UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549  
 ___________________________________________________________________
FORM 10-Q
 
x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended June 30, 2016
 
OR
 
o          Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 ___________________________________________________________________

Commission File Number 001-31564
Fibrocell Science, Inc.
(Exact name of registrant as specified in its Charter)
Delaware
 
87-0458888
(State or other jurisdiction of incorporation)
 
(I.R.S. Employer Identification No.)
405 Eagleview Boulevard
Exton, Pennsylvania 19341
(Address of principal executive offices, including zip code)
(484) 713-6000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for any shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ý   No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
    Yes  ý   No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
 
Accelerated filer o
 
 
 
Non-accelerated filer  o
 
Smaller reporting company  x
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is shell company (as defined in Rule 12b-2of the Exchange Act)     Yes  o   No  ý
As of July 29, 2016, there were 43,898,785 outstanding shares of the registrant’s common stock, par value $0.001.
 


Table of Contents

TABLE OF CONTENTS
 
 
 
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
_____________________________

Unless the context otherwise requires, all references in this Form 10-Q to the “Company,” “Fibrocell,” “we,” “us,” and “our” include Fibrocell Science, Inc. and its subsidiaries.

Trademark Notice
Fibrocell ® , Fibrocell Science ® , the Fibrocell logo and LAVIV ® are trademarks of Fibrocell Science, Inc. (Exton, PA). All other trademarks, service marks or trade names appearing in this Form 10-Q are the property of their respective owners.


Table of Contents

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, among others, statements relating to:
•
our expectation that our existing cash resources will be sufficient to enable us to fund our operations into the fourth quarter of 2016;
•
our plans to address our capital requirements and the consequences of failing to do so;
•
our expectation to dose the first subject in the Phase I portion of our Phase I/II clinical trial of FCX-007 at the end of 2016 and to have three-month data for the adult subjects in the Phase I portion of the trial in the second half of 2017, as well as six-month data for a cohort of this group;
•
the anticipated submission of an Investigational New Drug application (IND) for FCX-013 to the United States Food and Drug Administration (FDA) in 2017;
•
expected costs associated with the wind-down of azficel-T (including LAVIV) operations at our Exton, PA facility including future cash expenditures to decommission our azficel-T manufacturing facility and to terminate and wind-down our contractual and other obligations relating to our azficel-T operations, as well as potential non-cash charges related to future impairments of the carrying values of inventory and equipment used in our azficel-T operations;
•
future expenses and capital expenditures;
•
our product development goals under the collaboration that we entered into with Intrexon Corporation (Intrexon) in December 2015;
•
the potential benefits of orphan drug and pediatric rare disease designations; and
•
the potential advantages of our product candidates and technologies;
as well as other statements relating to our future operations, financial performance and financial condition, prospects, strategies, objectives or other future events. Forward-looking statements appear primarily in the sections of this Form 10-Q entitled “Item 1—Financial Statements,” and “Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations.” In some cases, you can identify forward-looking statements by words such as “may,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing,” “scheduled” and similar expressions, although not all forward-looking statements contain these identifying words.

Forward-looking statements are based upon current expectations and assumptions and are subject to a number of known and unknown risks, uncertainties and other factors that could cause actual results to differ materially and adversely from those expressed or implied by such statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (2015 Form 10-K) and in particular, the risks and uncertainties discussed under the caption “Item 1A—Risk Factors”. As a result, you should not place undue reliance on forward-looking statements.

Additionally, the forward-looking statements contained in this Form 10-Q represent our views only as of the date of this Form 10-Q (or any earlier date indicated in such statement). While we may update certain forward-looking statements from time to time, we specifically disclaim any obligation to do so, even if new information becomes available in the future. However, you are advised to consult any further disclosures we make on related subjects in the periodic and current reports that we file with the Securities and Exchange Commission (SEC).

This Form 10-Q also contains estimates, projections and other information concerning our industry, our business, and the markets for certain diseases, including data regarding the estimated size of those markets, and the incidence and prevalence of certain medical conditions. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry, business, market and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data and similar sources.

1
Table of Contents

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Fibrocell Science, Inc.
Condensed Consolidated Balance Sheets
(unaudited)
($ in thousands, except share and per share data)

 
June 30,
2016
 
December 31, 2015
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
8,161

 
$
29,268

Inventory, net
109

 
482

Prepaid expenses and other current assets
636

 
1,244

Total current assets
8,906

 
30,994

Property and equipment, net of accumulated depreciation of $1,401 and $1,242, respectively
1,546

 
1,582

Intangible assets, net of accumulated amortization of $0 and $2,204, respectively
—

 
4,136

Other assets
64

 
—

Total assets
$
10,516

 
$
36,712

Liabilities and Stockholders’ Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
553

 
$
499

Related party payable
924

 
10,720

Accrued expenses
1,253

 
1,779

Deferred revenue
408

 
457

Warrant liability, current
5

 
1,910

Total current liabilities
3,143

 
15,365

Warrant liability, long term
759

 
6,365

Deferred rent
785

 
779

Total liabilities
4,687

 
22,509

Stockholders’ equity:
 

 
 

Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares outstanding as of June 30, 2016 and December 31, 2015
—

 
—

Common stock, $0.001 par value; 150,000,000 shares authorized, 43,898,785 shares issued and outstanding as of June 30, 2016; 100,000,000 shares authorized, 43,898,785 shares issued and outstanding as of December 31, 2015
44

 
44

Additional paid-in capital
162,555

 
161,330

Accumulated deficit
(156,770
)
 
(147,171
)
Total stockholders’ equity
5,829

 
14,203

Total liabilities and stockholders’ equity
$
10,516

 
$
36,712

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


2
Table of Contents

Fibrocell Science, Inc.
Condensed Consolidated Statements of Operations
(unaudited)
($ in thousands, except share and per share data)

 
Three Months
Ended June 30,
 
Six Months
Ended June 30,
 
2016
 
2015
 
2016
 
2015
Revenue from product sales
$
73

 
$
55

 
$
85

 
$
168

Collaboration revenue
14

 
82

 
18

 
163

Total revenue
87

 
137

 
103

 
331

Cost of product sales
392

 
77

 
409

 
221

Cost of collaboration revenue
—

 
85

 
1

 
88

Total cost of revenue
392

 
162

 
410

 
309

Gross (loss) profit
(305
)
 
(25
)
 
(307
)
 
22

Research and development expense
2,352

 
2,567

 
4,954

 
4,814

Research and development expense - related party
925

 
1,127

 
2,249

 
2,867

Selling, general and administrative expense
2,540

 
3,640

 
5,280

 
6,564

Intangible asset impairment expense
3,905

 
—

 
3,905

 
—

Restructuring costs
292

 
—

 
292

 
—

Operating loss
(10,319
)
 
(7,359
)
 
(16,987
)
 
(14,223
)
Other income (expense):
 
 
 

 
 
 
 
Warrant revaluation income (expense)
2,254

 
602

 
7,511

 
(1,061
)
Other expense
(31
)
 
—

 
(31
)
 
—

Interest income
4

 
1

 
8

 
3

Loss before income taxes
(8,092
)
 
(6,756
)
 
(9,499
)
 
(15,281
)
Income tax benefit
—

 
—

 
—

 
—

Net loss
$
(8,092
)
 
$
(6,756
)
 
$
(9,499
)
 
$
(15,281
)
 
 
 
 
 
 
 
 
Per Share Information:
 
 
 
 
 
 
 
Net loss:
 
 
 
 
 
 
 
     Basic
$
(0.18
)
 
$
(0.17
)
 
$
(0.22
)
 
$
(0.37
)
     Diluted
$
(0.18
)
 
$
(0.17
)
 
$
(0.26
)
 
$
(0.37
)
Weighted average number of common shares outstanding:
 

 
 

 
 
 
 
     Basic
43,898,785

 
40,889,732

 
43,898,785

 
40,875,704

     Diluted
43,898,785

 
40,889,732

 
43,934,819

 
40,875,704

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


3
Table of Contents

Fibrocell Science, Inc.
Condensed Consolidated Statement of Stockholders’ Equity
(unaudited)
($ in thousands, except share data) 

 
Common Stock
 
Additional paid-in capital
 
Accumulated deficit
 
Total Equity
 
Shares
 
Amount
 
 
 
Balance, December 31, 2015
43,898,785

 
$
44

 
$
161,330

 
$
(147,171
)
 
$
14,203

Cumulative effect from adoption of new accounting standard (Note 3)
—

 
—

 
100

 
(100
)
 
—

Stock-based compensation expense
—

 
—

 
1,125

 
—

 
1,125

Net loss
—

 
—

 
—

 
(9,499
)
 
(9,499
)
Balance, June 30, 2016
43,898,785

 
$
44

 
$
162,555

 
$
(156,770
)
 
$
5,829

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


4
Table of Contents

Fibrocell Science, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
($ in thousands) 
 
Six Months Ended June 30,
 
2016
 
2015
Cash flows from operating activities:
 

 
 

Net loss
$
(9,499
)
 
$
(15,281
)
Adjustments to reconcile net loss to net cash used in operating activities:
 

 
 

Stock-based compensation expense
1,125

 
1,044

Warrant revaluation (income) expense
(7,511
)
 
1,061

Depreciation and amortization
391

 
346

Provision for (recovery of) doubtful accounts
(12
)
 
(1
)
Inventory reserve
151

 
—

Intangible asset impairment
3,905

 
—

Loss on disposal or impairment of property and equipment
65

 
—

Decrease (increase) in operating assets:
 

 
 

Accounts receivable
12

 
2

Inventory
222

 
87

Prepaid expenses and other current assets
728

 
549

Other assets
(64
)
 
—

Increase (decrease) in operating liabilities:
 
 
 
