note 10. Fair Value Measurements (Continued)

 

The reconciliation of warrant liability measured at fair value on a recurring basis using unobservable inputs (Level 3) is as follows:

 

		Warrant
($ in thousands)		Liability
Balance at December 31, 2011		$	13,087
Issuance of additional warrants			11,077
Exercise of warrants			(17)
Warrants reclassified to equity due to change in term			(15,048)
Change in fair value of warrant liability			(8,725)
Balance at December 31, 2012		$	374
Exercise of warrants			(298)
Change in fair value of warrant liability			134
Balance at December 31, 2013		$	210

 

The fair value of the warrant liability is based on Level 3 inputs.  For this liability, the Company developed its own assumptions that do not have observable inputs or available market data to support the fair value.  See Note 7 for further discussion of the warrant liability.

 

The Company believes that the fair values of our current assets and current liabilities approximate their reported carrying amounts.  There were no transfers between Level 1, 2 and 3.

Note 11. Equity-based Compensation

 

Our board of directors (the “Board”) adopted the 2009 Equity Incentive Plan (as amended to date, the “Plan”) effective September 3, 2009.  The Plan is intended to further align the interests of the Company and its stockholders with its employees, including its officers, non-employee directors, consultants and advisors by providing incentives for such persons to exert maximum efforts for the success of the Company.  The Plan allows for the issuance of up to 2,600,000 shares of the Company’s common stock.  In addition, there were 206,000 options issued outside of the Plan to consultants. 

 

The types of awards that may be granted under the Plan include options (both nonqualified stock options and incentive stock options), stock appreciation rights, stock awards, stock units, and other stock-based awards.  The term of each award is determined by the Board at the time each award is granted, provided that the terms of options may not exceed ten years.  Vesting schedules for the stock options vary, but generally vest 25% per year, over four years.  The Plan had 713,280 options available for grant as of December 31, 2013. 

 

Total stock-based compensation expense recognized using the straight-line attribution method in the consolidated statement of operations for the years ended December 31 is as follows:

 

($ in thousands)		2013			2012
Stock option compensation expense for employees and       directors		$	1,045		$	1,200
Equity awards for nonemployees issued for services			105			24
Total stock-based compensation expense		$	1,150		$	1,224

 

During the years ended December 31, 2013 and 2012, the weighted average fair market value using the Black-Scholes option-pricing model of the options granted was $2.79 and $5.00, respectively. 

 

 

	F20

 

Fibrocell Science, Inc.

Notes to Consolidated Financial Statements (Continued)

 

Note 11. Equity-based Compensation (Continued)

 

The fair market value of the stock options at the date of grant was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions for the years ended December 31:

 

			2013			2012
Expected life (years)			5.8			5.7
Interest rate			1.6	%		1.6	%
Dividend yield			—			—
Volatility			71	%		64	%

 

		Number of shares			Weighted- average exercise price			Weighted- average remaining contractual term (in years)			Aggregate intrinsic value
Outstanding at December 31, 2011			544,340		$	19.25			7.5		$	-
Granted			38,000		$	8.02
Exercised			-			-
Forfeited			(20,315)		$	15.48
Outstanding at December 31, 2012			562,025		$	18.56			7.0		$	-
Granted			1,532,000		$	4.15
Exercised			-			-
Forfeited			(25,305)		$	14.71
Outstanding at December 31, 2013			2,068,720		$	7.93			8.4		$	89
Exercisable at December 31, 2013			703,437		$	15.36			6.9		$	23

 

The total fair value of shares vested during the years ended December 31, 2013 and 2012 were $1.2 million and $1.3 million, respectively.  There were no exercises of vested stock options during the years ended 2013 and 2012.  As of December 31, 2013, there was $2.8 million of total unrecognized compensation cost, related to nonvested stock options which vest over time.  That cost is expected to be recognized over a weighted-average period of 3.4 years.  As of December 31, 2013, there was approximately $0.6 million of total unrecognized compensation cost related to performance-based nonvested consultant options. 

Note 12. Income Taxes

 

Fibrocell Science, Inc. and Fibrocell Technologies, Inc. file a consolidated U.S. Federal income tax return, and file U.S. state income tax returns in several jurisdictions as well.  In general, the U.S. federal and state income tax returns remain open to examination by taxing authorities for tax years beginning in 2010 to present.  However, if and when the Company claims net operating loss carryforwards from years prior to 2010 against future taxable income, those losses may be examined by the taxing authorities as well.  The Company's foreign subsidiaries file income tax returns in their respective jurisdictions. 

