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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Fibrocell Science Inc    FCSC

FIBROCELL SCIENCE INC

(FCSC)
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FIBROCELL SCIENCE : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

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08/14/2019 | 05:27pm EDT

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 Quarterly Report on Form 10-Q

(this Form 10-Q); and

• our audited consolidated financial statements and accompanying notes

included in our Annual Report on Form 10-K for 2018 (2018 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 2018 Form 10-K.

Overview


We are a cell and gene therapy company focused on improving the lives of people
with rare diseases of the skin and connective tissue. We are utilizing our
proprietary autologous fibroblast technology to develop personalized biologics
that target the underlying cause of disease.  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 and genetically
modifying them to create localized therapies that are compatible with the unique
biology of the patient (i.e., which are autologous).

Our pipeline of localized gene therapy candidates include FCX-007 for the
treatment of recessive dystrophic epidermolysis bullosa (RDEB), a
life-threatening genetic disorder diagnosed in infancy with no cure or treatment
approved by the U.S. Food and Drug Administration (FDA). We are also developing
FCX-013 for the treatment of moderate to severe localized scleroderma.
Currently, all of our research and development operations and focus are on
gaining regulatory approvals to commercialize our gene therapy candidates in the
United States; however, we may seek to expand into international markets in the
future.

On April 12, 2019, we entered into a co-development and license agreement (CCP
Agreement) with Castle Creek Pharmaceuticals, LLC (CCP) with respect to the
development and commercialization of our lead gene therapy candidate, FCX-007,
for the treatment of RDEB.

Under the terms of the CCP Agreement, CCP will receive an exclusive license to
commercialize FCX-007 in the United States. CCP will be responsible for the
first $20 million in development costs prior to the initial Biologics License
Application (BLA) filing with U.S. Food and Drug Administration (FDA) and
manufacturing costs undertaken prior to commercial launch of FCX-007. If such
spending exceeds $20 million, CCP will be responsible for 70% of the excess
costs and we will cover 30% of the remaining additional expenses. We will
maintain responsibility for the development (including pre-launch manufacturing)
of FCX-007 through initial BLA approval of FCX-007, and CCP will be responsible
for all post-approval development and commercialization activities for FCX-007.
The parties have agreed to negotiate the terms of a manufacturing and supply
agreement that will set forth the terms under which we will supply CCP
commercial quantities of FCX-007. A joint development committee consisting of
representatives from our company and CCP will oversee the development of FCX-007
pursuant to an agreed-upon development plan and budget.

At the closing of the CCP Agreement, we received an upfront payment of $7.5
million, and will receive an additional $2.5 million for the first patient
enrolled in the Phase 3 clinical trial of FCX-007 and $30 million upon BLA
approval of FCX-007 and FCX-007 commercial manufacturing readiness. We are also
eligible to receive up to $75 million in sales milestones, consisting of $25
million upon the achievement of $250 million in cumulative FCX-007 net sales and
an additional $50 million upon the achievement of $750 million in cumulative
FCX-007 net sales. In addition, CCP will pay us a 30% share of the gross profits
from FCX-007 sales. We will retain sole ownership of the Rare Pediatric Disease
Priority Review Voucher (PRV), which may be granted upon BLA approval of
FCX-007. A PRV can be used to obtain priority review for a subsequent New Drug
Application or BLA, and can be sold to another entity.

As part of our existing exclusive channel collaboration agreement with Intrexon
Corporation (Intrexon), we will pay Intrexon 50% of all upfront, milestone and
profit share payments from CCP. Payments to Intrexon do not include funds
received from CCP in connection with the development and manufacturing costs or
payments for supply of FCX-007.


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Unless earlier terminated, the CCP Agreement will expire on the later of (a)
expiration of the last-to-expire valid claim of any FCX-007 patent rights in the
United States and (b) forty years from the date of initial BLA approval of
FCX-007.

CCP has the right to terminate the CCP Agreement at will upon 180 days' prior
written notice. If CCP elects to terminate the agreement at will, then, among
other things, the license granted to CCP will terminate and all rights will
revert in their entirety to the Company. In the event of such a termination, the
Company shall upon first commercial sale by the Company, its affiliates or
licensees in the territory pay to CCP an amount equal to five percent (5%) of
product gross profit in respect of sales of the product in the territory by the
Company, its affiliates or licensees in the Initial Indication and any
additional indications developed or commercialized by the parties as of the
effective date of termination.