Accounts payable
(3
)
 
1,061

Related party payable
(9,796
)
 
(338
)
Accrued expenses and deferred rent
(518
)
 
599

Deferred revenue
(49
)
 
84

Net cash used in operating activities
(20,853
)
 
(10,787
)
Cash flows from investing activities:
 

 
 

Purchase of property and equipment
(143
)
 
(111
)
Net cash used in investing activities
(143
)
 
(111
)
Cash flows from financing activities:
 

 
 

Payment of deferred offering costs
(109
)
 
—

Proceeds from the exercise of stock options
—

 
255

Principle payments on capital lease obligations
(2
)
 
(2
)
Net cash (used in) provided by financing activities
(111
)
 
253

Net decrease in cash and cash equivalents
(21,107
)
 
(10,645
)
Cash and cash equivalents, beginning of period
29,268

 
37,495

Cash and cash equivalents, end of period
$
8,161

 
$
26,850

 
 
 
 
 
 
 
 
Supplemental Cash Flow Disclosures:
 
 
 
Non Cash Investing and Financing Activities:
 
 
 
Property and equipment in accounts payable
$
46

 
$
—

Deferred offering costs in accounts payable
$
11

 
$
—

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


5
Table of Contents
Fibrocell Science, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)


Note 1. Business and Organization

Organization

Fibrocell Science, Inc. (as used herein, “we,” “us,” “our,” “Fibrocell” or the “Company”) is the parent company of Fibrocell Technologies, Inc. (Fibrocell Tech). Fibrocell Tech is the parent company of Isolagen International, S.A., a company organized under the laws of Switzerland (Isolagen Switzerland). The Company’s international activities are currently immaterial.

Effective April 1, 2016, Fibrocell Science Hong Kong Limited (“Fibrocell Hong Kong”), a company organized under the laws of Hong Kong and former subsidiary of Fibrocell, was dissolved. As this entity had no historical financial or operational activities, the impact of the dissolution did not, and is not expected to have, a material impact on the Company’s present or future consolidated financial statements.

Business Overview

Fibrocell is an autologous cell and gene therapy company translating personalized biologics into medical breakthroughs. The Company is focused on discovering and developing therapies for the localized treatment of diseases affecting the skin and connective tissue. All of the Company’s product candidates incorporate its proprietary autologous fibroblast technology. The Company’s research and development efforts focus on gaining regulatory approvals of its product candidates in the United States.

Liquidity and Financial Condition

The Company expects to continue to incur losses and will require additional capital to advance its product candidates through development to commercialization. As of June 30, 2016 , the Company had cash and cash equivalents of approximately $ 8.2 million and working capital of approximately $ 5.8 million . The Company believes that its cash and cash equivalents at June 30, 2016 will be sufficient to fund operations into the fourth quarter of 2016. The Company will require additional capital to fund operations beyond that point. To meet its capital needs, the Company intends to raise additional capital through debt or equity financings, collaborations, partnerships or other strategic transactions. However, there can be no assurance that the Company will be able to complete any such transaction on acceptable terms or otherwise. The failure of the Company to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on the Company’s business, results of operations and financial condition. These conditions raise substantial doubt about its ability to continue as a going concern. Consequently, the audit report prepared by the Company’s independent registered public accounting firm related to its Consolidated Financial Statements for the year ended December 31, 2015 included a going concern explanatory paragraph.
Note 2. Basis of Presentation

General

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnote disclosures required by GAAP for complete consolidated financial statements.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.  These financial statements and accompanying notes should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (2015 Form 10-K), filed with the Securities and Exchange Commission (SEC). The Company’s significant accounting policies are described in the Notes to Consolidated Financial Statements in the 2015 Form 10-K and updated, as necessary, in Note 3 in this Form 10-Q. The results of the Company’s operations for any interim period are not necessarily indicative of the results of operations for any other interim period or full year.

All intercompany accounts and transactions have been eliminated in consolidation. The Company's international operations are immaterial and it has no unrealized gains or losses from the sale of investments. As a result, it does not have any items that would be classified as other comprehensive income in such a statement.

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Table of Contents
Fibrocell Science, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

Note 2. Basis of Presentation (continued)

Reclassifications

The prior year Condensed Consolidated Financial Statements presented in this Form 10-Q contain certain reclassifications made to the Condensed Consolidated Statement of Operations and the Condensed Consolidated Statement of Cash Flows to conform to the current year’s presentation. Specifically, related party payables were reclassified from accounts payable and accrued expenses as of June 30, 2015.
Note 3. Summary of Significant Accounting Policies

Intangible Assets

Intangible assets are research and development assets related to the Company’s primary study on azficel-T that were capitalized on the balance sheet upon emergence from bankruptcy. The portion of the reorganization value which was attributed to identifiable intangible assets was $6.3 million . Azficel-T had two current or target indications: the Company's FDA-approved product LAVIV ® and a clinical development program for azficel-T for the treatment of vocal cord scarring resulting in chronic or severe dysphonia. 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 were considered to be finite-lived intangible assets and began amortizing over 12 years , the estimated useful life of the assets which is analogous with the exclusivity period granted to the Company under the BLA.

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. The Company reviews the estimated remaining useful life of its intangible assets on an annual basis with any changes, if applicable, accounted for prospectively. In accordance with Financial Accounting Standards Board (FASB) Accounting Standards 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. In June 2016, based on its failure to achieve primary efficacy endpoints for its Phase II clinical trial of azficel-T for the treatment of vocal cord scarring, the Company determined to wind-down its azficel-T operations as more fully described in Note 9. As a result, management concluded that the Company’s intangible assets had become fully impaired. Accordingly, a non-cash impairment charge of approximately $3.9 million was recorded during the three months ended June 30, 2016 and is included in the Condensed Consolidated Statement of Operations.

Stock-Based Compensation

The Company follows ASC 718, Compensation – Stock Compensation (ASC 718) , or ASC 505-50, Equity – Equity Based Payments to Non-Employees, where applicable. 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 non-employees in accordance with the accounting guidance for equity instruments that are issued to entities or persons 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 term of the options. The value of the award that is ultimately expected to vest based on the achievement of a performance condition (i.e., service period) is recognized as expense on a straight-line basis over the requisite service period. See Note 7 for additional details.

Previously, ASC 718 required forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differed from those estimates. In the first quarter of 2016, the Company adopted FASB Accounting Standards Update (ASU) 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which allows an entity to elect as an accounting policy either to continue to estimate the total number of awards for which the requisite service period will not be rendered or to account for forfeitures when they occur. In connection with the adoption of this ASU, the Company made an accounting policy election to account for forfeitures as they occur and applied this change in accounting policy on a modified retrospective basis. As a result, the Company recorded a cumulative-effect adjustment to retained earnings which resulted in an increase to accumulated deficit of $0.1 million with an offsetting

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Table of Contents
Fibrocell Science, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

Note 3. Summary of Significant Accounting Policies (continued)

increase to additional paid-in capital (zero net total equity impact) as of the date of adoption, principally related to additional stock compensation expense that would have been recognized on unvested outstanding options unadjusted for estimated forfeitures.

Restructuring Costs

Restructuring charges are primarily comprised of severance costs related to workforce reductions, contract termination and wind-down costs, asset impairments and costs of decommissioning the Company’s azficel-T manufacturing facility. In accordance with ASC 420, Exit or Disposal Cost Obligations , the Company recognizes restructuring charges when the liability has been incurred, except for one-time employee termination benefits that are incurred over time. Generally, one-time employee termination benefits (i.e. severance costs) are accrued at the date management has committed to a plan of termination and employees have been notified of their termination dates and expected severance payments. Other costs, including but not limited to, contract termination and wind-down costs and manufacturing facility decommissioning costs, will be recorded as incurred. Asset impairment charges have been, and will be, recognized when management has concluded that the assets have been impaired in accordance with ASC 360-10-35, Impairment or Disposal of Long-Lived Assets , or other applicable authoritative guidance. See Note 9 for additional details.

Income Taxes
    
In accordance with ASC 270, Interim Reporting, and ASC 740, Income Taxes , the Company is required at the end of each interim period to determine the best estimate of its annual effective tax rate and then apply that rate in providing for income taxes on a current year-to-date (interim period) basis.  For the six months ended June 30, 2016 and 2015 , the Company recorded no tax expense or benefit due to the expected current year loss and its historical losses.  The Company has not recorded its net deferred tax asset as of either June 30, 2016 or December 31, 2015 because it maintains a full valuation allowance against all deferred tax assets as management has determined that it is not more likely than not that the Company will realize these future tax benefits. As of June 30, 2016 and December 31, 2015 , the Company had no uncertain tax positions.

Recently Issued Accounting Pronouncements

Management does not believe that any recently issued accounting pronouncements issued by the FASB or guidance issued by the SEC had or is expected to have a material impact on the Company’s present or future consolidated financial statements.
Note 4. Inventory
    
Inventories consist of raw materials and work in process intended for use in the manufacture of LAVIV, which was approved by the FDA in 2011 for the improvement of nasolabial fold wrinkles in adults. However, raw materials may be used for clinical trials and are charged to research and development (R&D) expense when consumed for such activities.
Inventories consisted of the following as of:
 
($ in thousands)
June 30, 2016
 
December 31, 2015
 
 
Raw materials (LAVIV and product candidates)
$
71

 
$
338

 
Work in process (LAVIV)
189

 
144

 
Total inventory, gross
260

 
482

 
Less: Reserve for work in process expiration
(151
)
 
—

 
Total inventory, net
$
109

 
$
482


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Table of Contents
Fibrocell Science, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

Note 4. Inventory (Continued)

In connection with the wind-down of the Company’s azficel-T operations, as more fully described in Note 9, the Company recognized inventory write-downs of approximately $0.2 million in cost of goods sold and recorded a reserve for work in process expiration of approximately $0.2 million during the second quarter of 2016. With respect to LAVIV, the Company is no longer accepting new prescriptions.
Note 5. Warrants

The Company accounts for common stock warrants as either equity instruments or derivative liabilities depending on the specific terms of the warrant agreement. As of June 30, 2016 and December 31, 2015 , all of the Company’s outstanding common stock warrants were classified as derivative liabilities and accounted for based on the guidance in ASC 815, Derivatives and Hedging as the warrants contain “down-round protection” or other terms that could potentially require “net cash settlement” and hence were determined not to be indexed to the Company’s own stock. The warrants will continue to be classified as a liability, regardless of the likelihood that such instruments will ever be settled in cash, until they are exercised, expire or are amended in a way that would no longer require these warrants to be classified as a liability.

