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Fibrocell Science, Inc. (NYSEMKT:FCSC)

Q1 2014 Results Earnings Conference Call

May 19, 2014 5:00 PM ET

Executives

Karen Casey - Investor Relations Manager

David Pernock - Chairman and CEO

Greg Weaver - Chief Financial Officer

Analysts

Keith Markey - Griffin Securities

David Nierengarten - Wedbush

Operator

All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will a question-and-answer session. (Operator Instructions)

I would now like to turn the call over to [Karen Casey] (ph), Investor Relations Manager. Karen Casey, the floor is yours.

Karen Casey

Thank you. Good afternoon, everyone, and thank you for joining us. Our first quarter 2014 financial results were released today along with filing our Form 10-Q for the quarter ending March 31, 2014. The Form 10-Q is available on EDGAR and the company’s earnings release and Form 10-Q will be available on our website at fibrocellscience.com.

Today’s call will be archived. The replay will be available later today and remain available until June 30, 2014, and on our website for approximately 90 days.

Before we begin today’s call, we wish to inform participants that the forward-looking statements made today are pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

You are cautioned that such forward-looking statements involve risks and uncertainties, including and without limitation, the risk of clinical failures, program delays, unforeseen changes in the cost of our research and development activities, and clinical trials, possible acquisitions of our technologies, assets, or businesses and possible adverse actions by customers, suppliers, competitors, regulatory authorities, and other risks detailed from time to time in the company’s periodic reports filed with the Securities and Exchange Commission. Our future results may differ materially from our current expectations discussed today.

Following our formal remarks today, we will open the call for questions. I’d like to now turn the call over to David Pernock, Chairman and CEO of Fibrocell Science.

David Pernock

Thank you, Karen. Good afternoon. And thank you for joining our Fibrocell Science quarterly conference call. I’m joined today by Greg Weaver, Fibrocell’s Chief Financial Officer. We will provide an overview of our first quarter 2014 results, including an update of our 2014 goals. Following that, Greg, will review the financials.

First, I want to bring to your attention Forms 8-K and 12b-25 that we filed last Monday. Well, we announced the delay of the filing of our Form 10-Q due to the need for restating financial statements for certain prior audited periods.

The need for restatement was uncovered in connection with an internal review initiated by our CFO, Greg Weaver, in a consultation with our audit committee. Restatement was necessitated due to the misapplication of technical accounting guidance related to warrants, issued by the company between 2009 and 2012, where there we reported as equity while they should have been booked as liability.

I wish to emphasize that the required adjustments are entirely non-cash for all affected periods that have no impact on our company’s operations. We are actively resolving the issue. Greg will speak to this in greater detail in his remarks in just a few minutes.

Moving to our business update, that Fibrocell is unique in leveraging the favorable characteristics of autologous, fibroblast cells to create a line-up of products for rare diseases in conditions of skin and connective tissue, for which there are currently no -- there are limited options or treatment.

Our platform has two productive product engines. The azficel-T autologous, fibroblast engine based upon our company’s already approved BLA. Our focus is on the treatment of serious and debilitating scarring conditions, including vocal cord scarring and restrictive burn scarring.

Azficel-T is FDA approved through a biologic license application for the aesthetic indication. These new indications will be supplemental applications to our existing BLA. This is a big advantage.

In cross collaboration with Intrexon, our fibroblast protein expression product engine is creating biologic products by genetically modifying the fibroblast to express target proteins that are either inactive or missing from patient’s with rare skin and connective tissue diseases.

As a brief background for new investors over the past 12 months, Fibrocell has obtained significant corporate milestones in its evolution as a personalized biologic’s company. We aligned our corporate strategy development plans to address rare skin and connective tissue diseases with high unmet needs and significant opportunities for commercialization.

While we no longer actively promoting the aesthetic indication, we are focusing our resources on what we believe there will be more significant opportunities. We are leveraging azficel-T’s approved aesthetic BLA to streamline the approval path for the therapeutic indications by supplemental BLAs.

With our collaborations with the Intrexon Corporation, we are developing genetically modified personalized biologics for multiple orphan, rare skin and connective tissue diseases.

First, let’s provide update on our two azficel-T label expansion studies in vocal cord scarring and restrictive burn scarring. It is estimated that between 200,000 and 700,000 people in United States experience vocal cord scarring.

Current treatment options are limited. There is an opportunity for Fibrocell’s product to meet a significant unmet medical need with this indication. Our vocal cord scarring placebo controlled Phase II clinical trial is enrolling patients. As of today, we have enrolled four patients and are actively screening additional patients.

