CELLULAR DYNAMICS INTERNATIONAL, INC. - FORM 10-Q - November 10, 2014

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________

FORM 10-Q
____________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from          to         
Commission File Number: 001-36021
____________________

CELLULAR DYNAMICS INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in its Charter)
____________________

Wisconsin
 
 
 
26-1737267
(State or Other Jurisdiction of Incorporation or Organization)
 
 
 
(I.R.S. Employer
Identification Number)

525 Science Drive
Madison, Wisconsin 53711
(Address of principal executive offices and zip code)

(608) 310-5100
(Registrant’s telephone number, including area code)
____________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such 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 x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 x No ¨

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one:)
Large accelerated filer
¨
 
Accelerated filer
¨
Non-accelerated filer
x  (Do not check if a smaller reporting company)
 
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).   Yes ¨ No x

As of November 5, 2014, there were 15,814,008 shares of the registrant's common stock outstanding.
 


Cellular Dynamics International, Inc.
Form 10-Q
Table of contents

2


Part I – Financial information
Item 1. Financial statements (unaudited)
Cellular Dynamics International, Inc.
Balance sheets
(Unaudited)
 
 
 
(Dollars in thousands, except per share amounts)
December 31,
2013
 
September 30,
2014
Assets
 
 
 
Current assets:
 
 
 
  Cash and cash equivalents
$
62,029

 
$
40,969

  Accounts receivable, net
3,318

 
1,736

  Inventories
3,884

 
3,971

  Prepaid expenses and other assets
964

 
1,171

           Total current assets
70,195

 
47,847

Property and equipment, net
2,052

 
3,904

Goodwill
6,817

 
6,817

Intangible assets, net
4,122

 
3,953

Debt issuance costs, net
199

 
163

Other assets
10

 
17

Total
$
83,395

 
$
62,701

 
 
 
 
Liabilities and shareholders' equity
 
 
 
Current liabilities:
 
 
 
  Accounts payable
$
1,811

 
$
1,972

  Accrued liabilities
3,361

 
2,586

  Deferred revenue
1,439

 
3,521

  Current maturities of long-term debt
18

 
3,131

           Total current liabilities
6,629

 
11,210

Long-term debt, less current portion
11,879

 
8,916

Commitments and contingencies (Note 7)


 


Shareholders' equity:
 
 
 
Preferred stock, $0.01 par value — authorized, 10,000,000 shares at December 31, 2013 and September 30, 2014; no shares issued and outstanding, at December 31, 2013 and September 30, 2014
—

 
—

Common stock, $0.0001 par value — authorized, 100,000,000 shares at December 31, 2013 and September 30, 2014; issued and outstanding, 15,757,725 shares at December 31, 2013 and 15,762,725 at September 30, 2014
2

 
2

Additional paid-in capital
171,907

 
174,421

Accumulated deficit
(107,022
)
 
(131,848
)
           Total shareholders' equity
64,887

 
42,575

Total
$
83,395

 
$
62,701

 
 
 
 
See notes to financial statements.


3

Cellular Dynamics International, Inc.
 
 
 
 
Statements of operations
 
 
 
 
(Unaudited)
 
 
 
 
 
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
(Dollars in thousands, except per share data)
2013
 
2014
 
2013
 
2014
Revenues:
 
 
 
 
 
 
 
Product sales
$
1,793

 
$
1,669

 
$
5,516

 
$
5,534

Collaborations, partnerships and other revenues
730

 
1,898

 
2,209

 
4,609

Total revenues
2,523

 
3,567

 
7,725

 
10,143

 
 
 
 
 
 
 
 
Costs and expenses:
 
 
 
 
 
 
 
Cost of product sales
371

 
418

 
1,624

 
1,410

Research and development
3,906

 
5,716

 
11,673

 
16,210

Sales and marketing
1,679

 
2,069

 
4,710

 
6,063

General and administrative
3,727

 
3,172

 
7,614

 
10,300

Total costs and expenses
9,683

 
11,375

 
25,621

 
33,983

 
 
 
 
 
 
 
 
Loss from operations
(7,160
)
 
(7,808
)
 
(17,896
)
 
(23,840
)
 
 
 
 
 
 
 
 
Other (expense) income:
 
 
 
 
 
 
 
Interest expense
(358
)
 
(342
)
 
(369
)
 
(986
)
Other income
20

 
—

 
20

 
—

Total other expense
(338
)
 
(342
)
 
(349
)
 
(986
)
 
 
 
 
 
 
 
 
Net loss
$
(7,498
)
 
$
(8,150
)
 
$
(18,245
)
 
$
(24,826
)
 
 
 
 
 
 
 
 
Net loss per share of common stock, basic and diluted
$
(0.62
)
 
$
(0.52
)
 
$
(3.49
)
 
$
(1.58
)
Shares used in computing net loss per share of common stock, basic and diluted
12,087,370

 
15,762,725

 
5,223,101

 
15,761,765

 
 
 
 
 
 
 
 
See notes to financial statements.


4

Cellular Dynamics International, Inc.
 
 
 
Statements of cash flows
(Unaudited)
 
 
Nine months ended
 
September 30,
(Dollars in thousands)
2013
 
2014
Cash flows from operating activities:
 
 
 
Net loss
$
(18,245
)
 
$
(24,826
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation
618

 
743

Amortization of licenses, patents and other agreements
383

 
445

Amortization of debt issuance costs and debt discount
24

 
79

Loss (Gain) on disposal of assets
—

 
(1
)
Stock-based compensation
928

 
2,363

Gain on revaluation of warrants
(20
)
 
—

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
750

 
1,582

Inventories
(1,126
)
 
(87
)
Prepaid expenses and other current assets
(430
)
 
(214
)
Accounts payable
186

 
(200
)
Accrued liabilities
525

 
(789
)
Accrued interest
59

 
125

Deferred revenue
(45
)
 
2,082

Net cash used in operating activities
(16,393
)
 
(18,698
)
 
 
 
 
Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(646
)
 
(2,246
)
Proceeds from sale of fixed assets
—

 
12

Payments to acquire licenses
(235
)
 
(141
)
Net cash used in investing activities
(881
)
 
(2,375
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Repayments of debt
(1,055
)
 
(18
)
Proceeds from debt
12,000

 
—

Payment of debt issuance costs
(163
)
 
—

Proceeds from exercise of stock options
103

 
31

Proceeds from issuance of common stock, net of offering costs
41,064

 
—

Net cash provided by financing activities
51,949

 
13

 
 
 
 
Net increase (decrease) in cash and cash equivalents
34,675

 
(21,060
)
 
 
 
 
Cash and cash equivalents — Beginning of period
33,900

 
62,029

 
 
 
 
Cash and cash equivalents — End of period
$
68,575

 
$
40,969

 
 
 
 

5

Supplemental disclosure of cash flow information —
 
 
 
Cash paid for interest
$
284

 
$
776

 
 
 
 
Supplemental information on noncash activities:
 
 
Issuance of stock options for non-competition agreement
$
70

 
$
120

Property and equipment additions not yet paid
$
—

 
$
522

Licenses not yet paid
$
25

 
$
15

Debt issuance costs not yet paid
$
59

 
$
—

Common stock issuance costs not yet paid
$
292

 
$
—

See notes to financial statements.


