$HART Form 10-Q

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Form 10-Q for HARVARD APPARATUS REGENERATIVE TECHNOLOGY, INC.


16-Nov-2015

Quarterly Report

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.Forward Looking Statements

This Quarterly Report on Form 10-Q contains statements that are not statements of historical fact and are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). The forward-looking statements are principally, but not exclusively, contained in “Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements include, but are not limited to, statements about management’s confidence or expectations, and our plans, objectives, expectations and intentions that are not historical facts. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,” “goals,” “sees,” “estimates,” “projects,” “predicts,” “intends,” “think,” “potential,” “objectives,” “optimistic,” “strategy,” and similar expressions intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Factors that may cause our actual results to differ materially from those in the forward-looking statements include the success of our collaborations, clinical trials and pre-clinical development efforts and programs, which success may not be achieved on a timely basis or at all; our ability to obtain and maintain regulatory approval for our implant products, bioreactors, scaffolds and other devices we pursue, including for the esophagus or airway, which approvals may not be obtained on a timely basis or at all; our ability to access debt and equity markets and raise additional funds when needed; the number of patients who can be treated with our products; the amount and timing of costs associated with our development of implant products, bioreactors, scaffolds and other devices; our failure to comply with regulations and any changes in regulations; unpredictable difficulties or delays in the development of new technology; our collaborators or other third parties we contract with, including with respect to conducting any clinical trial or pre-clinical development efforts, not devoting sufficient time and resources to successfully carry out their duties or meet expected deadlines; our ability to attract and retain qualified personnel and key employees and retain senior management; potential liability exposure with respect to our products; our inability to operate effectively as a stand-alone, publicly traded company; the actual costs of separation may be higher than expected; the availability and price of acceptable raw materials and components from third-party suppliers; difficulties in obtaining or retaining the management and other human resource competencies that we need to achieve our business objectives; increased competition in the field of regenerative medicine and the financial resources of our competitors; our ability to obtain and maintain intellectual property protection for our device and product candidates; our inability to implement our growth strategy; plus factors described under the heading “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014 filed with the Securities and Exchange Commission (the “SEC”) on March 27, 2015 or described in our other public filings. Our results may also be affected by factors of which we are not currently aware. We may not update these forward-looking statements, even though our situation may change in the future, unless we have obligations under the federal securities laws to update and disclose material developments related to previously disclosed information.

Overview

Our Business

We are a clinical-stage regenerative medicine company developing life-saving organ implants to address life-threatening diseases or conditions. Our technology initially is focused on restoring organ function to a patient’s esophagus or airways (bronchus or trachea). Our central focus continues to be the development of bioengineered organs for life-threatening conditions. We have built a dedicated internal team of materials scientists, engineers and biologists who are working with our collaborators at Mayo Clinic and Connecticut Children’s Medical Center to bring our products to the patients who need them.

For the past several months our scientific efforts have resulted in significant advances in the development of our second-generation (Gen2) bioengineered implants. Our Gen2 technology reflects design enhancements aimed at improving the body’s response to the implant and better guiding the repair of tissue in the healing process. Our recent animal studies tested all three of our Gen2 implants – esophagus, trachea, and bronchus. We believe the trachea study demonstrated the resolution of the negative inflammatory response observed with the prior generation of the technology. This achievement was significant, and we will now proceed to a confirmatory large-animal study of our trachea and bronchus implants with Mayo Clinic. Our bronchus study achieved similar positive results as those seen in the trachea study. The results of the pre-clinical esophageal implant study suggest clinically significant evidence of tissue and nerve regeneration in the esophageal implant. Complete regeneration of the esophagus was achieved in 2 weeks. This result positions the esophageal implant as our current lead development priority. The esophageal implant is intended to address a very significant need as a potentially life-saving treatment for patients with esophageal cancer. Each year in the U.S. approximately 17,000 new cases of esophageal cancer are diagnosed, and more than 4,000 are addressed by surgery.

We plan to confirm the improvements in our Gen2 platform by conducting large-animal studies at Mayo Clinic along with their team of regenerative medicine experts. The study design has been completed, requisite tests are underway, and we expect the animal surgeries to occur in December 2015. We expect that those studies will provide the key data to determine if our Gen2 scaffolds are ready for use in patients. We believe positive results from these studies would support the use of a Gen2 product in compassionate use surgeries.