We have two current sites actively enrolling UCLA and Stanford University and the third site at NYU will be added. The efficacy endpoint has approved in voice quality compared to baseline after four months of treatment. The measurements are well-accepted and endorsed.

We have manufacturing and clinical trial that’s real for these patients which has a reminder is the same proprietary autologous fibroblast cell technology approved by the FDA here in our Pennsylvania manufacturing facility.

We’re optimistic about this trial and forecast to be fully enrolled the 20 subjects by the end of third quarter 2014 with readout of efficacy in Q3 of ‘15. Our optimism is based upon feedback from our key opinion leaders and the results of our Phase I clinical trial.

Our second labeled extension clinical study is a restrictive burn scarring which is one of the most debilitating aftereffects of serious burns. About one-half of approximately 40,000 hospitalized patients, burnt patients each year in United States would develop some restrictive burn scarring. It could cause disfigurement, decreased mobility and continuous pain.

Currently treatment options are limited and we see significant potential for azficel-T to address this important patient need. As we previously disclosed, after reviewing -- after experiencing a slower than expected enrollment start-up with this prior 2013, we did two key things. We expanded the number of centers and we received approval to modify the burnt patient enrollment eligibility to increase enrollment.

There are four subjects enrolled for this study as of today. Our study investigators are optimistic to take a reach our stated goals and expect to have the trial fully enrolled with 21 subjects by the end of the third quarter of 2014. Optimism for this trial stems from encouraging results that we’ve seen in burnt victim case studies and optimism from our key opinion leaders.

To summarize, we believe that both our vocal cord and burnt scarring Phase II trials would complete study enrollment targets in the third quarter of ’14. We are making progress everyday and our investors can expect an announcement when each trial completes enrollment.

Now, I would like to provide an update on our Autologous Fibroblast Protein Expression product engine. As a reminder, the integration of Fibrocell’s azficel-T Autologous Fibroblast Product Engine and Intrexon’s Corporation’s UltraVector technology enables the development of genetically-modified personalized biologics to directly address the fundamental cause of rare skin and connective tissue diseases.

The autologous fibroblast is the delivery vehicle for the protein expressing gene that is either missing or deficient in the patient. We believe this concept will be successful by combining the technologies of Fibrocell and Intrexon.

It is important to remember that because we are using the autologous fibroblast cell, we could deliver the gene through a targeted local area in the skin affective tissue and avoid toxic systemic treatments. It is also important because our approach is game-changing.

We treat the underlying causes debilitating rare in serious skin and connective tissue diseases are replacing the gene that is missing or deficient. We are making important advances with our Intrexon collaboration.

Our lead program is focused on RDEB, which is recessive dystrophic epidermolysis bullosa. It’s the most severe form of epidermolysis bullosa, a devastating and debilitating genetic disorder. It causes severe blistering in areas of missing skin.

The patient skin is extremely fragile and susceptible to blisters with normal daily occurrences. The current RDEB population in the United States is estimated between 2,800 to 5,600 people. There is no cure or treatment for this disease beyond basic wound care.

We are working with leading RDEB centers including Stanford University School of Medicine, the Cincinnati Children's Hospital Medical Center, the preclinical proof-of-concept data on animal work, with the goal of filing an IND in the first half of 2015.

We remained on track in working with Intrexon and in collaboration with leading university centers of excellence in RDEB and we expect to be reporting results of our proof-of-concept post-study by the end of the year.

Our progress continues as we have schedule to be with the FDA later this summer to review and confirm our study design, which we hope to demonstrate the genetically modified cells form connective fibers that connect the dermis to the epidermis, which is the underlying problem with this disease. These results will be provided to the FDA in the IND filing early next year.

In addition, our collaborative early stage preclinical work continues on other orphan diseases. We will update you on these important programs as we progress on future calls. Before I turn the call over to Greg, I would like to summarize other business efforts are ongoing and presenting potential near-term news.

Number one, we are working with UCLA and completing an exciting update to our long-term collaboration and access to important IP assets with the university and with Doctor, James Byrne.

Two, we are working on potential license on one of our cell-based cream product technologies as part of our ongoing business development efforts. In this case, it’s a non-core asset with potential to add value.

Three, we are opportunistically reviewing the potential to work with the U.S. government on our autologous cell-based therapy for awarded military personnel. This could be interesting. While today too soon before we disclose, we look forward to making an announcement at the appropriate time.

Four, regarding our aesthetic business (indiscernible), we are pursuing an update in key territories like China and Asia, as we are broadening our business development reach.

Five, we have began a technology transfer initiative and a contract manufacture cell therapies for our orphan disease programs and we are also in that same contract manufacture, will service a backup supply for our azficel-T product. We have more to say about that in the near future.