6

Cellular Dynamics International, Inc.
Notes to financial statements
September 30, 2014
(Unaudited)
1.
Description of business
Cellular Dynamics International, Inc. (the Company), was incorporated in Wisconsin in late 2007 under the name iPS Cells, Inc. In July 2008, the Company acquired two companies—Cellular Dynamics International, Inc. and Stem Cell Products, Inc.—in a common stock merger transaction. Subsequent to the acquisitions, the combined entity was renamed Cellular Dynamics International, Inc.
The Company develops and manufactures fully functioning human cells in industrial quantities to precise specifications. Its proprietary iCell Operating System (iCell O/S) includes true human cells in multiple cell types (iCell products), human induced pluripotent stem cells (iPSCs) and custom iPSCs and iCell products (MyCell products). Its iCell O/S products provide standardized, easy-to-use, cost-effective access to the human cell, the smallest fully functioning operating unit of human biology. Customers use the Company's iCell O/S products, among other purposes, for drug discovery and screening; to test the safety and efficacy of their small molecule and biologic drug candidates; for stem cell banking; and in research and development of cellular therapeutics.
On June 27, 2013, the Company’s Board of Directors authorized a 1 for 9.75 reverse split of its Series A preferred stock, Series B preferred stock and common stock which was effective July 9, 2013. These financial statements give retroactive effect to the stock split.

2.    Basis of presentation and use of estimates
Basis of presentation
The unaudited interim financial statements have been prepared on the same basis as the annual statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s financial position and results of operations and cash flows for all interim periods presented herein. The financial data and the other information disclosed in these notes to the financial statements related to the interim periods are unaudited. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the year ending December 31, 2014, for any other interim period or for any other future year.

7

Use of estimates
The accompanying financial statements have been presented in conformity with accounting principles generally accepted in the United States of America (GAAP). The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions include primarily those required in the valuation of inventory, patents, licenses, goodwill, intangible assets, and property and equipment; the timing of revenue recognition; and the calculation of stock-based compensation. Management bases its estimates on certain assumptions, which it believes are reasonable in the circumstances, and while actual results could differ from those estimates, management does not believe that any change in those assumptions in the near term would have a significant effect on the Company’s financial position, results of operations or cash flows.
These unaudited interim financial statements and accompanying notes should be read in conjunction with the Company’s annual financial statements and the notes thereto for the fiscal year ended December 31, 2013, included in its Annual Report on Form 10-K/A.

3.    Significant accounting policies and supplemental financial information
Significant accounting policies
There have been no material changes to the Company's significant accounting policies as compared to the significant accounting policies described in the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 2013.
Interim Financial Statement Details
The following tables and disclosures show the Company’s financial statement details as of December 31, 2013 and September 30, 2014 and for the three and nine months ended September 30, 2013 and 2014 (tables in thousands, except for share data).
Accounts receivable
The Company establishes an allowance for doubtful accounts based on a customer's ability and likelihood to pay. There was no allowance at either December 31, 2013 or September 30, 2014.
Inventories
 
December 31, 2013
 
September 30, 2014
 
 
 
 
Raw materials
$
1,658

 
$
1,775

Work in process
547

 
515

Finished goods
1,679

 
1,681

Total
$
3,884

 
$
3,971



8

Property and equipment 
 
December 31, 2013
 
September 30, 2014
 
 
 
 
Leasehold improvements
$
451

 
$
798

Production and lab equipment
4,815

 
7,160

Office and computer equipment
546

 
1,262

Construction-in-progress
932

 
117

 
6,744

 
9,337

Less accumulated depreciation and amortization
(4,692
)
 
(5,433
)
Total
$
2,052

 
$
3,904


Goodwill
Goodwill is not amortized. The Company reviews goodwill for impairment annually during the fourth quarter or more often if conditions warrant. There was no change in goodwill for the nine months ended September 30, 2014.
Accrued liabilities

December 31, 2013

September 30, 2014




Accrued payroll, vacation and employee-related expenses
$
1,024


$
771

Accrued incentive compensation
1,229


1,091

Accrued unbilled professional fees
196


87

Accrued royalties
584


295

Accrued quarterly consulting fees
76


76

Accrued incentives for sales staff
202


99

Other
50


167

Total
$
3,361


$
2,586

Deferred revenue 
 
December 31, 2013

September 30, 2014
 
 
 
 
CIRM
$
924

 
$
2,980

Coriell
—

 
166

Lilly
279

 
146

Other
236

 
229

Total
$
1,439

 
$
3,521

Deferred revenue represents payments received, but not yet earned. The deferred revenue shown above is primarily generated by long-term contracts and multiple-element arrangements, which include but are not limited to the agreements with the California Institute for Regenerative Medicine (CIRM), Coriell Institute for Medical Research (Coriell) and Eli Lilly and Company (Lilly).

9

Net loss per share of common stock

The Company’s basic net loss per share of common stock is calculated by dividing the net loss by the weighted-average number of shares of common stock outstanding for the period. The diluted net loss per share of common stock is computed by dividing the net loss by the weighted-average number of potential common shares outstanding for the period determined using the treasury-stock method. For purposes of this calculation, the following potential common shares were excluded because including them would have been anti-dilutive:

 
September 30,
 
2013
 
2014
 
 
 
 
Common stock warrants
28,406

 
28,406

Common stock options
2,305,863

 
2,859,827

 
2,334,269

 
2,888,233


Concentration of credit risk and other risks and uncertainties
As of September 30, 2014 the Company had $29.6 million invested in a 100% U.S. Treasury Securities Money Market Fund and $4.4 million in a U.S. Government Money Market Fund. An investment in a money market fund is not insured or guaranteed. The Company's remaining cash was deposited with one major financial institution. These deposits exceed federally insured limits. The Company has not experienced any losses in such accounts and believes that the Company is not exposed to any significant risk on these balances.
The Company is currently not profitable and no assurance can be provided that it will ever be profitable. The Company is subject to risks common to companies in the biotechnology industry including, but not limited to, new technological innovations, dependence on key personnel, dependence on key suppliers, protection of proprietary technology, the validity of and continued access to its owned and licensed intellectual property, compliance with government regulations, uncertainty of widespread market acceptance of products, and the need to obtain additional financing. The Company's products include materials subject to rapid technological change. Certain materials used in manufacturing have relatively few alternative sources of supply and establishing additional or replacement suppliers for such materials cannot be accomplished quickly. While the Company has ongoing programs to minimize the adverse effect of such uncertainty and considers technological change in estimating allowances, uncertainty continues to exist.
Fair value of financial instruments 
The carrying amounts of financial instruments, which include cash and cash equivalents, accounts receivable and accounts payable, approximate their respective fair values due to the relatively short-term nature of these instruments.