CCP may also terminate the CCP Agreement at any time, upon 180 days' prior
written notice to the Company, in the event (i) CCP determines, in its
reasonable discretion, that further development or commercialization of FCX-007
is not commercially viable or (ii) CCP determines that development or
commercialization of FCX-007 must be terminated because of safety issues outside
of CCP's reasonable control. If CCP elects to terminate the agreement due to
either of the specified reasons set forth in the preceding sentence, then, among
other things, the license granted to CCP will terminate and all rights will
revert in their entirety to the Company. In the event of such a termination, the
Company shall upon first commercial sale by the Company, its affiliates or
licensees in the territory, pay to CCP an amount equal to five percent (5%) of
FCX-007 gross profit in respect of sales of FCX-007 in the territory by the
Company, its affiliates or licensees in the Initial Indication and any
additional indications developed or commercialized by the parties as of the
effective date of termination. Either party may, subject to specified cure
periods, terminate the CCP Agreement in the event of the other party's uncured
material breach, and either party may terminate the CCP Agreement under
specified circumstances relating to the other party's insolvency. The upfront
payment and milestone payments are non-refundable; provided, however, that
certain disputed payments may be refunded in accordance with the dispute
resolutions procedures set forth in the CCP Agreement.

Based on our receipt of the upfront payment from CCP and reduction of expenses
associated with the development of FCX-007, we believe our existing cash will be
sufficient to fund operations into the third quarter of 2020.

In connection with the execution of the CCP Agreement with CCP, we concluded our strategic alternative review process announced last year.

Development Programs

Our current pipeline consists of the following product candidates, which we are developing in collaboration with Intrexon and CCP (FCX-007 only):

[[Image Removed: pipelinegraph6302019a.jpg]]





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FCX-007 for Recessive Dystrophic Epidermolysis Bullosa (RDEB)


FCX-007 is our clinical-stage, gene therapy product candidate for the treatment
of RDEB, a congenital and progressive orphan skin disease caused by the
deficiency of type VII collagen (COL7). 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 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.

Phase 2 Portion of Phase 1/2 Trial of FCX-007 for RDEB


In January 2018, Fibrocell obtained allowance from the FDA to initiate
enrollment of pediatric patients in the Phase 2 portion of its Phase 1/2
clinical trial of FCX-007, based on evidence of safety and potential benefit of
FCX-007 in adult patients dosed in the Phase 1 portion of the clinical trial. In
May 2018, we reported on interim adult data and provided a Phase 1 trial update
which included presenting at the 7th International Investigative Dermatology
meeting on May 19, 2018.

We completed the targeted enrollment of six patients ages seven and older in the
Phase 2 portion of the Phase 1/2 clinical trial for FCX-007, and have
over-enrolled by one patient for a total of seven patients. The Phase 2
population consists of one adult and six pediatric patients. In March 2019, we
reported additional positive safety and wound healing data for our ongoing Phase
1/2 trial. To date, FCX-007 has been evaluated in eight wounds across five adult
patients. In addition, we completed dosing of a sixth patient-the first
pediatric patient treated in the Phase 2 portion of the Phase 1/2 trial for
FCX-007-using the expected Phase 3 clinical trial dose regimen. We plan to
continue the remaining follow-up visits with all Phase 1/2 patients, but do not
intend to dose additional patients as part of the trial. Remaining Phase 2
patients who have not received dosing will be contacted to determine if they
would agree to reconsent to participate in the Phase 3 trial of FCX-007.

FCX-007 Phase 3 Clinical Trial


  In October 2018, we completed a Type C meeting with the FDA to discuss the
design of a Phase 3 clinical trial protocol for FCX-007. The FDA provided
guidance on various clinical trial design aspects and Chemistry, Manufacturing
and Control (CMC) requirements of the proposed Phase 3 clinical trial. In
November 2018, we received the official minutes from the FDA for the Type C
meeting. Based on FDA's feedback, we prepared a Phase 3 clinical trial protocol
for FCX-007 and filed it as part of the briefing package for the Type B meeting
in March 2019. We completed a Type B end-of-Phase 2 face-to-face meeting with
the FDA in March 2019 to discuss the design of a Phase 3 clinical trial for
FCX-007 to support a BLA filing. In the Type B meeting, the FDA provided
guidance on various design aspects of our Phase 3 clinical trial, named
DEFI-RDEB (dermal fibroblasts-RDEB). Based on the FDA's guidance, we updated the
CMC information filed to the IND in early July 2019. Timing of the updated CMC
submission was a strategic decision by us to provide the FDA with time to review
the CMC information prior to filing the Phase 3 protocol to mitigate potential
review issues.