Thanks again. Now, I would like to turn the call over to Greg Weaver.

Greg Weaver

Thanks, David and thanks again for joining the call today. I will begin by commenting on the Form 8-K and 12b-25 last week that were filed regarding the delay in filing our 10-Q for Q1 and the restatement of prior audited financials.

The contact here is that management questions the derivative fair value accounting for previously issued warrants and financings that were completed by the company between 2009 and 2012. And then so doing realizes that historical error has been made and was included in prior audited financials.

The error was at the company’s approximately 6 million warrants issued during the period that should have been recorded as liabilities, for all periods since issuance rather than as equity as was done, due to the specific terms of each warrant and the applicable GAAP guidance to be followed and the appropriate financial reporting.

And therefore, these outstanding warrants in our balance sheet require restatement and reclassify them to liability accounting and by extension it also includes mark-to-market treatment for each quarter outstanding. So the liability and the non-operating expenses calculated through money or modeling for each past accounting period and each historical warrant issuance.

As David mentioned, I would like to emphasize, again these restatements result in non-cash, non-operating financial statement corrections that have zero impact, have zero impact on the company’s current or previously reported cash positions, operating expenses, total operating, investing or financing cash flows, or our net operating loss carryforward.

We’ve discussed these matters in detail with the auditors, in this case BDO. We anticipate filing an amended 10-K/A for 2013 and will therein restate ‘13, ‘12, and ‘11, that’s 2013, 2012, and 2011 amount as needed, each annual and quarterly periods as affected and we plan to file that amended 10-K/A by not later than the end of the month, May 31st.

In summary, management found the problem and we are fixing it. We regret the error we occurred. I would like to assure you that we are operating a high quality accounting and finance reporting function here going forward. This fix will be thorough and accurate and is quick and as transparent as possible. Feel free to ask any questions in this subject that you may have during the Q&A period. And it’s important for us to make sure that you are fully informed on the situation on how we address it.

I now would like to move forward to the discussion of the Q1 numbers beginning with cash, where we reported cash and cash equivalents at March 31st of $54 million, as compared to $60 million at the end of 2013. The $6 million used in Q1 funded the core business initiatives and also a decrease in payables from year end. And we anticipate the use of cash, run rate to be in the $6 million to $7million per quarter range going forward, that’s consistent with our previous guidance and that our cash balance today will meet our needs well into 2015.

Our reported GAAP operating loss for the quarter, excluding any non-operating, non-cash warrant expense, was $11 million. This amount included $5.2 million of the $11 million of non-cash accrued stock issuance cost to Intrexon in Q1 related to the aided collaboration in hypermobility disorder. You might recall we did that deal back in January. The pro forma operating loss without that non-cash stock issuance technology fee was $5.9 million.

R&D costs for Q1 were $7.4 million. In that $7.4 million, also included the $5.2 million in the non-cash technology license fee. And the pro forma presentation of R&D expense omitting that, the non-cash number was $2.2 million for the quarter, which represents an increase of $800,000 over the same quarter last year, representing the increased investment in our clinical trials and preclinical development programs over that comparable quarter.

Moving to G&A expense in Q1, $2.8 million represents an increase of $600,000 over the same quarter last year, primarily driven by an increase in both compensation expense and facilities expenses for the quarter.

And lastly, cost of goods sold dropped significantly in Q1. You will notice our cost of sales was driven by the number of LAVIV aesthetic biopsies and injections process during the quarter. And the cost of sales will fluctuate in line with volumes. In addition, we implemented a standard cost system in January of this year, which reflects our clear understanding of the cost and manufacturing and the allocation appropriately across between cost of sales and R&D. And under the leadership of Bob Sheroff, our VP of Operations, we’ve lowered cost of certain key deliverables and the cost of sales calculation. And that ends my comments. Thank you very much. And I’ll turn it back to David.

David Pernock

Thank you, Greg. In summary, we are very excited about our upcoming milestones for the company, focused on the execution of our plan. We greatly appreciate your interest in Fibrocell. Operator, at this time, we can open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Keith Markey.

Keith Markey - Griffin Securities

Hi, thank you for taking my question. Just wondering if you could put ballpark figure onto the financially structuring charge or change that you will have related to the warrant accounting?

Greg Weaver

Thanks. This is Greg. Thanks, Keith. The non-cash, non-operating liability for the warrants is not yet completed for the 10-K/A. So we are still working on that. We will file it before the end of the month. It will be appropriately calculated through the Monte Carlo calculations. I think you will see on the 10-Q that we filed today the warrant liability amount stated there.

Keith Markey - Griffin Securities

Okay, thanks.