 

 

	F21

 

Fibrocell Science, Inc.

Notes to Consolidated Financial Statements (Continued)

 

Note 12. Income Taxes (Continued)

 

The components of the income tax expense/(benefit) related to continuing operations, are as follows:

 

		Year ended			Year ended
		December 31,			December 31,
($ in thousands)		2013			2012
U.S. Federal:
Current		$	-		$	-
Deferred			-			(2,068)
U.S. State:
Current			-			-
Deferred			-			(432)
		$	-		$	(2,500)

 

The reconciliation between income taxes/ (benefit) at the U.S. federal statutory rate and the amount recorded in the accompanying consolidated financial statements is as follows: 

 

		Year ended			Year ended
		December 31,			December 31,
($ in thousands)		2013			2012
Tax benefit at U.S. federal statutory rate		$	(10,722)		$	(9,144)
Increase in domestic valuation allowance			11,626			11,127
State income taxes/(benefit) before valuation allowance, net of federal benefit			(1,026)			(1,971)
Capital loss limitation			-			(817)
Loss on extinguishment of debt			-			1,547
Derivative revaluation expense			-			8
Warrant revaluation (gain)/expense			47			(3,054)
Other			75			(196)
		$	-		$	(2,500)

 

 

	F22

 

Fibrocell Science, Inc.

Notes to Consolidated Financial Statements (Continued)

 

Note 12. Income Taxes (Continued)

 

The components of the Company's net deferred tax assets and liabilities at December 31, 2013 and 2012 are as follows:

 

		December 31,			December 31,
($ in thousands)		2013			2012
Deferred tax liabilities:
Intangible assets		$	2,247		$	2,282
Total deferred tax liabilities		$	2,247		$	2,282
Deferred tax assets:
Loss carryforwards		$	54,253		$	49,598
Capital loss carryforward			844			817
Property and equipment			1,149			1,327
License fees			5,393			-
Accrued expenses and other			412			360
Stock compensation			2,698			2,492
Total deferred tax assets			64,749			54,594
Less: valuation allowance			(62,502)			(52,312)
Total deferred tax assets		$	2,247		$	2,282
Net deferred tax liabilities		$	-		$	-

 

As of December 31, 2013, the Company had generated U.S. net operating loss carryforwards of approximately $141.7 million which expire from 2018 to 2033.  There are also net loss carryforwards in certain non-U.S. jurisdictions of approximately $25.5 million, which are not included in the components of the Company’s net deferred tax assets listed above because there are no longer any foreign operations and no expectations that these net loss carryforwards can be realized.  The domestic net operating loss carryforwards are available to reduce future taxable income.  However, a change in ownership, as defined by federal income tax regulations, could significantly limit the Company's ability to utilize its U.S. net operating loss carryforwards.  Additionally, because federal tax laws limit the time during which the net operating loss carryforwards may be applied against future taxes, if the Company fails to generate taxable income prior to the expiration dates it may not be able to fully utilize the net operating loss carryforwards to reduce future income taxes.  As the Company has had cumulative losses and there is no assurance of future taxable income, valuation allowances have been recorded to fully offset the deferred tax asset at December 31, 2013 and 2012.  The valuation allowance increased by $10.2 million and $11.1 million during 2013 and 2012, respectively, primarily due to the impact from the current year net losses incurred.

Note 13. Collaboration with Related Party

 

                Intrexon is an affiliate of our largest shareholder, NRM VII Holdings I, LLC.  In addition, two of our seven directors are also affiliates of NRM VII Holdings I, LLC.

 

 

	F23

 

Fibrocell Science, Inc.

Notes to Consolidated Financial Statements (Continued)

 

Note 13. Collaboration with Related Party (Continued)

 

                On October 5, 2012, the Company entered into an Exclusive Channel Collaboration Agreement (the “Channel Agreement”) with Intrexon that governs a “channel collaboration” arrangement. The Channel Agreement grants the Company an exclusive license to use proprietary technologies and other intellectual property of Intrexon to develop and commercialize certain products in the United States.  Through the original collaboration with Intrexon, the Company is exploring the use of genetically-modified fibroblast cells to treat patients with collagen deficient diseases. The Company is working to genetically modify fibroblasts with the gene to produce collagen VII to treat patients with recessive dystrophic epidermolysis bullosa (“RDEB”). This development concept utilizes genetically-modified fibroblasts to up-regulate and produce collagen VII in a controlled manner for localized or systematic treatment of RDEB.