The following table summarizes outstanding liability-classified warrants to purchase common stock:
 
Number of Warrants
 
 
 
 
Liability-classified warrants
June 30, 2016
 
December 31, 2015
 
Exercise
Price
 
Expiration
Dates
Issued in March 2010 financing
—

 
319,789

 
$
6.25

 
Mar 2016
Issued in June 2011 financing
—

 
6,113

 
$
22.50

 
Jun 2016
Issued in Series B and D Preferred Stock offerings
1,970,594

 
1,970,594

 
$
6.25

 
Jul 2016 - Dec 2016
Issued in August 2011 financing
565,759

 
565,759

 
$
18.75

 
Aug 2016
Issued to placement agents in August 2011 financing
50,123

 
50,123

 
$
13.635

 
Aug 2016
Issued in Series E Preferred Stock offering
60,000

 
60,000

 
$
2.50

 
Dec 2017
Issued with Convertible Notes
1,125,578

 
1,125,578

 
$
2.50

 
Jun 2018
Issued in Series E Preferred Stock offering
1,568,823

 
1,568,823

 
$
7.50

 
Dec 2018
Total
5,340,877

 
5,666,779

 
 

 
 
    
The table below is a summary of the Company’s warrant activity during the six months ended June 30, 2016 :
 
Number of
warrants
 
Weighted-
average
exercise
price
Outstanding at December 31, 2015
5,666,779

 
$
7.14

Granted
—

 
—

Exercised
—

 
—

Expired
(325,902
)
 
6.55

Outstanding at June 30, 2016
5,340,877

 
$
7.18


Accounting for Liability-classified Warrants

The foregoing warrants were recorded as derivative liabilities at their estimated fair value at the date of issuance, with subsequent changes in estimated fair value recorded in other income or expense in the Company’s Condensed Consolidated Statements of Operations in each subsequent period. The change in the estimated fair value of the warrant liability for the three and six months ended June 30, 2016 resulted in non-cash income of approximately $2.3 million and $7.5 million , respectively. The change in the estimated fair value of the warrant liability for the three and six months ended June 30, 2015 resulted in non-

9
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Fibrocell Science, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

Note 5. Warrants (continued)

cash income of approximately $0.6 million and non-cash expense of approximately $1.1 million , respectively. The Company utilizes a Monte Carlo simulation valuation method to value its liability-classified warrants.

Assumptions Used in Determining Fair Value of Warrants

The estimated fair value of warrants is determined using Level 2 and Level 3 inputs.  Inherent in the Monte Carlo simulation valuation method are the following assumptions:

Volatility. The Company estimates stock price volatility based on the Company’s historical stock price performance over a period of time that matches the expected remaining life of the warrants.

Risk-free interest rate . The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the valuation date commensurate with the expected remaining life assumption.

Expected remaining life. The expected life of the warrants is assumed to be equivalent to their remaining contractual term.

Dividend rate. The dividend rate is based on the historical rate, which the Company anticipates will remain at zero.

Scenarios.  The probability of complex features of the warrants being triggered is subjective (no observable inputs or available market data) and based on internal and external information known to management at the valuation date.

The following table summarizes the calculated aggregate fair values, along with the inputs and assumptions utilized in each calculation:      
($ in thousands except per share data)
June 30, 2016
 
December 31, 2015
Calculated aggregate value
$
764

 
$
8,275

Weighted average exercise price per share
$
7.18

 
$
7.14

Closing price per share of common stock
$
1.15

 
$
4.55

Volatility
97.2
%
 
85.2
%
Weighted average remaining expected life
1 year, 3 months

 
1 year, 8 months

Risk-free interest rate
0.49
%
 
0.98
%
Dividend yield
—

 
—

Note 6. Fair Value Measurements

Assets and Liabilities Measured at Fair Value on a Recurring Basis
    
The Company follows the guidance in ASC 820, Fair Value Measurement, to account for financial assets and liabilities measured at fair value on a recurring basis. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The Company uses a fair value hierarchy, which distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs). The guidance requires fair value measurements be classified and disclosed in one of the following three categories within the hierarchy:
•
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.

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

Note 6. Fair Value Measurements (continued)

•
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).

Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each reporting period.

The following fair value hierarchy table presents information about each major category of the Company’s financial assets and liabilities measured at fair value on a recurring basis as of:
 
June 30, 2016
($ in thousands) 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 

 
 

 
 

 
 

Cash and cash equivalents
$
8,161

 
$
—

 
$
—

 
$
8,161

Liabilities:
 

 
 

 
 

 
 

Warrant liability
$
—

 
$
—

 
$
764

 
$
764

 

 
December 31, 2015
($ in thousands) 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 

 
 

 
 

 
 

Cash and cash equivalents
$
29,268

 
$
—

 
$
—

 
$
29,268

Liabilities:
 

 
 

 
 

 
 

Warrant liability
$
—

 
$
—

 
$
8,275

 
$
8,275


Changes in Level 3 Liabilities Measured at Fair Value on a Recurring Basis - Common Stock Warrants

The reconciliation of the warrant liability measured at fair value on a recurring basis using unobservable inputs (Level 3) was as follows:
 
Warrant
($ in thousands)
Liability
Balance at December 31, 2015
$
8,275

Expiration of warrants  (1)
(62
)
Change in fair value of warrant liability
(7,449
)
Balance at June 30, 2016
$
764


(1)
Represents the fair value as of the beginning of the year for warrants expiring during the year and has been recorded to warrant revaluation income or expense in the Condensed Consolidated Statement of Operations for the six months ended June 30, 2016.

Effect of Fibrocell’s Stock Price and Volatility Assumptions on the Calculation of Fair Value of Warrant Liabilities

The fair value of the warrant liability is based on Level 3 inputs. As discussed in Note 5, the Company uses a Monte Carlo simulation valuation method to value its liability-classified warrants. The determination of fair value as of the reporting date is affected by Fibrocell’s stock price as well as assumptions regarding a number of subjective variables that do not have observable inputs or available market data to support the fair value. These variables include, but are not limited to, expected stock price volatility over the term of the warrants and the risk-free interest rate. The primary factors affecting the fair value of the warrant liability are the Company’s stock price and volatility as well as certain assumptions by the Company as to the likelihood of provisions to the underlying warrant agreements being triggered. The methods described above and in Note 5 may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values.

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

Note 6. Fair Value Measurements (continued)

Furthermore, while the Company believes its valuation method is appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value could result in a different fair value measurement at the reporting date.

Fair Value of Certain Financial Assets and Liabilities

The Company believes that the fair values of the Company’s current assets and liabilities approximate their reported carrying amounts. There were no transfers between Level 1, 2 and 3 during the periods presented.
Note 7. Stock-Based Compensation

2009 Equity Incentive Plan

The Company’s 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 advisers by providing equity-based incentives.  The Plan allows for the issuance of up to 7,600,000 shares of the Company’s common stock.  In addition, there are 25,000 options outstanding that were issued outside the Plan to consultants in 2013.

The types of awards that may be granted under the Plan include options (both non-qualified 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 Compensation Committee of the Board at the time each award is granted, provided that the terms of options do not exceed ten years .  Vesting schedules for stock options vary, but generally vest 25% per year over four years for employee options and on the one -year anniversary date for non-employee director options. The Plan had 3,365,103 shares available for future grants as of June 30, 2016 .

Accounting for Stock-Based Compensation

The Company recognizes non-cash compensation expense for stock-based awards based on their grant date fair value, determined using the Black-Scholes option-pricing model. During the six months ended June 30, 2016 and 2015 , the weighted average fair market value for options granted was $1.53 and $3.57 , respectively.

Total stock-based compensation expense recognized using the straight-line attribution method and included in operating expenses in the Condensed Consolidated Statements of Operations was approximately $0.6 million and $0.8 million for the three months ended June 30, 2016 and 2015 , respectively, and approximately $1.1 million and $1.0 million for the six months ended June 30, 2016 and 2015 , respectively.

Assumptions Used in Determining Fair Value of Stock Options

Inherent in the Black-Scholes option-pricing model are the following assumptions:

Volatility. The Company estimates stock price volatility based on the Company’s historical stock price performance over a period of time that matches the expected term of the stock options.

Risk-free interest rate . The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant commensurate with the expected term assumption.

Expected term . The expected term of stock options granted is based on an estimate of when options will be exercised in the future. The Company applied the simplified method of estimating the expected term of the options, described in the SEC’s Staff Accounting Bulletins 107 and 110, as the historical experience is not indicative of the expected behavior in the future. The expected term, calculated under the simplified method, is applied to groups of stock options that have similar contractual terms. Using this method, the expected term is determined using the average of the vesting period and the contractual life of the stock options granted.

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

Note 7. Stock-Based Compensation (continued)

Forfeitures. The Company accounts for forfeitures when they occur. Ultimately, the actual expense recognized over the vesting period will be for only those shares that vest.