Collaborations

We continue to advance our development partnerships with Mayo Clinic and Connecticut Children’s Medical Center (CCMC). HART’s collaboration with Mayo Clinic focuses on developing solutions for cancer and other life-threatening diseases affecting the esophagus, bronchus and trachea. We have initiated our planned confirmatory large-animal studies of Gen2 implants in collaboration with Mayo Clinic. The study design has been completed, prerequisite tests are underway and we expect the animal surgeries to occur in December 2015. Our collaboration with CCMC is focused on developing a solution for a congenital childhood condition, pediatric esophageal atresia, a condition in which a significant or complete separation of a child’s esophagus prevents normal eating function. Initial tests with CCMC commenced during the third quarter of 2015.

During the third quarter of 2015 we also established the Scientific Advisory Board and announced that Joseph P. (Jay) Vacanti, M.D., a surgeon and pioneering scientist in the field of tissue engineering, has agreed to serve as Chairman. The Scientific Advisory Board’s role is to provide support and guidance for our research and development programs. We expect to add three to five additional members to the Scientific Advisory Board over the next twelve to eighteen months.

Dr. Vacanti has worked in the field of tissue engineering since its beginnings in the early 1980’s – a mission that stems from his long-held interest in solving the problem of organ shortages. He has held academic appointments at Harvard Medical School since 1974; has authored over 320 original reports, 69 book chapters, 54 reviews and over 473 abstracts. Dr. Vacanti has 81 patents or patents pending in the United States, Canada, Europe and Japan. Dr. Vacanti’s current medical affiliations including Harvard Medical School and Massachusetts General Hospital. Over the past 15 years, Dr. Vacanti has researched the creation of complete vascular networks as part of implantable tissue engineered devices that allow the fabrication of large, complex living structures such as vital organs or extremities. Dr. Vacanti was a founding co-president of what is now the Tissue Engineering Regenerative Medicine International Society (TERMIS) and he was also founding senior editor of “Tissue Engineering”.

Regulatory Update

Assuming we receive positive data from the preclinical studies with Mayo Clinic planned for the fourth quarter of 2015, we expect to file an Investigational New Drug (IND) application with the U.S. Food and Drug Administration (FDA) and a Clinical Trial Application (CTA) with the European Medicines Agency (EMA) for our first indication coming from our bioengineered organ implant product platform during 2016.

Our trachea implant product was granted orphan designation by the FDA in September 2014. Given the significant improvements to our second-generation product platform, we expect to file an amendment to our current orphan drug designation with the FDA. Upon marketing authorization, orphan status would provide a seven year marketing exclusivity in the U.S. for the trachea implant product. We applied for orphan status for the trachea implant product with the EMA during the fourth quarter of 2014 and withdrew that application during the second quarter of 2015 because our Gen2 trachea product, which is currently in development, will be sufficiently different from our first-generation product that we believe that filing for orphan status for the Gen2 product will be the fastest path to achieving orphan status in Europe.

Results of Operations

Components of Operating Loss

Research and development expense. Research and development expense consists of salaries and related expenses, including stock-based compensation, for personnel and contracted consultants and various materials and other costs to develop our new products, primarily: synthetic organ scaffolds, including investigation and development of materials and investigation and optimization of cellularization, and 3D organ bioreactors. Other research and development expenses include the costs of outside service providers and material costs for prototype and test units and outside testing facilities performing cell growth and materials experiments, as well as the costs of all other preclinical research and testing and expenses related to potential patents. We expense research and development costs as incurred.

Sales and marketing expense. Sales and marketing expense consists primarily of salaries and related expenses, including stock-based compensation, for personnel performing sales, marketing, and business development roles, and costs associated with their travel and participation in trade shows and conferences. It also includes the costs of marketing communications and web site development and maintenance.

General and administrative expense. General and administrative expense consists primarily of salaries and other related expenses, including stock-based compensation, for personnel in executive, accounting, information technology and human resources roles. Other costs include professional fees for legal and accounting services, insurance, investor relations and facility costs.