Greg Weaver

The number was $15 million at the end of December and $18 million at the end of March.

Keith Markey - Griffin Securities

Okay. All right. Thanks. Also I was wondering if you could tell us the number of centers participating in the burn scar trial?

Greg Weaver

We have six centers actively enrolling right now. We have three additional centers that are nearing completion of their IRB reviews and site visits. They should be enrolling within a couple of weeks. We hope that eight or nine centers within overall enrolling.

Keith Markey - Griffin Securities

Great. And so you are looking for what about -- were so additional patients per month going into ….

Greg Weaver

Yes. With eight or nine centers we are talking about basically two or three patients per center.

Keith Markey - Griffin Securities

Okay, great. And then, I was just wondering I know that you’ve done some work to improve the cost of goods and I was just wondering are you expanding your cell culturing facilities by very much this year?

Greg Weaver

No, we are not expanding our cell culturing capacity within Exton, Pennsylvania. As we said, we are doing a bit of a tech transfer with a cell-based manufacturing company that will expand our ability to produce our genetically modified products, which we cannot do in Exton since we are approved for a particular product. We can't produce another product rather I’d like say last we need additional space. But in so doing, it also don’t give us capacity through contract manufacturer to produce LAVIV as well, which we think will be helpful as we get into Phase III clinical trials and eventually increase demand.

Keith Markey - Griffin Securities

I see. Okay. Thank you. And one last question, could you give us an update on the bone morphogenetic protein 2 project?

David Pernock

Yeah. With BMP-2 at the UCLA we’re very excited about the fact that in last models that they have shown that they can put BMP-2 inside of autologous fibroblast cell and basically produce good quality bone with parallel information. UCLA is working on a publication in support of that which we’re very much excited about. And we’re in the final discussions with UCLA to pay the exclusive rights to the IP for their support timing, which could ultimately lead to very interesting line of products where potentially we could create biologic solutions to very common orthopedic problems.

Keith Markey - Griffin Securities

Very good. Thank you.

Operator

(Operator Instructions) And you have a question from the line of David Nierengarten.

David Pernock

Thanks, David.

David Nierengarten - Wedbush

Hey, thanks for taking my question. I just had a quick question on your study enrollment. How do you see enrollment going and how do you see it complete or when do you see it completing for the Phase II this year?

David Pernock

Yeah. So we’re very encouraged with our vocal cord studies with UCLA and Stanford enrolling and pretty soon we’re going to be bringing on NYU. And just the tail end of the process are getting through IRB with burns since we’re able to change our protocols I think inclusion and exclusion criteria a little bit more amenable towards enrollment by adding nutritional sites. We’re seeing a pick up in enrollment. And we expect to complete both by the end of the third quarter of this year.

David Nierengarten - Wedbush

Okay. Both of them into Q3. All right.

David Pernock

Yes.

David Nierengarten - Wedbush

Great. And then, are there any other steps or announcements to make before you initiate the Phase I of the genetically modified fibroblasts cells, or are we just going to wait until the first half or so ‘15 until you…?

David Pernock

Actually there will be -- essentially pretty soon, we’ll be able to talk about the company we selected via contract manufacturer.

David Nierengarten - Wedbush

Okay.

David Pernock

That the qualified product, I think that’s an important step. It shows our progress. Second thing is we scheduled the meeting with the FDA for the middle of the summer. And I think that will be an important step. The third step is we will be conducting our animal study at Stanford University in the early fall of this year. And we expect that those results are done by the end of the year.

And then as we get into next year, we’ll be filing the IND in the first half of next year. So we have quite a good news coming out of RDEB. So we’re very excited about each one of those steps because it shows progress and commitment, gives nice news for an element. And I think people will be excited about the fact that to be able to get the animal study that we could hopefully show that we’re forming a functional collagen fibers that are able to attach the dermis to the epidermis, which is the underlying cause of the disease. I think there will be a very meaningful for -- asset for the patients.

David Nierengarten - Wedbush

Great. Appreciate it. Thanks.

Greg Weaver

David. Thank you. Thanks for [Technically Difficulty]. For those who don’t know, David is the Wedbush Analyst for Fibrocell. Appreciate it, Dave.

Operator

There are no other questions at this time. Gentlemen, do you have any closing remarks?

David Pernock

Yes. Just thank you very much for the call. We think our fundamentals are very strong. The situation we have with the restatement is, does not affect our cash position at all. Greg and team are working out very hard to -- very diligently to correct it. And we look forward to updating on future calls and I thank you very much for your support. Thank you for your questions.

Operator

Thank you for participating in today’s call. You may now disconnect.

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