10

Recent accounting pronouncements
In August 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-15, Disclosure of Uncertainties about an Entities Ability to Continue as a Going Concern "ASU No. 2014-15", which is included in Accounting Standards Codification 205, Presentation of Financial Statements. ASU No. 2014-15 requires management to assess an entity's ability to continue as a going concern, and to provide related footnote disclosure in certain circumstances. ASU No. 2014-15 will be effective for the Company starting in the first quarter of fiscal year 2017. Early application is permitted. The Company is currently evaluating the impact the adoption of ASU No. 2014-15 will have on its financial statements.
In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers "ASU No. 2014-09", which supersedes nearly all accounting standards for revenue recognition. ASU No. 2014-09 requires that an entity recognize revenue upon transferring promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU No. 2014-09 will be effective for the Company starting in the first quarter of fiscal year 2017. Early application is not permitted. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company is currently evaluating the impact the adoption of ASU No. 2014-09 will have on its financial statements.

4.
Intangible assets
Intangible assets and accumulated amortization balances at December 31, 2013 and September 30, 2014, were as follows (in thousands):
 
December 31, 2013
 
September 30, 2014
 
 
 
 
Trade name
$
13

 
$
13

Licenses and patents
4,578

 
4,734

Non-competition agreement
641

 
761

 
5,232

 
5,508

Less accumulated amortization:
 
 
 
  Trade name
(13
)
 
(13
)
  Licenses and patents
(746
)
 
(1,067
)
  Non-competition agreement
(351
)
 
(475
)
 
(1,110
)
 
(1,555
)
Total, net
$
4,122

 
$
3,953

Amortization expense was $132,000 and $151,000 for the three months ended September 30, 2013 and 2014, respectively; and $383,000 and $445,000 for the nine months ended September 30, 2013 and 2014, respectively.
A portion of the March 2014 stock option grant to a scientific founder of the Company was issued in exchange for extending his non-competition agreement from July 2016 to July 2017. As of the grant date, the Company increased the value of the non-competition agreement by $120,000 and began amortizing that amount through July 2017.


11

5.
Long-term debt
Long-term debt at December 31, 2013 and September 30, 2014, consisted of the following (in thousands):
 
December 31, 2013
 
September 30, 2014
 
 
 
 
Term loan credit agreement, net of debt discount
$
11,879

 
$
12,047

License agreements
18

 
—

 
11,897

 
12,047

Less current portion
(18
)
 
(3,131
)
Total
$
11,879

 
$
8,916


The Company entered into the Credit Agreement on June 27, 2013. The term of the Credit Agreement is four years. Outstanding loans bear interest at 6.5% per annum plus the greater of 2% or one-month LIBOR. Interest payments are made monthly in arrears. The first of 30 monthly principal payments will occur at the end of January 2015.

6.
Stock options and restricted common stock
As of the consummation of the Company's initial public offering on July 30, 2013 (IPO), the Company's board of directors adopted and its shareholders approved the 2013 Equity Incentive Plan (the “2013 Plan”). As of that same date, the Company discontinued the granting of options under the 2008 Equity Incentive Plan (the "2008 Plan").
Assumptions used to value the option grants awarded in 2014 were as follows:
 
2014
Estimated expected term
1 to 8 years

Risk-free interest rate
0.18% to 2.38%

Expected volatility assumption
43% to 66%

Forfeiture rate
0% to 6%

Dividend yield assumption
—
%
The number of shares available for grant under the Company's Equity Incentive Plans, as amended (the "Plans") follows:
 
2008 Plan
 
2013 Plan
 
Total
Available for grant — January 1, 2014
—

 
29,870

 
29,870

Plan adjustments
(14,218
)
 
630,309

 
616,091

Grants
—

 
(575,530
)
 
(575,530
)
Forfeitures
14,218

 
84,879

 
99,097

Available for grant — September 30, 2014
—

 
169,528

 
169,528


12

A summary of option activity under the Plans as of September 30, 2014 and changes during the nine month period then ended follows:
 
Options
 
Weighted-
average
exercise
price
 
Weighted-
average
remaining
contractual
term
Outstanding — January 1, 2014
2,388,394

 
$
9.70

 
7.63
Granted
575,530

 
 
 
 
Exercised
(5,000
)
 
 
 
 
Forfeited
(99,097
)
 
 
 
 
Outstanding — September 30, 2014
2,859,827

 
$
10.61

 
7.29
 
 
 
 
 
 
Vested as of September 30, 2014
1,644,346

 
$
8.51

 
6.18
 
 
 
 
 
 
Vested or expected to vest as of September 30, 2014
2,850,394

 
$
10.60

 
7.28
 
 
 
 
 
 
Exercisable as of September 30, 2014
1,823,202

 
$
8.88

 
6.30
 
 
 
 
 
 
At September 30, 2014, the total compensation cost not yet recognized that related to nonvested awards was $7.8 million which is expected to be recognized over a weighted-average period of 2.80 years. That amount excludes options issued in exchange for and accounted as intangible assets.

7.    Commitments and contingencies
Contingencies – From time to time, the Company may be subject to various legal proceedings and claims arising in the ordinary course of business. The Company assesses contingencies to determine the degree of probability and range of possible loss for potential accrual in its financial statements. An estimated loss contingency is accrued in the financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. No such amounts were accrued at December 31, 2013 or September 30, 2014.

8.
Related-party transactions
The Company has consulting agreements with scientific advisors who are also shareholders. The total expense recorded to general and administrative expenses for these agreements was $76,000 for both the three months ended September 30, 2013 and 2014; and $227,000 for the both the nine months ended September 30, 2013 and 2014.
In March 2014, the Company granted stock options in exchange for future services and amendments to the consulting and non-competition agreements with a scientific founder of the Company who also serves on the board of directors. See Note 4 for additional information.