Comparison of the three months ended September 30, 2015 to the three months ended September 30, 2014:

Research and Development Expense

Research and development expense decreased $0.1 million, to $1.3 million or 9% for the three months ended September 30, 2015 compared with $1.4 million for the three months ended September 30, 2014. Decreases in recruiting costs of $0.2 million, payroll related cost of $0.1 million and consultancy cost associated with intellectual property of $0.1 million, were partially offset by increased spending on outsourced preclinical studies of $0.2 million and $0.1 million in non-cash stock based compensation.

Sales and Marketing Expense

Sales and marketing expense increased approximately $9,000 or 12%, to $86,000 for the three months ended September 30, 2015 compared with $77,000 for the three months ended September 30, 2014. The increase was primarily due to $20,000 in additional non-cash stock based compensation costs, partially offset by an $11,000 decrease in payroll related costs.

General and Administrative Expense

General and administrative expense decreased $0.2 million, or 20%, to $1.0 million for the three months ended September 30, 2015 compared with $1.2 million for the three months ended September 30, 2014. The $0.2 million decrease was composed of $0.1 million in non-cash stock-based compensation, and $0.1 million in payroll related costs.

Comparison of the nine months ended September 30, 2015 to the nine months ended September 30, 2014:

Research and Development Expense

Research and development expense decreased $0.3 million or 9%, to $3.5 million for the nine months ended September 30, 2015 compared with $3.8 million for the nine months ended September 30, 2014. The decrease of $0.3 million is composed of reductions of $0.2 million related to intellectual property consulting expenses, $0.2 million of recruiting, $0.1 million in other consulting, and $0.1 million in costs associated with our foreign subsidiaries, offset by increases of $0.3 million in spending on outsourced preclinical studies.

Sales and Marketing Expense
Sales and marketing expense increased approximately $35,000 or 15%, to $276,000 for the nine months ended September 30, 2015 compared with $241,000 for the nine months ended September 30, 2014. The increase was primarily due to $75,000 of additional non-cash stock based compensation offset by a $40,000 decrease in payroll related costs.

General and Administrative Expense

General and administrative expense increased $1.5 million, or 37%, to $5.7 million for the nine months ended September 30, 2015 compared with $4.2 million for the nine months ended September 30, 2014. The $1.5 million increase is composed of $2.1 million in non-cash stock-based compensation related to the acceleration and modification of employee stock options in association with the resignation of David Green as CEO on April 17, 2015, $0.2 million in additional recruiting costs related to the search for a new CEO, and $0.1 million in incremental legal fees associated creation and protection of intellectual property. These costs were partially offset by decreases of $0.5 million in non-cash stock-based compensation expense related to employees other than the former CEO, $0.1 million in payroll related costs, and $0.3 million in other costs.

Financial Condition, Liquidity and Capital Resources

Sources of liquidity. We have incurred net losses since inception. We are currently investing significant resources in development and commercialization of products for use by clinicians and researchers in the field of regenerative medicine and have incurred operating losses to date. We expect to continue to incur operating losses and negative cash flows from operations at least until we receive regulatory approval to market a clinical product, as revenues from research bioreactors sales will not generate sufficient gross profits to offset our operating expenses.

Operating activities. Net cash used in operating activities of $5.6 million for the nine months ended September 30, 2015 reflects our $9.4 million net loss, a $3.6 million add-back of non-cash stock-based compensation expense, a $0.3 million add-back for depreciation, and changes in working capital items.

Net cash used in operating activities of $5.7 million for the nine months ended September 30, 2014 reflects our $8.2 million net loss, a $1.9 million add-back of non-cash stock-based compensation expense, a $0.3 million add-back for depreciation, and changes in working capital items.

Investing activities. Net cash used in investing activities during the nine month periods ended September 30, 2015 and 2014 of $0.2 million and $1.0 million respectively, reflects cash used for additions to property, plant and equipment.

Financing activities. Net cash generated from financing activities during the nine months ended September 30, 2015 of $8.7 million was the net proceeds from the issuance of convertible preferred and common shares.

Cash generated from financing activities during the nine months ended September 30, 2014 of $0.4 million was primarily a result of employees’ exercises of stock options.

Recent Authoritative Accounting Guidance

There are no recently issued accounting standards that are not yet effective that the Company believes would materially impact the financial statements.

Critical Accounting Policies and Estimates

The critical accounting policies underlying the accompanying unaudited consolidated financial statements are those set forth in Part II, Item 7 included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, which was filed with the SEC on March 27, 2015.

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