 

In connection with the execution of the Channel Agreement on October 5, 2012, the Company entered into a Stock Issuance Agreement with Intrexon.  In connection with the stock issuance, Intrexon became a party to the Registration Rights Agreement, which provides Intrexon with a demand registration right with respect to the resale of the Technology Access Shares.  For additional details see Note 9. 

 

                On June 28, 2013, the Company and Intrexon entered into a First Amendment (the “Amendment”) to the parties’ Channel Agreement.  The Amendment broadens the existing collaboration to include potential treatments based on engineered autologous fibroblast cells for the localized treatment of autoimmune and inflammatory disorders including morphea profunda  / linear scleroderma, cutaneous eosinophilias and moderate to severe psoriasis.  In connection with the execution of the First amendment to the Channel Agreement on June 28, 2013, the Company entered into a Supplemental Stock Issuance Agreement with Intrexon. For additional details see Note 9.

 

Pursuant to the Channel Agreement and Amendment, the Company engaged Intrexon for support services for the development of new products covered under the Channel Agreement and Amendment, and will reimburse Intrexon for its fully-loaded cost for time and materials for transgenes, cell processing, or other work performed by Intrexon for such research and manufacturing. For the years ended December 31, 2013 and 2012, the Company incurred expenses of $3.7 million and $0.1 million, respectively, for work performed.  As of December 31, 2013 and 2012, the Company had outstanding trade payables with Intrexon of $1.3 million and $0.1 million, respectively.  The Company will pay quarterly cash royalties on improved products equal to one-third of cost of goods sold savings less any such savings developed by the Company outside of the Channel Agreement or Amendment. On all other developed products, the Company will pay Intrexon quarterly cash royalties of 7% on aggregate annualized net sales up to $100 million, and 14% on aggregate annualized net sales greater than $100 million. Sales from the Company’s products (including new indications) marketed at the time of the Channel Agreement are not subject to royalty payments unless they are improved upon through the Channel Agreement.  For additional discussion on Intrexon, see Note 17. 

Note 14. Commitments and Contingencies 

 

Leases

 

                On April 6, 2005, the Company entered into a non-cancellable operating lease (the “Lease”) for its office, warehouse and laboratory facilities in Exton, Pennsylvania.  The lease agreement had a term of 8 years.  On February 17, 2012, the Company entered into an amended and restated lease (the “Amended Lease”) for an additional term of 10 years through the year 2023.  The Lease and the Amended Lease provide for rent payments escalating on an annual basis.  In accordance with ASC 840-20 Operating Leases, the Company calculated the total minimum payments under the lease and divided them equally over the life of the lease to account for the lease on a straight-line basis.  The Company has the option to renew the lease for an additional 5 years at fair market value.  Rental expense totaled $1.5 million and $1.4 million for the years ended December 31, 2013 and 2012, respectively.

 

 

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Fibrocell Science, Inc.

Notes to Consolidated Financial Statements (Continued)

 

Note 14. Commitments and Contingencies (Continued)

 

License Agreements

 

On May 3, 2012, the Company entered into an exclusive license agreement with The Regents of the University of California, under which the Company acquired the rights to commercially apply discoveries resulting from the scientific collaboration between the University of California, Los Angeles (“UCLA”) and Fibrocell Science, Inc.  Under the terms of the license agreement, the Company agreed to pay UCLA a non-refundable initial license fee of $10,000 thirty days post execution of the agreement and the Company also agreed to pay UCLA an annual license maintenance fee of, a percentage of product royalties, and milestone payments based on the Company’s achievement of certain clinical and regulatory related milestones for these rights.  The Company’s ability to meet the milestones is dependent on a number of factors including final approvals by regulatory agencies and the continued enforceability of patent claims.

 

On May 3, 2012, the Company also entered into a sponsored research agreement with the Massachusetts Institute of Technology (“MIT”) to progress the research currently underway at UCLA above.  Under the agreement, MIT researchers will investigate viable techniques to isolate, separate, and expand subpopulations of mesenchymal stem cells from dermal cell populations. The goal is to produce relevant quantities of the cells and performs ex vivo studies to determine the ability of these cells to produce clinically meaningful outcomes, such as bone production. If successful, in vivo studies will be evaluated for safety and efficacy analysis. The agreement is currently scheduled to terminate in September 2015

 

The amounts in the table below assume the foregoing agreements are continued through their respective terms.  The agreements may be terminated at the option of either party.  In such event, the Company’s obligation would be limited to costs through the date of such termination.