13

Item 2. Management's discussion and analysis of financial condition and results of operations
You should read the following discussion of our financial condition and results of operations in conjunction with the unaudited interim financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and our Annual Form 10-K/A for the fiscal year ended December 31, 2013.
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including statements regarding our future results of operations including growth in revenues, and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “intend,” “expect” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those referenced in Part I Item 1A “Risk Factors” in our Annual Report on Form 10-K/A, which information is incorporated herein by reference. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
Unless expressly indicated or the context requires otherwise, the words “Cellular Dynamics,” “CDI,” “we,” the “Company,” “us” and “our” in this document refer to Cellular Dynamics International, Inc.
Overview
We develop and manufacture fully functioning human cells in industrial quantities to precise specifications. Our proprietary iCell Operating System (iCell O/S) includes true human cells in multiple cell types (iCell products), human induced pluripotent stem cells (iPSCs) and custom iPSCs and iCell products (MyCell products). Our iCell O/S products provide standardized, easy-to-use, cost-effective access to the human cell, the smallest fully functioning operating unit of human biology. Customers use our iCell O/S products, among other purposes, for drug discovery and screening; to test the safety and efficacy of their small molecule and biologic drug candidates; for stem cell banking; and in research and development of cellular therapeutics.
We market our products for use in three principal end use markets: 1) in vitro research and development as well as applied product testing; 2) stem cell banking; and 3) in vivo cellular therapeutics research and development. Our customers include biopharmaceutical companies, government research institutions, academic and nonprofit research institutions, clinical research organizations and stem cell banks. In 2013 we sold to 19 of the top 20 biopharmacuetical companies as ranked by their worldwide research and development spending.

14

The timing of our sales can be volatile and hard to predict because our products are a novel category and still relatively new to the marketplace. It is too early in our corporate life to make accurate predictions about the timing and product mix of future revenue. Volatility in quarterly Product sales arises because large orders from our biopharmaceutical customers are subject to the timing of and coordination with the customer's internal experimental work flow. Our revenue from Collaborations, partnerships and other revenues has historically been comprised of fewer customers but with larger arrangements than typically found in our revenue from Product sales. Those factors affecting the timing of revenue recognition, such as milestone achievements and varied progress against experimental work plans, can have a large effect on period to period revenue.
We find it useful, due to the early-stage of our company, to report Total revenues for the trailing twelve months. As of September 30, 2013 trailing twelve month revenue was $10.7 million. For the trailing twelve months ended September 30, 2014 revenue has grown to $14.3 million, an increase of 34%. This growth has been driven by both increases in the number of our customers and increases in revenue from our top customers.
During the trailing twelve months ended September 30, 2013, 142 customers purchased from us. During the trailing twelve months ended September 30, 2014, 185 customers purchased from us, an increase of 30%.
Average revenue for our top 10 customers increased from $704,000 for the trailing twelve months ended September 30, 2013 to $960,000 for the trailing twelve months ended September 30, 2014, an increase of 36%. Within our top ten customer base, the number of customers who have revenues over $1 million has increased from two to five, which we believe has decreased our dependence on any one customer within this group of customers.
For the three months ended September 30, 2014 our Total revenues were $3.6 million, an increase of 41% over the corresponding period in 2013. Product sales decreased 7% from $1.8 million for the three months ended September 30, 2013 to $1.7 million for the three months ended September 30, 2014. Collaborations, partnerships and other revenues increased 160% from $730,000 for the three months ended September 30, 2013 to $1.9 million for the three months ended September 30, 2014.
For the nine months ended September 30, 2014 our Total revenues were $10.1 million, an increase of 31% over the corresponding period in 2013. Product sales were $5.5 million for both the nine months ended September 30, 2013 and 2014. Collaborations, partnerships and other revenues increased 109% from $2.2 million for the nine months ended September 30, 2013 to $4.6 million for the nine months ended September 30, 2014.
Considered in the aggregate, our total operating expenses (excluding Cost of product sales) for the quarter increased 18% over the prior year quarter and, for the nine month period, increased 36% from the corresponding period in the prior year. As further discussed below in "Results of Operations", this growth is largely attributable to increases in Research and development expenses related to our contract with the California Institute for Regenerative Medicine (CIRM) and the continued development and order fulfillment of our iCell Hepatocytes which have not yet reached our internal specifications for characterization as Product sales and are offered on an early access basis to certain customers. Operating expenses also grew due to activity within Sales and marketing as well as increased compensation and other expenses related to our conduct as a public company included in General and administrative expenses.
We intend to achieve profitability in the long term as a result of ongoing revenue growth in excess of the growth in operating expenses. We continue to invest in product areas that we believe have long term growth potential which may negatively impact our ability to achieve profitability in the short term. As of September 30, 2014 our trailing twelve months total operating expenses (excluding Cost of product sales) were $42.4 million versus $31.5 million for the twelve months ended September 30, 2013. This was an increase of 35% versus our growth in trailing twelve month revenue as of September 30, 2014 of 34%.

15

As of September 30, 2014, we had $41.0 million of Cash and cash equivalents.

Results of operations
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
(Dollars in thousands, except per share data)
2013
 
2014
 
2013
 
2014
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
Product sales
$
1,793

 
$
1,669

 
$
5,516

 
$
5,534

Collaborations, partnerships and other revenues
730

 
1,898

 
2,209

 
4,609

Total revenues
2,523

 
3,567

 
7,725

 
10,143

 
 
 
 
 
 
 
 
Costs and expenses:
 
 
 
 
 
 
 
Cost of product sales
371

 
418

 
1,624

 
1,410

Research and development
3,906

 
5,716

 
11,673

 
16,210

Sales and marketing
1,679

 
2,069

 
4,710

 
6,063

General and administrative
3,727

 
3,172

 
7,614

 
10,300

Total costs and expenses
9,683

 
11,375

 
25,621

 
33,983

 
 
 
 
 
 
 
 
Loss from operations
(7,160
)
 
(7,808
)
 
(17,896
)
 
(23,840
)
 
 
 
 
 
 
 
 
Other (expense) income:
 
 
 
 
 
 
 
Interest expense
(358
)
 
(342
)
 
(369
)
 
(986
)
Other income
20

 
—

 
20

 
—

Total other expense
(338
)
 
(342
)
 
(349
)
 
(986
)
 
 
 
 
 
 
 
 
Net loss
$
(7,498
)
 
$
(8,150
)
 
$
(18,245
)
 
$
(24,826
)
 
 
 
 
 
 
 
 
Net loss per share of common stock, basic and diluted
$
(0.62
)
 
$
(0.52
)
 
$
(3.49
)
 
$
(1.58
)
Shares used in computing net loss per share of common stock, basic and diluted
12,087,370

 
15,762,725

 
5,223,101

 
15,761,765



16

Comparison of the three and nine months ended September 30, 2013 and September 30, 2014
Product sales:
Product sales represent the sale of iCell O/S products for which there is a well-defined manufacturing and quality control protocol. Products so characterized are produced within our manufacturing organization and are subject to a rigorous set of quality control metrics and other industrial controls.
 