In late July 2019, we submitted the revised Phase 3 clinical trial protocol to
the FCX-007 IND and initiated the Phase 3 trial of FCX-007. The Phase 3 trial is
designed as an open label, multi-centered, intra-patient controlled trial
expected to enroll 15-20 patients. The Phase 3 trial's primary outcome measure
is the comparison of the proportion of FCX-007 treated and untreated matched
wounds with complete wound closure at week 12.

We have executed several start-up tasks for the FCX-007 Phase 3 trial, including
completion of a Request for Proposal (RFP) process and selection of a Clinical
Research Organization (CRO) to manage the trial; hiring and onboarding of key
internal personnel in both regulatory and clinical operations leadership; and
ramp-up of staffing in manufacturing and quality.

We continue to project enrollment and dosing of Phase 3 patients will be
completed in the third quarter of 2020 and data collection for the primary
endpoint will be completed in the fourth quarter of 2020.  If the Phase 3 trial
is successful and completed within our projected timeframe, we expect to file a
BLA for FCX-007 in 2021.

We have designated our existing, cGMP cell therapy manufacturing facility in
Exton, PA as the production site for FCX-007 after incorporation into our IND
application. Our multi-product, gene therapy manufacturing facility will be used
for the remaining clinical and, if approved, future commercial manufacture of
FCX-007, to serve the U.S. market for RDEB.

FCX-007 has received Orphan Drug Designation for the treatment of DEB, including
RDEB, Rare Pediatric Disease Designation for the treatment of RDEB and Fast
Track Designation for the treatment of RDEB from the FDA. In May 2019, the FDA
granted the Regenerative Medicine Advanced Therapy (RMAT) Designation to FCX-007
for the treatment of RDEB.

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FCX-013 for Moderate to Severe Localized Scleroderma


In addition, our second clinical stage gene therapy candidate, FCX-013 is in
development for the treatment of moderate to severe localized scleroderma, which
manifests as excess production of extracellular matrix, specifically collagen,
resulting in thickening of the skin and connective tissue. FCX-013 is designed
to be injected under the skin at the location of the fibrotic lesions where the
genetically-modified fibroblast cells will produce matrix metalloproteinase 1
(MMP-1) to break down excess collagen accumulation. We previously completed a
proof-of-concept study and pre-clinical dose-ranging study for FCX-013. In
December 2017, we completed a GLP toxicology/biodistribution study. We submitted
an IND application for FCX-013 to the FDA in January 2018, and in March 2018,
the FDA allowed the IND to progress to clinical trials. We initiated the first
investigator site for clinical enrollment for an open label, single arm Phase
1/2 clinical trial. We are currently enrolling the Phase 1 portion of the Phase
1/2 clinical trial for FCX-013, and expect to complete enrollment of Phase 1
adult patients in the third quarter of 2019. We project that safety and efficacy
data for the adult patients in the Phase 1 portion of the trial will be
available in mid-2020. In addition, we feel FCX-013 may have future potential to
expand into its own pipeline, with applications in other sclerotic disorders. We
plan to manufacture FCX-013 at our Exton, PA cGMP manufacturing facility.

FCX-013 has received Orphan Drug Designation from the FDA for the treatment of
localized scleroderma and Rare Pediatric Disease Designation and in September
2018, Fast Track Designation for moderate to severe localized scleroderma.

Gene Therapy Research Program for Arthritis and Related Conditions


We expanded our collaboration with Intrexon to pursue the research, development
and commercialization of products for the treatment of chronic inflammation and
degenerative diseases of human joints through intra-articular or other local
administration of genetically modified fibroblasts. We are currently in the
research phase for a gene therapy to treat arthritis and related conditions
under this collaboration. 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.