The fair market value of these stock options at the date of grant was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions for the six months ended:
 
June 30, 2016
 
June 30, 2015
Expected term
6 years, 1 month

 
6 years, 1 month

Interest rate
1.40
%
 
1.56
%
Dividend yield
—

 
—

Volatility  (1)
92.4
%
 
103.3
%
(1)
For the six months ended June 30, 2016, the Company estimated expected volatility based on the historical volatility of its own common stock on a stand-alone basis. Prior to January 1, 2016, including the six months ended June 30, 2015, the Company estimated expected volatility based on the historical volatility of a peer group.

Stock Option Activity
    
The following table summarizes stock option activity for the six months ended June 30, 2016 :
($ in thousands except share and per share data)
Number of
shares
 
Weighted-
average
exercise
price
 
Weighted- average
remaining
contractual
term
 
Aggregate
intrinsic
value
Outstanding at December 31, 2015
3,134,094

 
$
6.23

 
8 years
 
$
1,630

Granted
1,091,000

 
2.01

 
 
 
 
Exercised
—

 
—

 
 
 
 
Forfeited
(29,256
)
 
4.61

 
 
 
 
Expired
(188
)
 
4.24

 
 
 
 
Outstanding at June 30, 2016  (1)
4,195,650

 
$
5.15

 
8 years
 
$
43

Exercisable at June 30, 2016
1,954,190

 
$
7.50

 
6 years, 11 months
 
$
—

(1)
Includes both vested stock options as well as unvested stock options for which the requisite service period has not been rendered but that are expected to vest based on achievement of a service condition.

The total fair value of options vested during the six months ended June 30, 2016 was approximately $1.6 million . Additionally, as of June 30, 2016 , there was approximately $4.7 million of unrecognized compensation expense related to non-vested stock options which is expected to be recognized over a weighted-average period of 2.8 years.
Note 8. Related Party Transactions

The Company and Intrexon Corporation (Intrexon) are parties to two distinct exclusive channel collaboration agreements including the Exclusive Channel Collaboration Agreement entered into in October 2012 and amended in June 2013 and January 2014 (as amended, the 2012 ECC) and the Exclusive Channel Collaboration Agreement entered into in December 2015 (the 2015 ECC). Pursuant to these agreements, the Company engages Intrexon for support services for the research and development of product candidates covered under the respective agreements and reimburses Intrexon for its cost for time and materials for such work.

For the three months ended June 30, 2016 and 2015 , the Company incurred total expenses of $0.9 million and $1.1 million , respectively, with Intrexon, for work performed under the 2012 ECC. During the same periods, no expenses were

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Fibrocell Science, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
 
Note 8. Related Party Transactions (continued)

incurred for work performed under the 2015 ECC. Of the $0.9 million incurred during the 2016 period, $0.3 million related to direct expenses for work performed by Intrexon and $0.6 million related to pass-through costs. Of the $1.1 million incurred during the 2015 period, $0.8 million related to direct expenses for work performed by Intrexon and $0.3 million related to pass-through costs.

For the six months ended June 30, 2016 and 2015 , the Company incurred total expenses of $2.2 million and $2.9 million , respectively, with Intrexon, for work performed under the 2012 ECC. During the same periods, no expenses were incurred for work performed under the 2015 ECC. Of the $2.2 million incurred during the 2016 period, $0.8 million related to direct expenses for work performed by Intrexon and $1.4 million related to pass-through costs. Of the $2.9 million incurred during the 2015 period, $1.7 million related to direct expenses for work performed by Intrexon and $1.2 million related to pass-through costs.

As of June 30, 2016 and December 31, 2015 , the Company had outstanding payables to Intrexon of $0.9 million and $10.7 million , respectively. In connection with the 2015 ECC, in consideration for the license and the other rights that the Company receives under the agreement, the Company paid Intrexon an up-front technology access fee of $10 million in cash in January 2016.
Randal J. Kirk is the chairman of the board and chief executive officer of Intrexon and, together with his affiliates, owns more than 50% of Intrexon’s common stock. Affiliates of Randal J. Kirk (including Intrexon) own approximately 38% of our common stock. Additionally, two of our directors, Julian Kirk (who is the son of Randal J. Kirk) and Marcus Smith, are employees of Third Security, LLC, which is an affiliate of Randal J. Kirk.
Note 9. Restructuring Costs

In June 2016, the Company determined to wind-down its azficel-T operations at the Company’s Exton, PA facility and to reduce the workforce that supports such operations. This decision enables the Company to focus its resources towards pre-clinical and clinical research and development of its gene-therapy product candidates.

Restructuring-related charges for both the three and six months ended June 30, 2016 totaled approximately $0.3 million and were comprised of approximately $0.3 million of employee severance and benefit related charges and less than $0.1 million of asset impairments.

The restructuring and asset impairment activity for the six months ended June 30, 2016 was as follows:
($ in thousands)
 
Employee Severance and Benefits
 
Asset Impairments
 
Total
Accrued restructuring balance as of December 31, 2015
 
$
—

 
$
—

 
$
—

Additional accruals
 
258

 
34

 
292

Cash payments
 
—

 
—

 
—

Non-cash settlements
 
—

 
(34
)
 
(34
)
Accrued restructuring balance as of June 30, 2016
 
$
258

 
$
—

 
$
258


The restructuring-related charges incurred during the three and six months ended June 30, 2016 related to employee severance and benefits resulting from the reduction-in-workforce and the impairment of property and equipment. In connection with the reduction-in-workforce, 25 positions were eliminated, primarily in the areas of manufacturing and quality operations, representing approximately 50% of the Company's employees. The accrued restructuring balance as of June 30, 2016 relates to employee severance and benefits which are expected to be paid in the third quarter of 2016 and is recorded as a current liability within accrued expenses in the Condensed Consolidated Balance Sheet. Additionally, the Company recognized inventory write-downs in cost of goods sold related to the wind-down of its azficel-T operations as described in Note 4.


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Fibrocell Science, Inc.
Notes to Consolidated Financial Statements
(unaudited)
 
Note 9. Restructuring Costs (continued)


The Company expects to incur additional charges in the future for employee severance and benefits, contract termination and wind-down costs, assets impairments and costs to decommission the Company’s azficel-T manufacturing facility, but cannot estimate them at this time.
Note 10.  Loss Per Share
    
Basic loss per share is computed by dividing net loss for the period by the weighted-average number of shares of common stock outstanding during that period.  The diluted loss per share calculation gives effect to dilutive stock options, warrants and other potentially dilutive common stock equivalents 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 and warrants, assuming the exercise of all in-the-money common stock equivalents based on the average market price during the period.  Common stock equivalents have been excluded where their inclusion would be anti-dilutive.
    
Details in the computation of basic and diluted loss per share are as follows:
 
Three months ended  June 30,
 
Six months ended  June 30,
($ in thousands, except share and per share data)
2016
 
2015
 
2016
 
2015
Loss per share - basic:
 

 
 

 
 

 
 

Numerator for basic loss per share
$
(8,092
)
 
$
(6,756
)
 
$
(9,499
)
 
$
(15,281
)
Denominator for basic loss per share
43,898,785

 
40,889,732

 
43,898,785

 
40,875,704

Basic loss per common share
$
(0.18
)
 
$
(0.17
)
 
$
(0.22
)
 
$
(0.37
)
Loss per share - diluted:
 

 
 

 
 

 
 

Numerator for diluted loss per share
$
(8,092
)
 
$
(6,756
)
 
$
(9,499
)
 
$
(15,281
)
Adjust: Warrant revaluation income (expense) for dilutive warrants
—

 
—

 
1,958

 
—

Net loss attributable to common share
$
(8,092
)
 
$
(6,756
)
 
$
(11,457
)
 
$
(15,281
)
Denominator for basic loss per share
43,898,785

 
40,889,732

 
43,898,785

 
40,875,704

Plus: Incremental shares underlying dilutive warrants outstanding
—

 
—

 
36,034

 
—

Denominator for diluted loss per share
43,898,785

 
40,889,732

 
43,934,819

 
40,875,704

Diluted net loss per common share
$
(0.18
)
 
$
(0.17
)
 
$
(0.26
)
 
$
(0.37
)
     
The following potentially dilutive securities have been excluded from the computations of diluted weighted-average shares outstanding, as their effect would be anti-dilutive: 
 
Three months ended  June 30,
 
Six months ended  June 30,
 
2016
 
2015
 
2016
 
2015
“In the money” stock options
216,000

 
1,482,614

 
545,500

 
1,518,957

“Out of the money” stock options
3,979,650

 
1,654,200

 
3,556,497

 
1,442,200

“In the money” warrants
—

 
1,201,698

 
—

 
1,201,698

“Out of the money” warrants
5,340,877

 
4,831,352

 
4,751,145

 
4,831,352

 
 
 
 
 
 
 
 
Other securities excluded from the calculation of diluted loss per share:
 
 
 
 
 
 
 
Stock options with performance condition
—

 
100,000

 
—

 
100,000


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



Note 11. Equity

Common Stock - Shares Authorized

In July 2016, the Company amended its Restated Certificate of Incorporation, as amended, to increase the number of shares of common stock that the Company is authorized to issue from 100,000,000 to 150,000,000 . The amendment was approved by stockholders in June at the Company’s 2016 Annual Meeting of Stockholders.

Common Stock - “At-The-Market” Equity Program

In January 2016, the Company entered into a Controlled Equity Offering™ Sales Agreement (the ATM Agreement) with Cantor Fitzgerald & Co. (Cantor Fitzgerald) to implement an "At-The-Market" (ATM) equity program under which the Company, from time to time, may offer and sell shares of its common stock having an aggregate offering price of up to $50.0 million (the Shares) through Cantor Fitzgerald.