Three months ended
 
 
 
 
 
Nine months ended
 
 
 
 
 
September 30,
 
 
 
 
 
September 30,
 
 
 
 
(Dollars in thousands)
2013
 
2014
 
$ Change
 
% Change
 
2013
 
2014
 
$ Change
 
% Change
Product sales
$
1,793

 
$
1,669

 
$
(124
)
 
(7
)%
 
$
5,516

 
$
5,534

 
$
18

 
—
%
Percentage of total revenue
71
%
 
47
%
 
 
 
 
 
71
%
 
55
%
 
 
 
 
The following table provides product sales revenue by product:
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
(Dollars in thousands)
2013
 
2014
 
2013
 
2014
iCell cardiomyocytes
$
1,026

 
$
713

 
$
3,369

 
$
2,320

iCell neurons
648

 
622

 
1,624

 
2,141

MyCell
—

 
148

 
170

 
529

Other
119

 
186

 
353

 
544

Total
$
1,793

 
$
1,669

 
$
5,516

 
$
5,534

The decrease in Product sales for the three months ended September 30, 2014 over the same prior year period is attributable to a decrease in iCell Cardiomyocytes, partially offset by an increase in MyCell and media products. The average sales price for iCell products was unchanged from the prior year quarter.
Product sales for the nine months ended September 30, 2014 were relatively unchanged when compared to the same prior year period. However, individual product performance changed period to period as shown in the table above. The average pricing for our iCell products increased by 6% from the prior nine month period.
Within iCell neurons product revenue, we recognized our first revenues from iCell DopaNeurons during 2014.
We believe that the sales mix of our products will continue to vary from quarter to quarter as our customers initiate and complete evaluations and projects related to individual cell types. We continue to pursue the development of a diverse portfolio of iCell products that will contribute to Product sales and remain encouraged about future growth in this revenue category.

17

Collaborations, partnerships and other revenues:
Collaborations, partnerships and other revenues consist of fees earned under early access and technology license arrangements, services rendered under experimental work plans, grants and milestone payments received under license and collaboration agreements. Some of these agreements are characterized as multiple-element arrangements. Under this caption, we also report revenue associated with the sale of differentiated cells which have not yet met our requirements for characterization as Product sales.
 
Three months ended
 
 
 
 
 
Nine months ended
 
 
 
 
 
September 30,
 
 
 
 
 
September 30,
 
 
 
 
(Dollars in thousands)
2013
 
2014
 
$ Change
 
% Change
 
2013
 
2014
 
$ Change
 
% Change
Collaborations, partnerships and other
$
730

 
$
1,898

 
$
1,168

 
160
%
 
$
2,209

 
$
4,609

 
$
2,400

 
109
%
Percentage of total revenue
29
%
 
53
%
 
 
 
 
 
29
%
 
45
%
 
 
 
 
The growth in Collaborations, partnerships and other revenues for the three and nine months ended September 30, 2014 over the same periods of the prior year is attributable to our contracts with CIRM and Coriell, increases in revenue on our grant with the Medical College of Wisconsin (MCOW) and an increase in the unit volume sales of iCell Hepatocytes. These increases were partially offset by a decline in revenues from the research components of the Lilly and AstraZeneca agreements which are nearing completion.
In each of the past four quarters, we have collected $1.1 million from CIRM. Of the $4.4 million that we have received, $1.4 million has been recognized as revenue - with $698,000 recorded in this quarter and $745,000 recorded in the previous three quarters. We expect that future quarters will have increased revenue over the current period, but the timing of such revenue recognition remains dependent on the rate of collection of blood samples by third parties.
We have also initiated our work on the $6.3 million subcontract on the $10.0 million grant Coriell received from CIRM. During the first three quarters of 2014 we invoiced $489,000 to Coriell, $323,000 of which was recognized as revenue.
The MCOW agreement relates to a grant awarded by the National Institute of Health – National Heart Lung and Blood Institute (NHLBI) to MCOW. This grant involves the derivation and use of iPSC-derived cardiomyocytes. The first two phases of this grant were completed as of June 2013. The third phase, representing approximately $2.7 million of the grant, began at the end of 2013 and will continue until the end of the project period in 2016. During the prior year three month period we recognized no revenue compared to $254,000 for the current three month period. During the prior nine month period, we recognized revenue of $200,000 compared to $861,000 for the current nine month period.
For the three and nine months ended September 30, 2013 we recognized $234,000 and $915,000 of revenue on the research components of our Lilly agreement. For those same periods, we recognized $163,000 and $492,000 of revenue on the AstraZeneca agreement. In the current year, Lilly research revenue has amounted to $314,000 for the three month period and $842,000 for the nine month period. The AstraZeneca agreement was substantially complete by the end of 2013.
Revenue from early access sales of our iCell Hepatocytes grew in 2014 due to an increase in unit sales to an increased number of customers. Revenue from iCell Hepatocytes was $226,000 for the three months ended September 30, 2013 compared to $261,000 for the current three month period. Revenue was $418,000 for the nine months ended September 30, 2013 compared to $893,000 for the current nine month period.

18


Cost of product sales:
Cost of product sales includes: (i) salaries and related personnel expenses, including stock-based compensation, of production related activity; (ii) material, royalties and shipping and handling; and (iii) infrastructure and overhead. Cost of product sales also includes costs associated with quality assurance, scrap and production variances. Cost of product sales includes the costs associated with the sale of products which we report as Product sales. The costs associated with revenue from Collaborations, partnerships and other revenues are included in Research and development expenses.
We believe that the difference between Product sales and Cost of product sales (gross margin on Product sales) is an important measurement of our performance.  Our gross margin on Product sales is likely to vary from period to period because of changes in product costs, product pricing and product mix.  Product costs may fluctuate due to: (i) reductions in material costs as products are produced in higher volume;  (ii) cost variances in material, labor and overhead attributable to the natural volatility of yield in biological manufacturing processes; (iii) systematic improvements in yield from increased scale and improving methods within our manufacturing processes; and (iv) technical innovation leading to product obsolescence.  Gross margin may also be impacted by pricing pressure from competitors entering our market and by sales and promotion activities. Our costs and pricing currently vary across our product portfolio. And, in addition, our future product portfolio is expected to include new products, the costs and pricing for which are unknown.
 