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Financial Condition, Liquidity and Capital Resources

Financial Condition


We have experienced losses since our inception. As of June 30, 2019, we had an
accumulated deficit of approximately $181.0 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 and is intended to supplement the more detailed discussion that follows:

($ in thousands)                             June 30, 2019      December 31, 2018
Cash and cash equivalents                   $        13,675    $            14,430

Working capital:
Total current assets                        $        24,866    $            14,535
Less: Total current liabilities                       7,101                 

2,172

Net working capital                         $        17,765    $            

12,363


Convertible notes payable (gross principal) $        18,003    $            18,003

Stockholders' equity                        $        17,863    $             9,557


Liquidity and Capital Resources


Our principal sources of liquidity are cash and cash equivalents of $13.7
million and net working capital of $17.8 million as of June 30, 2019. Net
working capital increased approximately $5.4 million, or 43.7%, from December
31, 2018 to June 30, 2019. This increase is the result primarily from the net
income recorded for the first six months of 2019.
Under the terms of the CCP Agreement, we will receive $2.5 million for the first
patient enrolled in the Phase 3 clinical trial of FCX-007 and $30 million upon
BLA approval of FCX-007 and FCX-007 commercial manufacturing readiness. We are
also eligible to receive up to $75 million in sales milestones, consisting of
$25 million upon the achievement of $250 million in cumulative FCX-007 net sales
and an additional $50 million upon the achievement of $750 million in cumulative
FCX-007 net sales. In addition, CCP will pay us a 30% share of the gross profits
from FCX-007 sales.
As part of our existing exclusive channel collaboration agreement with Intrexon,
we will pay Intrexon 50% of all upfront, milestone and profit share payments
from CCP. Payments to Intrexon do not include funds received from CCP in
connection with the development and manufacturing costs or payments for the
supply of FCX-007.
We believe that our cash and cash equivalents at June 30, 2019 and amounts paid
or payable to the Company under the CCP Agreement, including reimbursement of
the FCX-007 development cost and the $2.5 million milestone payment for the
first patient enrolled in the FCX-007 clinical trial will be sufficient to fund
operations into the third quarter of 2020. 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 1/2

clinical trial for FCX-007 and our Phase 3 clinical trial for FCX-007;

• the costs of clinical activities related to FCX-013, for which we received

       FDA allowance for our IND in the first quarter of 2018;




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•      the cost of additional pre-clinical studies and 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 will consider multiple alternatives, including but
not limited to equity financings, debt financings, corporate collaborations,
partnerships and other strategic transactions and funding opportunities.
However, there is no assurance that we will be able to complete any such
transaction or obtain the additional required capital on acceptable terms or
otherwise. Furthermore, the covenants under our convertible notes limit our
ability to obtain additional debt financing. 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.

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; or

• sell or license on unfavorable terms our rights to technologies or product

       candidates that we otherwise would seek to develop or commercialize
       ourselves.



Additionally, failure to obtain the necessary capital in a timely manner could
require us to seek bankruptcy protection or result in our breach or default
under agreements on which our business relies or pursuant to which we obtain
valuable rights which could result in, among other things, the potential
acceleration of payments thereunder or the termination of such agreements.

Cash Flows

Our cash flow activity is summarized below for the following periods:

                                         Six months ended June 30,
($ in thousands)                          2019              2018
Net cash flows (used in) provided by:
Operating activities                  $     (646 )$      (7,476 )
Investing activities                  $      (87 )     $         (83 )
Financing activities                  $      (22 )$       5,552



Operating Activities. Cash used in operating activities during the six months
ended June 30, 2019 was approximately $0.6 million, which is approximately $6.8
million, or 91% less than the six months ended June 30, 2018. This decrease was
primarily the result of the receipt of the $7.5 million milestone received under
the CCP agreement in April 2019.

Investing Activities. Cash used in investing activities during both the six months ended June 30, 2019 and 2018 was related solely to equipment and leasehold improvement purchases.


Financing Activities. Cash used in financing activities during the six months
ended June 30, 2019 was for offering costs related to the December 2018 Private
Placement, and cash provided by financing activities for the six months ended
June 30, 2018 was from proceeds related to the May 2018 Registered Direct
Offering and the conversion of warrants into common shares.

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Results of Operations

Comparison of Three and Six Months Ended June 30, 2019 and 2018

Revenue


For both the three and six months ended June 30, 2019, we recognized
approximately $21.2 million in revenue for the first milestone in the CCP
agreement, related to the purchase of an exclusive license to commercialize
FCX-007 in the United States. In addition we recognized approximately $0.8
million in revenue related to the reimbursement of expenses for FCX-007 in the
three and six months ended June 30, 2019, all related to the CCP agreement. See
Note 4 for further details on the recognition of revenue related to the CCP
agreement. We had no revenues for the 2018 periods.