  

Contractual Obligations

 

The following table summarizes the Company’s contractual obligations as of December 31, 2013:

 

		Payments due by period
($ in thousands)		Total			2014			2015 and 2016			2017 and 2018			2019 and thereafter
License fee obligations(1)		$	895		$	525		$	290		$	40		$	40
Operating lease obligations(2)		$	12,251		$	1,081		$	2,465		$	2,509		$	6,196
Total		$	13,146		$	1,606		$	2,755		$	2,549		$	6,236

 

(1)

Obligations for license agreement with the University of California, Los Angeles (UCLA) and sponsored research agreement with the Massachusetts Institute of Technology (MIT).  The amounts in the table assume the foregoing agreements are continued through their respective terms.  The agreements may be terminated at the option of either party.  In such event, the Company’s obligation would be limited to costs through the date of such termination.

 

(2)

Operating lease obligations are stated based on the amended lease agreement for the office, warehouse and laboratory facilities executed in February 2012.

 

 

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Fibrocell Science, Inc.

Notes to Consolidated Financial Statements (Continued)

 

Note 15. Supplemental Cash Flow Information

 

The following table contains additional cash flow information as of:

 

($ in thousands)		December 31, 2013			December 31, 2012
Supplemental disclosures of cash flow information:
Cash paid for interest		$	-		$	1,885
Non-cash investing and financing activities:
Subscription receivable		$	-		$	2,004
Conversion of note payable		$	-		$	2,385
Issuance of additional warrants		$	-		$	11,077
Conversion of preferred stock derivative balance into common stock		$	-		$	1,350
Cashless exercise of warrants previously recorded as a liability		$	298		$	17
Warrant liability reclassified to equity		$	-		$	15,048
Accrued derivative liability		$	-		$	793

Note 16. Discontinued Operations

 

                On August 31, 2012, the Company sold all of the shares of common stock of Agera held by the Company, which represented 57% of the outstanding common stock of Agera, to Rohto Pharmaceutical Co., Ltd. for approximately $1.0 million.  Accordingly, all operating results from continuing operations exclude the results for Agera which are presented as discontinued operations for the year ended December 31, 2012.  The Company recorded a gain of approximately $0.4 million on the sale.

 

The financial results of Agera are classified as discontinued operations in the accompanying Consolidated Statement of Operations for the year ended December 31, 2012. 

 

Summary financial information related to discontinued operations is as follows:

 

		Year ended December 31, 2012
($ in thousands)
Product sales		$	516
Cost of sales			275
Gross profit		$	241
Operating income (loss)		$	27
Net loss		$	(2)

 

                In addition, there were other minimal losses from foreign subsidiaries which were classified as discontinued operations for the year ended December 31, 2012.

 

 

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Fibrocell Science, Inc.

Notes to Consolidated Financial Statements (Continued)

 

Note 17. Subsequent Event

 

                On January 10, 2014, the Company and Intrexon entered into a Second Amendment (the “Second Amendment”) to the parties’ Exclusive Channel Collaboration Agreement dated October 5, 2012, as previously amended on June 28, 2013 (the “Channel Agreement” and such previous amendment, the “First Amendment”).  The Channel Agreement provides for a “channel collaboration” arrangement governing a strategic collaboration for the development and commercialization of genetically-modified and non-genetically-modified autologous fibroblasts and autologous dermal cells in the United States. The Channel Agreement originally granted the Company an exclusive license to use proprietary technologies and other intellectual property of Intrexon to research, develop, use, import, export, make, have made, sell, and offer for sale certain products in the Field in the United States.

 

                In connection with the execution of the Second Amendment to the Channel Agreement on January 10, 2014 between the Company and Intrexon, the Company entered into a Supplemental Stock Issuance Agreement with Intrexon.  The Company agreed to issue to Intrexon, who is an affiliate of NRM VII Holdings I, LLC, the Company’s largest shareholder, a number of shares of Company common stock based on a per share value of the closing price of the Company’s common stock on the NYSE MKT on the day prior to execution of the Supplemental Stock Issuance Agreement (the “Supplemental Access Fee Shares”).  The Supplemental Access Fee Shares were issued upon the satisfaction of customary closing conditions, including the approval for the listing of the  Supplemental Access Fee Shares on the NYSE MKT.  The closing took place on January 24, 2014.  The Company will record a fair value of $5.2 million for 1,024,590 shares, on a per share value of $5.03 based on the closing price of the Company’s common stock on the closing date, issued to Intrexon for the closing of the Supplemental Stock Issuance Agreement as a research and development expense in the first quarter of 2014.  For additional discussion on Intrexon, see Notes 9 and  13.

 

 

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