Three months ended
 
 
 
 
 
Nine months ended
 
 
 
 
 
September 30,
 
 
 
 
 
September 30,
 
 
 
 
(Dollars in thousands)
2013
 
2014
 
$ Change
 
% Change
 
2013
 
2014
 
$ Change
 
% Change
Cost of product sales
$
371

 
$
418

 
$
47

 
13
%
 
$
1,624

 
$
1,410

 
$
(214
)
 
(13
)%
Gross margin on product sales
79
%
 
75
%
 
 
 
 
 
71
%
 
75
%
 
 
 
 
The reduction in gross margin on Product sales in the current quarter is primarily associated with increased revenue from iCell DopaNeurons and MyCell products, which, to date, have had lower gross margins than existing iCell products. The increase in gross margin for the nine months ended September 30, 2014 was primarily due to lower royalty expense and an increase in average selling price of our iCell products (mentioned above). This increase was offset by additional revenue growth from iCell DopaNeurons and MyCell products.
Royalty expense related to Product sales totaled $110,000 or 7% of Product sales for the three months ended September 30, 2014, compared to $102,000 or 6% of Product sales for the three months ended September 30, 2013; and $373,000 or 7% for the nine months ended September 30, 2014, compared to $522,000 or 9% for the nine months ended September 30, 2013. The decrease in royalties as a percentage of Product sales reflects the generally lower royalty obligation on our current portfolio of iCell products.
We expect future margins will continue to vary due to changes in current product mix, average sales price and the introduction of new iCell and MyCell products that could have cost characteristics that differ from our existing products.

19

Research and development:
Research and development expenses include: (i) lab supplies, chemical reagents and finished goods internally consumed; (ii) salaries and related personnel expenses, including stock-based compensation, related to our research and development staffing; (iii) allocated and direct overhead and facilities expenses; and (iv) minimum royalties, royalties related to Collaborations, partnerships and other revenues, amortization of licenses and other license maintenance fees. Costs associated with revenue identified as Collaborations, partnerships and other revenues are expensed as Research and development costs. We do not track research and development expenses by individual product, nor do we capitalize any research and development expenses.
 
Three months ended
 
 
 
 
 
Nine months ended
 
 
 
 
 
September 30,
 
 
 
 
 
September 30,
 
 
 
 
(Dollars in thousands)
2013
 
2014
 
$ Change
 
% Change
 
2013
 
2014
 
$ Change
 
% Change
Research and development
$
3,906

 
$
5,716

 
$
1,810

 
46
%
 
$
11,673

 
$
16,210

 
$
4,537

 
39
%
Percentage of total revenue
155
%
 
160
%
 
 
 
 
 
151
%
 
160
%
 
 
 
 
Ending headcount


 


 
 
 
 
 
61

 
75

 
 
 
 
The principal components of Research and development expense were as follows:
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
(Dollars in thousands)
2013
 
2014
 
2013
 
2014
Materials and supplies
53
%
 
57
%
 
54
%
 
56
%
Compensation and benefits
32
%
 
28
%
 
32
%
 
29
%
Overhead and facilities
9
%
 
10
%
 
9
%
 
10
%
Royalties and license amortization
6
%
 
5
%
 
5
%
 
5
%
Total Research and development
100
%
 
100
%
 
100
%
 
100
%
For both the three and nine month periods, nearly half of the dollar increase and all of the headcount increase in Research and development expense was incurred in support of our new California operation and in performance of the CIRM and Coriell contracts. The remaining increase was generally attributable to materials consumed in continued development and order fulfillment of our iCell Hepatocytes which have not yet reached our internal specifications for characterization as Product sales and are offered on an early access basis to certain customers.
Research and development compensation and benefits included $86,000 of stock compensation for the nine months ended September 30, 2014 and $85,000 for the same period in 2013.
Research and development expenses also included amortization of license agreements. Amortization expense increased from $383,000 for the nine months ended September 30, 2013 to $445,000 for the nine months ended September 30, 2014 due to investments in licenses and other agreements made throughout 2013 and 2014.
We expect Research and development costs will continue to increase in order to support additional Collaborations, partnerships and other revenues and new product development. Such costs currently include those associated with increased iCell Hepatocytes unit volume as well as the costs necessary to perform on our CIRM and Coriell contracts. The CIRM and Coriell related costs will increase as revenue recognized on those contracts continues to grow.

20

Sales and marketing:
Our Sales and marketing expenses include: (i) salaries, commissions and related personnel expenses, including stock-based compensation, related to our sales, marketing and technical support and training staff; (ii) marketing programs, trade shows and associated professional fees; (iii) travel, lodging and other out-of-pocket expenses associated with our commercial activity; and (iv) other related overhead.
 
Three months ended
 
 
 
 
 
Nine months ended
 
 
 
 
 
September 30,
 
 
 
 
 
September 30,
 
 
 
 
(Dollars in thousands)
2013
 
2014
 
$ Change
 
% Change
 
2013
 
2014
 
$ Change
 
% Change
Sales and marketing
$
1,679

 
$
2,069

 
$
390

 
23
%
 
$
4,710

 
$
6,063

 
$
1,353

 
29
%
Percentage of total revenue
67
%
 
58
%
 
 
 
 
 
61
%
 
60
%
 
 
 
 
Ending headcount


 


 
 
 
 
 
27

 
35

 
 
 
 

Growth in Sales and marketing continued to be driven by increases in headcount. Compensation, benefits and related personnel expenses as a percentage of Sales and marketing expense was 63% for both the three months ended September 30, 2013 and 2014; and 61% and 63% for the nine months ended September 30, 2013 and 2014, respectively. Sales and marketing compensation and benefits included $278,000 of stock compensation for the nine months ended September 30, 2014, compared to $136,000 for the same period in 2013.

Overall, approximately 65% of the Selling and marketing expense increase for the nine months ended September 30, 2014 is related to the increase in compensation and benefits.

Additionally, 20% or $276,000 of the total Sales and marketing expense increase for the nine months ended September 30, 2014 related to increased spending on training for the sales and marketing teams, advertising and other activities such as our annual user group meeting.

We anticipate continued growth in Sales and marketing staff-related expenses and other sales and marketing expenses as we pursue planned activity for the remainder of 2014 and into 2015.
General and administrative:
Our General and administrative expenses include: (i) salaries and related personnel expenses, including stock-based compensation, related to our executive, finance, human resource and information technology staffing; (ii) audit, legal, valuation and other professional services fees; and (iii) unallocated occupancy expenses. General and administrative includes the compensation of all executives other than the Chief Commercial Officer, whose compensation is included in Sales and marketing.
 
Three months ended
 
 
 
 
 
Nine months ended
 
 
 
 
 
September 30,
 
 
 
 
 
September 30,
 
 
 
 
(Dollars in thousands)
2013
 
2014
 
$ Change
 
% Change
 
2013
 
2014
 
$ Change
 
% Change
General and administrative
$
3,727

 
$
3,172

 
$
(555
)
 
(15
)%
 
$
7,614

 
$
10,300

 
$
2,686

 
35
%
Percentage of total revenue
148
%
 
89
%
 
 
 
 
 
99
%
 
102
%
 
 
 
 
Ending headcount


 


 
 
 
 
 
13

 
17

 
 
 
 
General and administrative compensation and benefits, excluding stock compensation discussed below, as a percentage of total General and administrative expenses was 36% for the three months ended

21

September 30, 2014, compared to 40% for the same period in 2013; and 37% for the nine months ended September 30, 2014, compared to 38% for the same period in 2013.