Cost of Revenues


For both the three and six months ended June 30, 2019, we recognized
approximately $5.2 million in expenses. These expenses were the result of an
approximately $3.8 million license fee to our clinical partner Intrexon, and
approximately $1.4 million in research and development expenses covered under
the CCP agreement for reimbursement.

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
preclinical development costs and clinical trial and manufacturing 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 expenses are to be deployed across all of our
product candidates. We expect research and development costs to be reduced
significantly for the foreseeable future as a result of our ongoing
collaboration with CCP.

Direct research and development costs, by major program, and indirect research and development costs, by major component, were as follows:

                                                                              For the Six Months
                                For the Three Months Ended June 30,             Ended June 30,
($ in thousands)                   2019         2018      % Change      2019        2018       % Change
Direct costs:
FCX-007                         $      28$   203      (86.2 )%   $   784$   136       476.5  % (1)
FCX-013                                38          76      (50.0 )%        69         340       (79.7 )% (2)
Other                                   -           5     (100.0 )%         5         (41 )    (112.2 )% (3)
Total direct costs                     66         284      (76.8 )%       858         435        97.2  %
Indirect costs:
Compensation and related
expense                               158         525      (69.9 )%       635       1,052       (39.6 )% (4)
Other indirect R&D costs              372         712      (47.8 )%     1,090       1,376       (20.8 )% (5)
Total indirect costs                  530       1,237      (57.2 )%     1,725       2,428       (29.0 )%
Total research and development
expense                         $     596$ 1,521      (60.8 )%   $ 2,583$ 2,863        (9.8 )%



(1)    Costs for our FCX-007 program decreased approximately $0.2 million, or
       86.2%, for the three months ended June 30, 2019 compared to the same
       period in 2018. The decrease for the three month period ended June 30,

2019 was due to the reclassification of the direct costs for this program

under the CCP agreement, to cost of collaboration revenue.




Costs for our FCX-007 program increased approximately $.06 million, or 45%, for
the six months ended June 30, 2019 compared to the same period in 2018. The
increase for the six month period ended June 30, 2019 was primarily related to a
$0.5 million purchase of viral vector material and a reduction of $0.5 million
in costs related to the settlement of a dispute with a vendor recorded in 2018.
All direct costs beginning April 12, 2019 are being reimbursed at 100% under the
CCP agreement, and are recorded as part of cost of collaboration revenue.

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Through June 30, 2019, we incurred approximately $26.8 million in direct
research and development costs related to our FCX-007 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 1/2 clinical trial protocol and
recruiting patients. 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. Under the terms of
the CCP Agreement, CCP will be responsible for the first $20 million in
development costs prior to the initial BLA filing with the FDA and manufacturing
costs undertaken prior to commercial launch of FCX-007. If such spending exceeds
$20 million, CCP will be responsible for 70% of the excess costs and we will
cover 30% of the remaining additional expenses.

(2) Costs for our FCX-013 program decreased approximately $0.04 million, or

50%, for the three months ended June 30, 2019 compared to the same period

in 2018. The decrease for the three month period ended June 30, 2019 was

primarily related to an approximately $0.1 million decrease in costs from

       our clinical partner Intrexon, partially offset by an increase in
       purchases of lab supplies.



Costs for our FCX-013 program decreased approximately $0.3 million, or 79.7%,
for the six months ended June 30, 2019 compared to the same period in 2018. The
decrease for the six month period ended June 30, 2019 was primarily related to
an approximately $0.2 million decrease in costs from our clinical partner
Intrexon, and decreased costs for lab supplies and consulting expenses.

Through June 30, 2019, we incurred approximately $14.4 million in direct
research and development costs related to our FCX-013 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 and pre-clinical
dose-ranging studies. 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 meeting preparation
expenses, and the design and execution of clinical trials.

(3)    Other costs were not significant for the three and six months ended June
       30, 2019 and 2018.



(4)    Compensation and other related expense decreased approximately $0.4

million, or 69.9%, due to the allocation of compensation being reimbursed

       under the CCP agreement to cost of collaboration revenue. Without this
       reduction, compensation and related expense increased approximately $0.1
       million to $0.6 million, or 16% for the three months ended June 30, 2019
       as compared to the three months ended June 30, 2018. This increase is
       primarily related to increased salary and bonus costs.