Subject to the terms and conditions of the ATM Agreement, Cantor Fitzgerald will use its commercially reasonable efforts to sell the Shares from time to time, based upon the Company’s instructions. The Company has no obligation to sell any of the Shares, and may at any time suspend sales under the ATM Agreement or terminate the ATM Agreement. Cantor Fitzgerald will be entitled to a fixed commission of up to 3.0% of the gross proceeds from Shares sold. Through June 30, 2016 , no Shares have been sold through the ATM equity program.

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

The following discussion and analysis should be read in conjunction with:
•
our unaudited Condensed Consolidated Financial Statements and accompanying notes included in Part I, Item 1 of this Form 10-Q; and
•
our audited Consolidated Financial Statements and accompanying notes included in our Annual Report on Form 10-K for 2015 (2015 Form 10-K), as well as the information contained under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2015 Form 10-K.
Overview

We are an autologous cell and gene therapy company focused on translating personalized biologics into medical breakthroughs for diseases affecting the skin and connective tissue. Our approach to personalized biologics is distinctive and the foundation of our personalized biologics platform is our proprietary autologous fibroblast technology. Fibroblasts are the most common cell in skin and connective tissue and are responsible for synthesizing extracellular matrix proteins, including collagen and other growth factors, that provide structure and support. Because fibroblasts naturally reside in the localized environment of the skin and connective tissue, they represent an ideal delivery vehicle for proteins targeted to these areas. We target the underlying cause of disease by using fibroblast cells from a patient's skin to create localized therapies with genetic modification that are compatible with the unique biology of the patient (i.e., autologous).

We are focused on discovering and developing localized therapies for diseases affecting the skin and connective tissue, where there are high unmet needs, to improve the lives of patients and their families. In that regard, we commit significant resources to our research and development programs. Currently, all of our research and development operations and focus are on gaining regulatory approvals to commercialize our product candidates in the United States; however, we may seek to expand into international markets in the future.

Our current pipeline consists of the following product candidates which we are developing in collaboration with Intrexon Corporation (Intrexon):


Development Programs

FCX-007 for Recessive Dystrophic Epidermolysis Bullosa

Recessive dystrophic epidermolysis bullosa (RDEB) is the most severe form of dystrophic epidermolysis bullosa (DEB), a congenital, progressive, devastatingly painful and debilitating genetic disorder that often leads to death. RDEB is caused by a mutation of the COL7A1 gene, the gene which encodes for type VII collagen (COL7), a protein that forms

17
Table of Contents

anchoring fibrils. Anchoring fibrils hold together the layers of skin, and without them, skin layers separate causing severe blistering, open wounds and scarring in response to friction, including normal daily activities like rubbing or scratching. Children who inherit this condition are often called “butterfly children” because their skin can be as fragile as a butterfly’s wings. We estimate that there are approximately 1,100 - 2,500 RDEB patients in the U.S. Currently, treatments for RDEB address only the sequelae, including daily bandaging (which can cost a patient in excess of $10,000 per month), hydrogel dressings, antibiotics, feeding tubes and surgeries.
    
Our lead product candidate, FCX-007, is in clinical development for the treatment of RDEB. In addition to having orphan drug designation from the U.S. Food and Drug Administration’s (FDA) Office of Orphan Products Development (OOPD), FCX-007 also was granted pediatric rare disease designation. FCX-007 is a genetically-modified autologous fibroblast that encodes the gene for COL7 for localized treatment of RDEB and is being developed in collaboration with Intrexon. By genetically modifying autologous fibroblasts, ex vivo , to produce COL7, culturing them and then treating blisters and wounds locally via injection, FCX-007 offers the potential to address the underlying cause of the disease by providing high levels of COL7 directly to the affected areas, thereby avoiding systemic treatment. In addition, we believe the autologous nature of the cells, localized delivery, use of an integrative vector and the low turnover rate of the protein will contribute to long-term persistence of the COL7 produced by FCX-007.

Phase I/II Trial of FCX-007 for RDEB

The primary objective of this open-label trial is to evaluate the safety of FCX-007 in RDEB subjects. Additionally, the trial will assess (i) the mechanism of action of FCX-007 through the evaluation of type VII collagen expression and the presence of anchoring fibrils and (ii) the efficacy of FCX-007 through intra-subject paired analysis of target wound area by comparing FCX-007 treated wounds to untreated wounds in Phase I and to wounds administered with sterile saline in Phase II. Six adult subjects are expected to be treated with FCX-007 in the Phase I portion of the trial and six pediatric subjects in the Phase II portion of the trial. Prior to enrolling pediatric subjects, we are required to obtain allowance from the FDA and submit evidence of FCX-007 activity in adult subjects and final data from an ongoing toxicology study.

We are actively recruiting adult subjects for the Phase I portion of this trial and currently have 2 subjects enrolled. We expect to dose our first subject at the end of 2016. Additional adult subjects will be dosed after a required 90-day waiting period following the dosing of the first subject. This required waiting period is to provide time to assess the safety of the first dose of the new gene therapy. We expect to have three-month post-treatment data for safety, mechanism of action and efficacy for the adult subjects in the Phase I portion of the trial in the second half of 2017, as well as six-month data for a cohort of this group.

FCX-013 for Linear Scleroderma

Linear scleroderma, a form of localized scleroderma, is a chronic autoimmune skin disorder that manifests as excess production of extracellular matrix, specifically type I collagen and type III collagen, resulting in thickening of the skin and connective tissue. The localized areas of skin thickening may extend to underlying tissue and muscle in children which can impair growth and development. Lesions appearing across joints can be painful, impair motion and may be permanent. Current treatments for linear scleroderma, which include systemic or topical corticosteroids, UVA light therapy and physical therapy, only address the symptoms of the disorder. We estimate the U.S. population of patients who have linear scleroderma over a major joint and exhibit severe joint pain to be approximately 40,000.

Our second gene-therapy product candidate, FCX-013, is in pre-clinical development for the treatment of linear scleroderma. FCX-013 incorporates Intrexon’s proprietary RTS ® switch, a biologic switch activated by an orally administered compound to control future protein expression once the initial fibrosis has been resolved. FCX-013 is designed to be injected under the skin at the location of the fibrosis where the genetically-modified fibroblast cells will produce a protein to break down excess collagen accumulation. The patient takes an oral compound to facilitate protein expression. Once the fibrosis is resolved, the patient will stop taking the oral compound which will stop further production of the subject protein by FCX-013.

We have successfully completed a proof-of-concept study for FCX-013 in which the primary objective was to determine whether FCX-013 had the potential to reduce dermal thickness in fibrotic tissue. In this study, FCX-013 was evaluated in a bleomycin-induced scleroderma model utilizing severe combined immunodeficiency (SCID) mice. Data from the study demonstrated that FCX-013 reduced dermal thickness of fibrotic tissue to levels similar to that of the non-treated control and further reduced the thickness of the sub-dermal muscle layer. Based upon these data and the FDA’s feedback to our pre-IND briefing package, we are advancing FCX-013 into a pre-clinical dose-ranging study to be followed by a toxicology/biodistribution study. In April 2016 we received orphan drug designation from the OOPD for FCX-013 for the treatment of localized scleroderma. We expect to submit an IND application for FCX-013 to the FDA in 2017.

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Gene Therapy Research Program for Arthritis and Related Conditions

Arthritis is a broad term that covers a group of more than 100 different types of diseases that affect the joints, as well as connective tissues and organs, including the skin. According to the Centers for Disease Control and Prevention, arthritis—characterized by joint inflammation, pain and decreased range of motion—is the United States’ most common cause of disability affecting more than 52 million adults as well as 300,000 children at a cost exceeding $120 billion.

Our third gene-therapy program is focused on the treatment of arthritis and related conditions. Our goal is to deliver a protein therapy locally to the joint to provide sustained efficacy while avoiding key side effects typically associated with systemic therapy.

Intrexon Collaborations

We collaborate with Intrexon Corporation, a related party, through two distinct exclusive channel collaboration agreements consisting of the Exclusive Channel Collaboration Agreement entered into in October 2012 and amended in June 2013 and January 2014 (as amended, the 2012 ECC) and the Exclusive Channel Collaboration Agreement entered into in December 2015 (the 2015 ECC). Pursuant to these agreements, we engage Intrexon for support services for the research and development of product candidates covered under the respective agreements and reimburse Intrexon for its cost for time and materials for such work. We are developing FCX-007 and FCX-013 under the 2012 ECC and we are in the research phase for a gene-therapy treatment for arthritis and related conditions under the 2015 ECC. For additional details, see Note 8 in the accompanying Notes to the Condensed Consolidated Financial Statements included in this Form 10-Q and additional disclosures included in our 2015 Form 10-K.
Wind-down of azficel-T Operations

In June 2016, we reported that the primary efficacy endpoints were not met in our Phase II clinical trial of azficel-T for the treatment of vocal cord scarring resulting in chronic or severe dysphonia. As a result, we determined to wind-down azficel-T (including LAVIV) operations at our Exton, PA facility in order to focus our efforts and resources on our gene-therapy portfolio of product candidates. In connection with this wind-down, we eliminated 25 positions, primarily in the areas of manufacturing and quality operations, representing approximately 50% of our employees. We have incurred one-time termination costs in connection with the reduction in workforce, which include severance, benefits and related costs, of approximately $0.3 million for the quarter ended June 30, 2016 and expect to incur an additional $0.1 million for the quarter ended September 30, 2016. We have incurred approximately $0.3 million and less than $0.1 million, respectively, for non-cash impairment charges against the carrying values of inventory (including reserves) and equipment used in our azficel-T operations for the quarter ended June 30, 2016. Additionally, we expect to incur other cash expenditures to decommission our azficel-T manufacturing facility and to terminate and wind-down our contractual and other obligations relating to our azficel-T operations, as well as potential non-cash charges related to future impairments of the carrying values of inventory and equipment used in our azficel-T operations, but cannot estimate them at this time. Please refer to Note 9 in the accompanying Notes to the Condensed Consolidated Financial Statements contained in this Form 10-Q for further details including the financial statement impact this restructuring has had, and is expected to have, on our results of operations.