Stock compensation as a percentage of General and administrative expenses was 19% for the nine months ended September 30, 2014, compared to 9% for the same period in 2013. The increase related principally to the July 2013 and March 2014 stock option grants awarded to executive management and a scientific founder. Approximately 48% of the General and administrative expense increase for the nine months ended September 30, 2014 is related to the increase in stock compensation.

Overall, approximately 83% of the General and administrative expense increase for the nine months ended September 30, 2014 is related to the increase in compensation and benefits initiated as of the IPO and during the first two quarters of this year.

Additional increased costs related to our being a public company include premiums for directors and officers insurance. Approximately 16% of the General and administrative expense increase for the nine months ended September 30, 2014 is due to such costs.
In July 2013, effective as of the IPO date, our Board approved an annual incentive cash compensation plan for executives and a non-employee director compensation policy. The periods covered under such plan and such policy were retroactive to the beginning of 2013. As a result, the quarter ended September 30, 2013 included an accrued expense of $757,000 for three quarters of annual incentive cash compensation and $248,000 for non-employee director compensation.

Liquidity and capital resources
Overview
As of September 30, 2014, we had $41.0 million of Cash and cash equivalents. Our company is not profitable and we cannot provide any assurance that we will ever be profitable. As of September 30, 2014 we have an accumulated deficit of $131.8 million. We believe that our Cash and cash equivalents should be sufficient to satisfy our operating and investing needs through at least the next 12 months.
We intend to use our Cash and cash equivalents to fund: ongoing operations; research and product development activities; sales and marketing activities, including expansion of our sales force to support the ongoing commercialization of our products; acquisition of property, plant and equipment; acquisition or license of intellectual property; and for working capital and other general corporate purposes. We may also use a portion of our assets to acquire and invest in complementary products, technologies, businesses or other assets; however, we currently have no agreements or commitments to complete any such transaction.
We may need or choose to raise additional capital including by issuing equity, refinancing our existing long-term debt, or incurring additional debt to expand the commercialization of our products, fund our operations and further our research and development activities. Our future funding requirements will depend on many factors, including market acceptance of our products, the cost of our research and development activities, the cost of filing and prosecuting patent applications, the cost of defending, in litigation or otherwise, any claims that we infringe third-party patents or violate other intellectual property rights, the cost and timing of regulatory clearances or approvals, if any, the cost and timing of establishing additional sales, marketing and distribution capabilities, the cost and timing of establishing additional technical support capabilities, the effect of competing technological and market developments and the extent to which we acquire or invest in businesses, products and technologies.

22

The following table summarizes our cash flows for the periods presented:
 
Nine months ended
 
September 30,
(Dollars in thousands)
2013
 
2014
Operating activities
$
(16,393
)
 
$
(18,698
)
Investing activities
(881
)
 
(2,375
)
Financing activities
51,949

 
13

Increase (decrease) in cash and cash equivalents
$
34,675

 
$
(21,060
)
Operating activities
Our cash used in operating activities principally reflects our net losses of $24.8 million for the nine months ended September 30, 2014 and $18.2 million for the nine months ended September 30, 2013.
In the nine months ended September 30, 2014, our operating losses and other uses of cash were partially offset by an increase in deferred revenue attributable to $3.3 million of payments from CIRM. Payments from CIRM are expected to be received in advance of work being performed and revenue being recognized. As a consequence, we expect to remain in a deferred revenue position on the CIRM contract until it is complete.
During the nine months ended September 30, 2014, changes in our operating assets and liabilities, excluding deferred revenue, amounted to an increase of $417,000. This net amount included payment of $1.2 million for incentive compensation accrued as of December 31, 2013 offset by a $1.6 million reduction in accounts receivable.
For the nine months ended September 30, 2013 our net losses were partially offset by the collection of certain large receivables in early 2013 and by a reduction in accrued liabilities.
Investing activities
Investing activities include expenditures for licenses and fixed assets. During the nine months ended September 30, 2014, we purchased $2.6 million of property and equipment, $522,000 of which will be paid in the fourth quarter, and acquired $156,000 in licenses, $15,000 of which will be paid in the fourth quarter.
In late 2013, we began the build-out of our facility in California from which work will be performed on the CIRM and Coriell contracts. Capital expenditures in California have amounted to $2.5 million, $1.2 million of which occurred in the nine months ended September 30, 2014. We believe that capital spending related to the contracts is substantially complete.
The additional capital expenditures in the nine months ended September 30, 2014 primarily related to the expansion of laboratory space in Madison, WI and to improvements in our information technology and network infrastructure.
Investing activities during the nine months ended September 30, 2013 included $260,000 to acquire certain licenses, $25,000 of which was paid in the fourth quarter of 2013 and $646,000 for purchases of property and equipment.

23

Financing activities
During the nine months ended September 30, 2014, financing activities included the repayment of $18,000 of long-term debt and the receipt of $31,000 from the exercise of stock options.
Under the terms of our Credit Agreement, we will continue to make interest-only payments through the end of this year. The first of 30 monthly principal and interest payments of $445,000 will be paid at the end of January 2015.
During the nine months ended September 30, 2013 financing activities included the borrowing of $12.0 million under the Credit Agreement, the repayment of $1.1 million of debt, and the $41.1 million in net proceeds from our initial public offering.

Off-balance sheet arrangements
We did not have any off balance sheet arrangements as of December 31, 2013 or September 30, 2014.

Contractual obligations and commitments
Our contractual obligations and commitments have not changed materially from the disclosures included in the Annual Report on Form 10-K/A for the fiscal year ended December 31, 2013.
 
Critical accounting policies, significant judgments and estimates
Our financial statements are prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.
We believe that the assumptions and estimates associated with revenue recognition, stock-based compensation, common stock valuations prior to our IPO, income taxes, inventory valuation and goodwill have the greatest potential impact on our financial statements. Therefore, we consider these to be our critical accounting policies and estimates.
There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our Annual Report on Form 10 K/A for the fiscal year ended December 31, 2013.