Compensation and other related expense decreased approximately $0.4 million, or
39.6%, for the reasons as described above. Without the reduction from the
classification of some of these costs to cost of collaboration revenue,
compensation and related expense were comparable for the six months ended June
30, 2019 and June 30, 2018 at approximately $1.1 million for each period.

(5)    Other indirect costs decreased approximately $0.4 million, or 50.1%, for
       the three months ended June 30, 2019, as compared to the same period in
       2018. This decrease was primarily due to the allocation of certain of
       these costs being reimbursed under the CCP agreement to cost of
       collaboration revenue. Without this reduction other indirect costs

increased 5.0% to approximately $0.8 million. This increase was the result

primarily of increased costs for contract labor, lab supplies and facility

& equipment repair and maintenance.




Other indirect costs decreased approximately $0.3 million, or 22.0%, for the six
months ended June 30, 2019, as compared to the same period in 2018. This
decrease was primarily due to the allocation of certain of these costs being
reimbursed under the CCP agreement to cost of collaboration revenue. Without
this reduction other indirect costs increased 6.5% to approximately $1.5
million. This increase was the result primarily of increased costs for contract
labor, lab supplies and facility & equipment repair and maintenance.

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Selling, General and Administrative Expense
Selling, general and administrative expense was comprised of the following:
                                                                                 For the Six Months
                                  For the Three Months Ended June 30,              Ended June 30,
($ in thousands)                         2019        2018     % Change      2019        2018      % Change
Compensation and related expense $        540$   427        26.5 %   $   960$   875         9.7 % (1)
Professional fees                       1,031         366       181.7 %     1,626         809       101.0 % (2)
Facilities and related expense
and other                                 885         763        16.0 %     1,740       1,511        15.2 % (3)
Total selling, general and
administrative expense           $      2,456$ 1,556        57.8 %   $ 4,326$ 3,195        35.4 %


(1) Compensation and related expense increased approximately $0.1 million, or

26.5% for the three months ended June 30, 2019 and 2018. This increase was

related primarily to increased employee salary and bonus costs.

Compensation and related expense increased approximately $0.1 million, or 9.7% for the six months ended June 30, 2019 and 2018. This increase was related primarily to increased employee salary and bonus costs.

(2) Professional fees increased approximately $0.7 million, or 181.7%, for the

       three months ended June 30, 2019 as compared to the same period in 2018.
       This increase was due primarily to increased consulting and legal fees
       related to the CCP Agreement.


Professional fees increased approximately $0.8 million, or 101.0%, for the six
months ended June 30, 2019 as compared to the same period in 2018. This increase
was due primarily to increased consulting and legal fees related to the CCP
Agreement.
(3)    Facilities and related expense and other, increased approximately $0.1

million, or 15.9%, for the three months ended June 30, 2019 as compared to

the three months ended June 30, 2018. This increase was due primarily to

costs associated with new employee acquisition and increased insurance

costs.



Facilities and related expense and other, increased approximately $0.2 million,
or 15.1%, for the six months ended June 30, 2019 as compared to the six months
ended June 30, 2018. This increase was due primarily to costs associated with
new employee acquisition and increased insurance costs.
Warrant Revaluation Income (Expense)

During the three months ended June 30, 2019 and 2018, we recorded non-cash
income of approximately $0.04 million, and $0.1 million, respectively, for
warrant revaluation charges in our Condensed Consolidated Statements of
Operations. The primary reason for the significant change between the warrant
revaluation charges noted above was due to the change in our stock price (from
$1.93 to $1.90) during the three months ended June 30, 2019 as compared to the
change (from $2.95 to $2.71) in our stock price during the three months ended
June 30, 2018.
During the six months ended June 30, 2019 and 2018, we recorded non-cash income
of $0.01 million and $0.3 million, respectively, for warrant revaluation charges
in our Condensed Consolidated Statements of Operations. The primary reason for
the significant change between the warrant revaluation charges noted above was
due to the change in our stock price (from $1.50 to $1.90) during the six months
ended June 30, 2019 compared to the change (from $3.20 to $2.71) in our stock
price during the six months ended June 30, 2018.
Due to the nature and inputs of the model used to assess the fair value of our
outstanding warrants, it is normal 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.