With the focus now on our gene-therapy portfolio, we are actively seeking an acquiror for azficel-T.

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Financial Condition, Liquidity and Capital Resources

Financial Condition
    
We have experienced losses since our inception. As of June 30, 2016 , we had an accumulated deficit of $156.8 million . The process of developing and commercializing our product candidates requires significant research and development efforts and clinical trial work, as well as significant manufacturing and process development. These activities, together with our selling, general and administrative expenses, are expected to continue to result in significant operating losses for the foreseeable future.

Our financial condition is summarized below as of the following dates:
 
June 30, 2016
 
December 31, 2015
 
Change
($ in thousands)
 
 
$
%
Cash and cash equivalents
$
8,161

 
$
29,268

 
$
(21,107
)
(72.1
)%
Working capital:
 
 
 
 
 
 
Total current assets
$
8,906

 
$
30,994

 
$
(22,088
)
(71.3
)%
Total current liabilities
(3,143
)
 
(15,365
)
 
12,222

(79.5
)%
Net working capital
$
5,763

 
$
15,629

 
$
(9,866
)
(63.1
)%

Liquidity and Capital Resources
    
Our principal sources of liquidity are cash and cash equivalents of $8.2 million as of June 30, 2016 . As of June 30, 2016 , we had net working capital of $5.8 million . Net working capital decreased approximately $9.9 million , or 63.1% , from December 31, 2015 to June 30, 2016 . This decrease is primarily the result of net consumption of cash used in operations to further our development programs (for which future funding requirements are described below). We believe that our existing cash and cash equivalents will be sufficient to fund our operations into the fourth quarter of 2016; however, changing circumstances may cause us to consume capital faster than we currently anticipate, and we may need to spend more money than currently expected because of such circumstances. We will require additional capital to fund operations beyond that point and prior to our business achieving significant net cash from operations. Our future capital requirements may be substantial, and will depend on many factors, including, but not limited to:
•
the cost of clinical activities and outcomes related to our Phase I/II clinical trial for FCX-007;
•
the costs of pre-clinical activities and outcomes related to FCX-013, for which we expect to file an IND with the FDA in 2017;
•
the costs to wind-down our azficel-T (including LAVIV) operations including, without limitation, the costs to decommission our azficel-T manufacturing facility and to terminate and wind-down our contractual and other obligations relating to our azficel-T operations;
•
the cost of additional clinical trials in order to obtain regulatory approvals for our product candidates;
•
the cost of regulatory submissions, as well as the preparation, initiation and execution of clinical trials in potential new clinical indications; and
•
the cost of filing, surveillance around, prosecuting, defending and enforcing patent claims.

To meet our capital needs, we are considering multiple alternatives, including but not limited to equity financings, debt financings, corporate collaborations, partnerships and other strategic transactions and funding opportunities. If we raise additional funds by issuing equity securities, our stockholders will experience dilution. Debt financing, if available, will result in increased fixed payment obligations and may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Any debt or equity financing that we complete may contain terms, such as liquidation and other preferences, which are not favorable to us or our stockholders. If we raise additional funds through collaboration or partnership arrangements with third parties, it may be necessary to relinquish valuable rights to our technologies, future revenue streams or product candidates or to grant licenses on terms that may not be favorable to us. Additionally, there can be no assurance that we will be able to complete any such financings or capital-raising transactions on acceptable terms or otherwise.


20
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If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we will need to curtail and reduce our operations and costs and modify our business strategy which may require us to, among other things:
•
significantly delay, scale back or discontinue the development or commercialization of one or more of our product candidates or one or more of our other research and development initiatives;
•
seek collaborators for one or more of our current or future product candidates at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available;
•
sell or license on unfavorable terms our rights to technologies or product candidates that we otherwise would seek to develop or commercialize ourselves; or
•
seek bankruptcy protection which may result in the termination of agreements pursuant to which we license certain intellectual property rights including our exclusive channel collaboration agreements with Intrexon.

These factors raise substantial doubt about our ability to continue as a going concern. As a result, our independent registered public accounting firm included an explanatory paragraph in its audit report on our Consolidated Financial Statements for the year ended December 31, 2015 in our 2015 Form 10-K related to our ability to continue as a going concern.

Cash Flows
Our cash flow activity is summarized below for the following periods:
 
Six months ended June 30,
($ in thousands)
2016
 
2015
Net cash flows (used in) provided by:
 
 
 
Operating activities
$
(20,853
)
 
$
(10,787
)
Investing activities
$
(143
)
 
$
(111
)
Financing activities
$
(111
)
 
$
253


Operating Activities. Cash used in operating activities during the six months ended June 30, 2016 was approximately $ 20.9 million , an increase of $ 10.1 million as compared to the same period last year, primarily due to the $10 million up-front technology access fee payment to Intrexon in January 2016 in connection with the 2015 ECC.

Investing Activities. Cash used in investing activities during both the six months ended June 30, 2016 and 2015 was related primarily to equipment purchases.

Financing Activities. Cash used in financing activities during the six months ended June 30, 2016 was related to payments of deferred offering costs in connection with our “at-the-market” equity offering program. Cash provided by financing activities during the same period in 2015 related to cash received for employee stock option exercises. See Note 11 in the accompanying Notes to the Condensed Consolidated Financial Statements for additional information regarding our “at-the-market” offering program. To date, no shares of common stock have been sold and thus no proceeds have been received from this program.

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Results of Operations

Comparison of Three and Six Months Ended June 30, 2016 and 2015

Revenue and Cost of Revenue

Revenue and cost of revenue were comprised of the following:
 
For the Three Months
Ended June 30,
 
For the Six Months
Ended June 30,
 
 
($ in thousands)
2016
 
2015
 
% Change
 
2016
 
2015
 
% Change
 
 
Revenue from product sales
$
73

 
$
55

 
32.7
 %
 
$
85

 
$
168

 
(49.4
)%
 
(1)
Collaboration revenue
14

 
82

 
(82.9
)%
 
18

 
163

 
(89.0
)%
 
(2)
Total revenue
87

 
137

 
(36.5
)%
 
103

 
331

 
(68.9
)%
 
 
Cost of product sales
392

 
77

 
409.1
 %
 
409

 
221

 
85.1
 %
 
(3)
Cost of collaboration revenue
—

 
85

 
(100.0
)%
 
1

 
88

 
(98.9
)%
 
(4)
Total cost of revenue
392

 
162

 
142.0
 %
 
410

 
309

 
32.7
 %
 
 
Gross (loss) profit
$
(305
)
 
$
(25
)
 
1,120.0
 %
 
$
(307
)
 
$
22

 
(1,495.5
)%
 
 

(1)
Revenue from product sales solely relates to, and is recognized based on, the shipment of LAVIV injections to patients. Although the number of injections can fluctuate from period to period, product revenues continue to be, and are expected to remain, insignificant to our operations. In connection with the wind-down of azficel-T operations, the Company is no longer accepting new prescriptions.

(2)
Collaboration revenue is related to a research and development agreement that we have with a third party to investigate potential new non-pharmaceutical applications for our conditioned fibroblast media technology. Revenue recognized to date relates to an upfront license fee of approximately $0.1 million that is being amortized over the estimated total contract period and $0.2 million for a proof-of-concept study that was completed during the fourth quarter of 2015. Collaboration revenue for the three and six months ended June 30, 2016 solely relates to amortization of the upfront license fee while collaboration revenue for the three and six months ended June 30, 2015 includes amortization of both the upfront license fee and proof-of-concept study.

(3)
Cost of product sales includes direct and indirect costs related to the processing of cells for LAVIV. Cost of product sales increased approximately $0.3 million , or 409.1% , for the three months ended June 30, 2016 and $0.2 million , or 85.1% , for the six months ended June 30, 2016 as compared to the same periods in 2015. The increases for both the three and six month periods are primarily due to the write-down of raw materials inventory and reserve for work in process inventory, both recorded during the second quarter of 2016 in connection with the wind-down of our azficel-T operations.

(4)
Cost of collaboration revenue during the three and six months ended June 30, 2015 relates to a proof-of-concept study which was completed during 2015. As such, no such expenses were incurred during the three and six months ended June 30, 2016.

Research and Development Expense

For each of our research and development programs, we incur both direct and indirect expenses. We track direct research and development expenses by program, which include third party costs such as contract research, consulting and pre-clinical and clinical development costs. We do not allocate indirect research and development expenses, which may include regulatory, laboratory (equipment and supplies), personnel, facility, process development and other overhead costs (including depreciation and amortization), to specific programs, as these resources are to be deployed across all of our product candidates. We expect research and development costs to continue to be significant for the foreseeable future as a result of our pre-clinical studies and clinical trials, as well as our ongoing collaborations with Intrexon.