Recent accounting pronouncements
In August 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-15, Disclosure of Uncertainties about an Entities Ability to Continue as a Going Concern "ASU No. 2014-15", which is included in Accounting Standards Codification 205, Presentation of Financial Statements. ASU No. 2014-15 requires management to assess an entity's ability to continue as a going concern, and to provide related footnote disclosure in certain circumstances. ASU No. 2014-15 will be effective for the Company starting in the first quarter of fiscal year 2017. Early application is permitted. We are currently evaluating the impact the adoption of ASU No. 2014-15 will have on its financial statements.
In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers "ASU No. 2014-09", which supersedes nearly all accounting standards for revenue recognition. ASU No. 2014-09 requires that an entity recognize revenue upon transferring promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU No. 2014-09 will be effective for the Company starting in the first quarter of fiscal year 2017. Early application is not permitted. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. We are currently evaluating the impact the adoption of ASU No. 2014-09 will have on our financial statements.


24

Item 3. Quantitative and qualitative disclosures about market risk
Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. We do not hold or issue financial instruments for trading purposes.
Foreign currency exchange risk
All cash and cash equivalents are maintained in U.S. dollars, and, to date, our revenue, including transactions with our Japanese distributor, has been denominated in U.S. dollars. Our expenses are typically incurred in the United States, although we have sales and marketing employees located in the United Kingdom and Germany whose salaries and activities are paid in the local currency. The account used for these foreign activities is funded on a periodic basis. The value of activity in this arrangement is not considered significant compared to overall sales and marketing activity. However, if funded in a similar manner, future foreign sales and marketing efforts may result in additional exchange risk.
Interest rate sensitivity
Cash and cash equivalents are held for working capital purposes. As of September 30, 2014 we had $29.6 million invested in a 100% U.S. Treasury Securities Money Market Fund and $4.4 million in a U.S. Government Money Market Fund. An investment in a money market fund is not insured or guaranteed. The remaining cash was on deposit with a major financial institution. We have not experienced any losses in such accounts and believe that we are not exposed to any significant risk on these balances. We do not rely on interest received from these balances to fund our operations and do not believe that a change in interest rates would have a material impact on our financial condition.
Outstanding balances under the Credit Agreement bear interest at 6.5% per annum plus the greater of 2% or one month LIBOR. Currently, one-month LIBOR is below the 2% floor, therefore, we do not believe that near term changes in LIBOR would have a material impact on our financial condition.
Fair value of financial instruments
The carrying amounts of financial instruments, which include cash and cash equivalents, accounts receivable and accounts payable, approximate their respective fair values due to the relatively short-term nature of these instruments.


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Item 4. Controls and procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a- 15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our principal executive officer and principal financial officer have concluded that, as of such date, our disclosure controls and procedures were effective.
Changes in Internal Control
There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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Part II – Other information
Item 1. Legal proceedings
We are not currently a party to any material legal proceedings, but are subject to certain legal proceedings and claims from time to time that are incidental to our ordinary course of business.

Item 1A. Risk factors
There are no material changes to the risk factors contained in Part I Item 1A “Risk Factors” in our Annual Report on Form 10-K/A for the year ended December 31, 2013.

Item 2. Unregistered sales of equity securities and use of proceeds
Unregistered sales of equity securities
In the three months ended September 30, 2014, we did not sell any securities that were unregistered.
Use of proceeds from public offering of common stock
On July 30, 2013 we closed our IPO, in which we registered and sold 3,846,000 shares of common stock at a price of $12.00 per share. The aggregate offering price for shares sold in the offering was approximately $46.2 million. The offer and sale of all of the shares in the IPO were registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-189049), which was declared effective by the SEC on July 24, 2013. J.P. Morgan Securities LLC, Cowen and Company LLC and Leerink Swann LLC acted as the underwriters. We raised approximately $40.8 million in net proceeds after deducting underwriting discounts and commissions of approximately $3.2 million and other offering expenses of approximately $2.2 million for total estimated expenses of $5.4 million.
Through September 30, 2014, the net proceeds from our IPO have been applied as follows: $15.5 million for research and development activities, $6.2 million for sales and marketing activities, $3.0 million for property, plant and equipment and intellectual property, and $8.4 million for general corporate purposes. With regards to the remaining proceeds, there has been no material change in the planned use of proceeds from our IPO from that described in the final prospectus filed with the SEC pursuant to Rule 424(b).
Our Credit Agreement could restrict our ability to, among other things, sell certain assets, engage in a merger or change in control transaction, incur debt, pay cash dividends, enter into transactions with affiliates and make investments.

Item 5. Other information
The Audit Committee of our Board of Directors approved the following audit-related and non-audit services performed or to be performed for us by our independent registered public accounting firm, Deloitte & Touche LLP, in the three months ended September 30, 2014: procedures performed in connection with their consent to reissue their audit opinion that was incorporated by reference in our registration statement on Form S-3 filed on September 2, 2014.


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Item 6. Exhibits
Exhibit
Number
Description of Exhibit
Incorporated by reference from Form
Incorporated by reference from Exhibit Number
Date Filed
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Filed herewith


31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Filed herewith


32.1*
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Furnished herewith


32.2*
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Furnished herewith


101**
The following materials from Cellular Dynamics International, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, formatted in XBRL (Extensible Business Reporting Language): (i) the unaudited Balance Sheets, (ii) the unaudited Statements of operations, (iii) the unaudited Statements of cash flows, and (iv) Notes to financial statements, tagged as blocks of text.
Filed herewith







*
The certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Quarterly Report on Form 10-Q and will not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, except to the extent that the Registrant specifically incorporates them by reference.



**
Users of this data are advised that, pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under these sections.




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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Madison, State of Wisconsin, on November 10, 2014.

 
CELLULAR DYNAMICS INTERNATIONAL, INC.
 
 
 
 
 
 
 
 
 
 
By:
/s/ Timothy D. Daley
 
 
Timothy D. Daley
 
 
Vice President and Interim Chief Financial Officer
 
 
(Signing on behalf of the Registrant and as the
 
 
Principal Financial Officer and Principal Accounting
 
 
Officer)

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Exhibit Index
Exhibit
Number
Description of Exhibit
Incorporated by reference from Form
Incorporated by reference from Exhibit Number
Date Filed
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Filed herewith
 
 
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Filed herewith
 
 
32.1*
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Furnished herewith
 
 
32.2*
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Furnished herewith
 
 
101**
The following materials from Cellular Dynamics International, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, formatted in XBRL (Extensible Business Reporting Language): (i) the unaudited Balance Sheets, (ii) the unaudited Statements of operations, (iii) the unaudited Statements of cash flows, and (iv) Notes to financial statements, tagged as blocks of text.
Filed herewith
 
 
 
 
 
 
 
*
The certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Quarterly Report on Form 10-Q and will not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, except to the extent that the Registrant specifically incorporates them by reference.

 
 
**
Users of this data are advised that, pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under these sections.

 
 



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CELLULAR DYNAMICS INTERNATIONAL, INC. Reports