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Derivative Revaluation Income (Expense)


During the three months ended June 30, 2019 and 2018, we recorded non-cash
derivative revaluation expense of approximately $1.1 million and non-cash
derivative revaluation income of approximately $0.2 million, respectively, for
derivative liability revaluation charges in our Condensed Consolidated
Statements of Operations related to a compound bifurcated derivative initially
recorded in September 2016 in connection with the private placement of an
aggregate of $18,087,500 in principal of convertible promissory notes and
accompanying warrants to purchase an aggregate of 1,205,840 shares of our common
stock to institutional and accredited investors (the 2016 Private Placement).
The primary reason for the significant change between the derivative revaluation
charges noted above was due to a change in estimate of the probability of a
change of control transaction.

During the six months ended June 30, 2019 and 2018, we recorded non-cash
derivative revaluation expense of approximately $1.1 million and non-cash
derivative revaluation income of approximately $0.2 million, respectively, for
derivative liability revaluation charges in our Condensed Consolidated
Statements of Operations related to a compound bifurcated derivative initially
recorded in September 2016 in connection with the 2016 Private Placement. The
primary reason for the significant change between the derivative revaluation
charges noted above was due to a change in estimate of the probability of a
change of control transaction.

  Due to the nature and inputs of the model used to assess the fair value of our
compound bifurcated derivative, it is normal 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 bifurcated derivative, and changes in management's
estimated probability of certain events occurring that would impact the compound
bifurcated derivatives.

Interest Expense

During the three months ended June 30, 2019 and 2018, we recorded interest expense of approximately $0.2 million for each period in our Condensed Consolidated Statements of Operations related to the convertible promissory notes that we issued in the 2016 Private Placement (the Convertible Notes) which bear interest at 4% per annum.


During the six months ended June 30, 2019 and 2018, we recorded interest expense
of approximately $0.4 million for each period in our Condensed Consolidated
Statements of Operations related to the Convertible Notes which bear interest at
4% per annum.

Other income, net

During the three months ended June 30, 2019 and 2018, we had other income of
approximately $0.1 million and $0.04 million, respectively. This increase is due
primarily to increased earnings on invested cash balances.

During the six months ended June 30, 2019 and 2018, we had other income of
approximately $0.5 million and $0.1 million, respectively. This increase is due
primarily to approximately $0.3 million in charges being reimbursed under the
FDA grant we received in 2018.

Income taxes


During the three months ended June 30, 2019 , we had income tax expense of
approximately $0.6 million. This is due to our effective rate estimated for the
year to be approximately 7.23%. We did not record a tax expense for the three
months ended June 30, 2018.

During the six months ended June 30, 2019, we had income tax expense of approximately $0.6 million. This is due to our effective rate estimated for the year to be approximately 7.23%. We did not record a tax expense for the six months ended June 30, 2018.

Net Income


Net income increased approximately $14.7 million to approximately $11.8 million
for the three months ended June 30, 2019, as compared to the $2.9 million loss
for the three months ended June 30, 2018. The increase in net income was due
primarily to an approximately $16.6 million increase in gross profits and an
approximately $0.9 million decrease in research and development costs, and an
approximately $0.1 million increase in other income, partially offset by an
approximately $0.9

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million increase in selling, general and administrative expenses, an approximately $1.4 million increase in derivative revaluation expense and an approximately $0.6 million increase in income taxes all as described above.


Net income increased approximately $13.9 million to $8.1 million for the six
months ended June 30, 2019, as compared to the approximately $5.8 million loss
for the three months ended June 30, 2018. The increase in net income was due
primarily to an approximately $16.6 million increase in gross profits and an
approximately $0.3 million decrease in research and development costs and an
approximately $0.3 million increase in other income, partially offset by an
approximately $1.1 million increase in selling, general and administrative
expenses, an approximately $1.6 million increase in derivative and warrant
revaluation expense, and an approximately $0.6 million increase in income taxes
all as described above.

Contractual Obligations

During the six months ended June 30, 2019, there have been no material changes
to our contractual obligations outside the ordinary course of business from
those specified in our 2018 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.

Our summary of significant accounting policies is described in Note 3 to our
Consolidated Financial Statements contained in our 2018 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 our new significant policy
on revenue, and 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.

Not applicable.

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