22
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Research and development expense was comprised of the following:
 
For the Three Months
Ended June 30,
 
For the Six Months
Ended June 30,
 
 
($ in thousands)
2016
 
2015
 
% Change
 
2016
 
2015
 
% Change
 
 
Direct costs:
 
 
 
 


 
 
 
 
 


 
 
FCX-007
$
895

 
$
905

 
(1.1
)%
 
$
1,918

 
$
2,227

 
(13.9
)%
 
(1)
FCX-013
109

 
254

 
(57.1
)%
 
419

 
704

 
(40.5
)%
 
(2)
azficel-T for vocal cord scarring
135

 
436

 
(69.0
)%
 
170

 
724

 
(76.5
)%
 
(3)
Other
22

 
43

 
(48.8
)%
 
56

 
102

 
(45.1
)%
 
 
Total direct costs
1,161

 
1,638

 
(29.1
)%
 
2,563

 
3,757

 
(31.8
)%
 
 
Indirect costs:
 
 
 
 
 
 
 
 
 
 
 
 
 
Regulatory costs
275

 
239

 
15.1
 %
 
450

 
480

 
(6.3
)%
 
 
Intangible amortization
93

 
138

 
(32.6
)%
 
231

 
276

 
(16.3
)%
 
 
Compensation and related expense
959

 
888

 
8.0
 %
 
2,055

 
1,816

 
13.2
 %
 
(4)
Process development
401

 
176

 
127.8
 %
 
999

 
192

 
420.3
 %
 
(5)
Other indirect R&D costs
388

 
615

 
(36.9
)%
 
905

 
1,160

 
(22.0
)%
 
(6)
Total indirect costs
2,116

 
2,056

 
2.9
 %
 
4,640

 
3,924

 
18.2
 %
 
 
Total research and development expense
$
3,277

 
$
3,694

 
(11.3
)%
 
$
7,203

 
$
7,681

 
(6.2
)%
 
 

(1)
Costs for our FCX-007 program for the three months ended June 30, 2016 were consistent with those incurred during the same period in 2015. Costs decreased approximately $0.3 million , or 13.9% , for the six months ended June 30, 2016 as compared to the same period in 2015 primarily due to the completion of pre-clinical development activities in the first quarter of 2016 that were ongoing during the first and second quarters of 2015, offset by the initiation of the Phase I portion of our Phase I/II clinical trial for FCX-007 in adults in the second quarter of 2016.

Through June 30, 2016 , we have incurred approximately $19.1 million in direct research and development costs related to this program, life-to-date, which include non-cash expenses of $6.9 million in stock issuance costs associated with the 2012 ECC with Intrexon. Other costs include product and assay development, key opinion leader development, pre-clinical studies and manufacturing, the design of the Phase I/II clinical trial protocol and recruiting subjects. Going forward, research and development investments for this program are expected to support clinical product manufacturing, statistical analyses, report generation and future clinical trial costs.

(2)
Costs for our FCX-013 program decreased approximately $0.1 million , or 57.1% , for the three months ended June 30, 2016 and $0.3 million , or 40.5% , for the six months ended June 30, 2016 as compared to the same periods in 2015. The decreases for both the three and six month periods are primarily due to the completion of our proof-of-concept study in the first quarter of 2016, as compared to early product development expenses incurred in the first half of 2015 which included gene screening and selection, construct build and optimization, vector optimization, assay development, RTS ® switch and ligand optimization and some early animal model work.

Through June 30, 2016 , we have incurred approximately $9.6 million in direct research and development costs related to this program, life-to-date, which include non-cash expenses of $6.4 million in stock issuance costs with the 2012 ECC with Intrexon. Other costs include product and assay development and pre-clinical work, including execution of our proof-of concept study. Going forward, research and development investments for this program are expected to support ongoing product and assay development, pre-clinical study execution, key opinion leader development, National Institutes of Health Recombinant DNA Advisory Committee (NIH RAC) meeting preparation expenses and the design and execution of clinical trials.

(3)
Costs for our azficel-T for vocal cord scarring program decreased approximately $0.3 million , or 69.0% , for the three months ended June 30, 2016 and $0.6 million , or 76.5% , for the six months ended June 30, 2016 as compared to the same periods in 2015 as dosing in the Phase II trial was complete as of December 31, 2015. Therefore, no subject enrollment or clinical manufacturing costs were incurred in the 2016 periods.

Through June 30, 2016 , we have incurred approximately $2.6 million in direct research and development costs related to this program, life-to-date. These costs include the author and review of clinical trial protocols, recruiting investigator sites, the cost to manufacture clinical trial material, recruiting subjects, executing our Phase I and II clinical trials and statistical analyses. Going forward, no significant research and development investments for this

23
Table of Contents

program are anticipated as the Phase II trial did not meet primary efficacy endpoints and the trial will be terminated upon assessment of the final 12-month endpoint.

(4)
Compensation and related expense increased approximately $0.1 million , or 8.0% , for the three months ended June 30, 2016 and $0.2 million , or 13.2% , for the six months ended June 30, 2016 as compared to the same periods in 2015. The increases for both the three- and six-month periods are primarily due to increases in salaries and other employee benefits.

(5)
Process development costs increased approximately $0.2 million , or 127.8% , for the three months ended June 30, 2016 and $0.8 million , or 420.3% , for the six months ended June 30, 2016 as compared to the same periods in 2015. The increases for both the three and six month periods are primarily due to an increase in internal process development work as additional resources were directed towards optimizing our current manufacturing processes, benefiting several of our ongoing development programs.

(6)
Other indirect R&D costs decreased approximately $0.2 million , or 36.9% , for the three months ended June 30, 2016 and $0.3 million , or 22.0% , for the six months ended June 30, 2016 as compared to the same periods in 2015. The decreases for both the three and six month periods are primarily due to a research agreement with an unrelated third party that was ongoing during the 2015 periods but terminated in the second half of 2015.

Selling, General and Administrative Expense
Selling, general and administrative expense was comprised of the following:
 
For the Three Months
Ended June 30,
 
For the Six Months
Ended June 30,
 
 
($ in thousands)
2016
 
2015
 
% Change
 
2016
 
2015
 
% Change
 
 
Compensation and related expense
$
1,352

 
$
1,638

 
(17.5
)%
 
$
2,750

 
$
2,525

 
8.9
 %
 
(1)
Professional fees
434

 
1,277

 
(66.0
)%
 
1,018

 
2,569

 
(60.4
)%
 
(2)
Facilities and related expense and other
754

 
725

 
4.0
 %
 
1,512

 
1,470

 
2.9
 %
 
 
Total selling, general and administrative
     expense
$
2,540

 
$
3,640

 
(30.2
)%
 
$
5,280

 
$
6,564

 
(19.6
)%
 
 

(1)
Compensation and related expense decreased approximately $0.3 million , or 17.5% , for the three months ended June 30, 2016 as compared to the same period in 2015, primarily due to decreases in bonus and non-cash stock-based compensation expenses, offset by an increase in other employee benefits.
    
Compensation and related expense increased approximately $0.2 million , or 8.9% , for the six months ended June 30, 2016 as compared to the same period in 2015, primarily due to increases in salaries and other employee benefits, offset by a decrease in bonus expense.

(2)
Professional fees decreased approximately $0.8 million , or 66.0% , for the three months ended June 30, 2016 and $1.6 million , or 60.4% , for the six months ended June 30, 2016 as compared to the same periods in 2015. The decreases for both the three- and six-month periods are primarily due to legal fees related to litigation and contract matters that were incurred in the prior year period and did not recur in 2016. Additionally, in the second quarter of 2015, we hired in-house general counsel which further reduced legal costs incurred with outside vendors.

Intangible Asset Impairment Expense

During the three months ended June 30, 2016 we recorded a non-cash impairment charge of approximately $3.9 million to write off the Company’s intangible assets. No such charges were incurred in the prior periods. See Note 3 in the accompanying Notes to the Condensed Consolidated Financial Statements contained in this Form 10-Q.

Restructuring Costs
    
During the three months ended June 30, 2016 we recorded restructuring costs totaling approximately $0.3 million which were comprised of employee severance and benefit related charges associated with our reduction in workforce and non-cash impairment charges against the carrying values of equipment. No such costs were incurred in the prior periods. See

24
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additional information included under the heading “Wind-down of azficel-T Operations” in Item 2 of this Form 10-Q and in Note 9 in the accompanying Notes to the Condensed Consolidated Financial Statements contained in this Form 10-Q.

Warrant Revaluation Income (Expense)

During the three months ended June 30, 2016 and 2015, we recorded non-cash income of approximately $ 2.3 million and $0.6 million for warrant revaluation charges in our Condensed Consolidated Statements of Operations, respectively. During the six months ended June 30, 2016 and 2015, we recorded non-cash income of approximately $7.5 million and non-cash expense of $1.1 million for warrant revaluation charges in our Condensed Consolidated Statements of Operations, respectively. Due to the nature and inputs of the model used to assess the fair value of our outstanding warrants, it is not abnormal to experience significant fluctuations from period to period. These fluctuations are due to a variety of factors including changes in our stock price, changes in the remaining contractual life of the warrants, and changes in management's estimated probability of certain events occurring that would impact the warrants. The primary reason for the significant changes between the warrant revaluation charges for both the three and six month ended comparable periods noted above was the decrease in our stock price during both the three and six months ended June 30, 2016 compared to an increase in our stock price experienced during both the three and six months ended June 30, 2015.
Contractual Obligations

During the six months ended June 30, 2016 , there have been no material changes to our contractual obligations outside the ordinary course of business from those specified in our 2015 Form 10-K.
Critical Accounting Policies

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our Condensed Consolidated Financial Statements, which have been prepared in conformity with U.S. generally accepted accounting principles (GAAP). Preparing financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. 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. These estimates and assumptions are affected by the application of our accounting policies. Critical accounting policies and practices are both important to the portrayal of a company’s financial condition and results of operations, and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain. Actual results could differ from such estimates due to changes in economic factors or other conditions that are outside the control of management.

A summary of our significant accounting policies is described in Note 3 to our Consolidated Financial Statements contained in our 2015 Form 10-K. However, please refer to Note 3 in the accompanying Notes to the Condensed Consolidated Financial Statements contained in this Form 10-Q for updated policies and estimates, if applicable, that could impact our results of operations, financial position, and cash flows.
Recently Issued Accounting Pronouncements
    
See Note 3 in the accompanying Notes to the Condensed Consolidated Financial Statements of this Form 10-Q for discussion on recently issued accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
    
There have been no material changes to our market risk since December 31, 2015 .
Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures 
    
Our management, including our principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this Form 10-Q. Based upon that evaluation, our Chief

25
Table of Contents

Executive Officer and Chief Financial Officer, concluded that, as of June 30, 2016 , our disclosure controls and procedures were effective to provide reasonable assurance that (a) the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (b) such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarterly period ended June 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 
PART II. OTHER INFORMATION
Item 1A. Risk Factors
 
You should carefully consider each of the risk factors set forth under the heading "Risk Factors" in our Form 10-K for 2015. The risk factor set forth below supplements those risk factors. The occurrence of any one or more of these risks could materially harm our business, operating results, financial condition and prospects. These risks and uncertainties could also cause actual results to differ materially and adversely from those expressed or implied by forward-looking statements that we make from time to time. Please see "Note Regarding Forward-Looking Statements" appearing at the beginning of this Form 10-Q.

We recently announced the wind-down of our azficel-T (including LAVIV) operations at our Exton, PA facility and related workforce reduction that are expected to result in significant cost savings as we focus our efforts and resources on our gene-therapy portfolio of product candidates. If we are unable to realize the anticipated cost-saving benefits of these measures or we incur additional costs as we progress through the wind-down process, our operating results and financial condition could be adversely affected.

In June 2016, we announced that we are focusing our efforts and resources on our gene-therapy portfolio of product candidates and, as a result, determined to wind-down azficel-T (including LAVIV) operations at our Exton, PA facility and reduce the workforce that supports such operations. In connection with this reduction in workforce, 25 positions were eliminated, primarily in the areas of manufacturing and quality operations, representing approximately 50% of our employees. We have incurred one-time termination costs in connection with the reduction in workforce, which include severance, benefits and related costs, of approximately $0.3 million for the quarter ended June 30, 2016 and expect to incur an additional $0.1 million for the quarter ended September 30, 2016. We have incurred $0.3 million and $0.1 million, respectively, for non-cash impairment charges against the carrying values of inventory and equipment used in our azficel-T operations for the quarter ended June 30, 2016. Additionally, we expect to incur other cash expenditures to decommission our azficel-T manufacturing facility and to terminate and wind-down our contractual and other obligations relating to our azficel-T operations, as well as potential non-cash charges related to future impairments of the carrying values of inventory and equipment used in our azficel-T operations, but cannot estimate them at this time.

If we are unable to realize the expected cost savings from the workforce reduction and wind-down activities, our operating results and financial condition would be adversely affected. In addition, as we progress through the wind-down activities, we may incur additional costs and expenses, including costs to decommission our azficel-T manufacturing facility and to terminate and wind-down our contractual and other obligations relating to our azficel-T operations. The wind-down process may also be difficult to manage and may increase the likelihood of turnover of other key employees, all of which may have an adverse impact on our business, as well as on our operating results and financial condition.
Item 6.     Exhibits.
 
See the Exhibit Index following the signature page of this Form 10-Q for a list of exhibits filed or furnished with this report, which Exhibit Index is incorporated herein by reference.

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SIGNATURES
 
Pursuant to the requirements 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/ Keith A. Goldan
 
Keith A. Goldan
 
Senior Vice President and Chief Financial Officer
 
(Principal Financial and Accounting Officer)
 
 
Date:
August 4, 2016


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Table of Contents

EXHIBIT INDEX

EXHIBIT NO.
 
IDENTIFICATION OF EXHIBIT
3.1*
 
Certificate of Amendment of the Restated Certificate of Incorporation of Fibrocell Science, Inc.
10.1*
 
Amendment to the Fibrocell Science, Inc. 2009 Equity Incentive Plan
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. 
101.SCH
 
XBRL Taxonomy Extension Schema Document.
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document.
 
* Filed or furnished, as applicable, herewith.

28

Exhibit 3.1



STATE OF DELAWARE

CERTIFICATE OF AMENDMENT
OF THE RESTATED CERTIFICATE OF INCORPORATION OF
FIBROCELL SCIENCE, INC.


Fibrocell Science, Inc., a corporation organized and existing under the laws of the State of Delaware (the “Corporation”) for the purpose of amending its Restated Certificate of Incorporation of the Corporation, as amended, in accordance with the General Corporation Law of Delaware, does hereby make and execute this Certificate of Amendment to the Restated Certificate of Incorporation, as amended, and does hereby certify that:

1.
The provisions of the present Article IV of the Restated Certificate of Incorporation of the Corporation, as amended, are amended by amending and restating the first sentence of Article IV, with no changes to be made to the subsequent sentences and provisions of Article IV:

“The Corporation shall have the authority to issue an aggregate of 155,000,000 shares, of which 5,000,000 shares shall be preferred stock, par value $0.001 per share (hereinafter the “Preferred Stock”), and 150,000,000 shares shall be common stock, par value $0.001 per share (hereinafter the “Common Stock”).”

2.
The foregoing amendment has been duly adopted in accordance with the provisions of Section 242 of the General Corporation law of the State of Delaware by the vote of a majority of each class of outstanding stock of the Corporation entitled to vote thereon.

IN WITNESS WHEREOF, I have signed this Certificate of Amendment this 12 th day of July, 2016.
 

 
 
 
 /s/ David Pernock
Chairman of the Board and Chief Executive Officer




Exhibit 10.1


AMENDMENT TO THE
FIBROCELL SCIENCE, INC. 2009 EQUITY INCENTIVE PLAN

WHEREAS , Fibrocell Science, Inc. (the “ Company ”), maintains the Fibrocell Science, Inc. 2009 Equity Incentive Plan, as amended (the “ Plan ”);

WHEREAS, pursuant to Section 17(a) of the Plan, the Board of Directors of the Company (the “ Board ”) is authorized to amend the Plan from time to time, provided that such amendment shall be contingent on the approval of the Company’s shareholders (“ Shareholder Approval ”) when such approval is required pursuant to the Internal Revenue Code of 1986, as amended and/or stock exchange requirements; and

WHEREAS, the Board desires to increase the number of shares of common stock of the Company reserved for issuance under the Plan (the “ Share Increase ”) and to include an annual limit on the number of shares underlying awards made to any one participant under the Plan in any calendar year (the “ Annual Limit ”); and

WHEREAS, pursuant to Section 17(a) of the Plan, in order to effect each of these desired changes, Shareholder Approval must be obtained; and

WHEREAS, the Board desires to amend the Plan to provide for the Share Increase and the Annual Limit as set forth in this Amendment to the Plan (the “ Amendment ”), subject to timely Shareholder Approval.

NOW, THEREFORE , the Board hereby amends the Plan, subject to timely Shareholder Approval, as follows:

1.
Section 5(a) of the Plan, subject to timely Shareholder Approval, is hereby amended to read in its entirety as follows:

“ Shares Authorized.   The aggregate number of shares of Company Stock that may be issued under the Plan is 7,600,000 shares, subject to adjustment as described in subsection (d) below.”

2.
A new Section 5(e) is, subject to timely Shareholder Approval, hereby added to the Plan to read in its entirety as follows:

“ Limitations . In accordance with the requirements under Section 162(m) of the Code, subject to adjustment as described in subsection (d) above, the maximum number of shares of Company Stock underlying Grants that may be granted during a calendar year to any individual Participant shall be 1,500,000 shares of Company Stock.”

3.
Except as specifically provided in and modified by this Amendment, the Plan is in all other respects hereby ratified and confirmed and references to the Plan shall be deemed to refer to the Plan as modified by this Amendment, contingent upon obtaining timely Shareholder Approval.

IN WITNESS WHEREOF , the Company has executed this Amendment to the Fibrocell Science, Inc. 2009 Equity Incentive Plan, as amended, as of April 15, 2016.
 
FIBROCELL SCIENCE, INC.
 
 
By:
 
/s/ David Pernock
Name:  
Its:
 
David Pernock
Chairman of the Board and CEO





Exhibit 31.1
 
OFFICER’S CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
 
I, David Pernock, certify that:
1.  I have reviewed this Quarterly Report on Form 10-Q of Fibrocell Science, Inc.;
2.  Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made not misleading with respect to the period covered by this report;
3.  Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.  The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date:
August 4, 2016
By:
/s/ David Pernock
 
David Pernock
 
Chief Executive Officer





Exhibit 31.2
 
OFFICER’S CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
 
I, Keith A. Goldan, certify that:
1.  I have reviewed this Quarterly Report on Form 10-Q of Fibrocell Science, Inc.;
2.  Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made not misleading with respect to the period covered by this report;
3.  Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.  The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; 
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date:
August 4, 2016
By:
/s/ Keith A. Goldan
 
Keith A. Goldan
 
SVP and Chief Financial Officer





Exhibit 32.1
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2016 of Fibrocell Science, Inc. (the “Company”) as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David Pernock, Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
 
• The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C 78m or 78o(d)); and
• The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
Date:
August 4, 2016
By:
/s/ David Pernock
 
David Pernock
 
Chief Executive Officer
 
A signed original of this written statement required by Section 906 has been provided to Fibrocell Science, Inc. and will be retained by Fibrocell Science, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.





Exhibit 32.2
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2016 of Fibrocell Science, Inc. (the “Company”) as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Keith A. Goldan, Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
 
• The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C 78m or 78o(d)); and
• The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
Date:
August 4, 2016
By:
/s/ Keith A. Goldan
 
Keith A. Goldan
 
SVP and Chief Financial Officer
 
A signed original of this written statement required by Section 906 has been provided to Fibrocell Science, Inc. and will be retained by Fibrocell Science, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.