Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended June 30, 2014

Or

For the transition period from             to            

Commission File Number: 001-32966

OSIRIS THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

443-545-1800

(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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o   No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Table of Contents

OSIRIS THERAPEUTICS, INC.

INDEX

2

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1.                   Financial Statements — Unaudited

OSIRIS THERAPEUTICS, INC.
CONDENSED BALANCE SHEETS

(amounts in thousands, except per share amounts)

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

3

Table of Contents

OSIRIS THERAPEUTICS, INC.
STATEMENTS OF COMPREHENSIVE LOSS

Unaudited
(amounts in thousands, except per share data)

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

4

Table of Contents

OSIRIS THERAPEUTICS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the six months ended June 30, 2014

Unaudited
(amounts in thousands, except for share and per share data)

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

5

Table of Contents

OSIRIS THERAPEUTICS, INC.
STATEMENTS OF CASH FLOWS

Unaudited
(amount in thousands)

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

6

Table of Contents

OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

SIX MONTHS ENDED JUNE 30, 2014 AND 2013

1.  Description of Business and Significant Accounting Policies

Description of Business

Osiris Therapeutics, Inc. (“we,” “us,” “our,” or the “Company”) is a Maryland corporation headquartered in Columbia, Maryland. We began operations on December 23, 1992 and were a Delaware corporation until, with approval of our stockholders, we reincorporated as a Maryland corporation on May 31, 2010. We are a leading stem cell regenerative medicine company focused on developing and marketing products in the wound, orthopedic, and sports medicine markets.

From 2010 to 2013, we operated our business in two segments, Biosurgery and Therapeutics. We now operate only our Biosurgery business, as a result of the sale of our Therapeutics segment assets in the fourth quarter of 2013, as discussed further below. Our Biosurgery business focuses on products for wound care, cartilage repair, and orthopedics, to harness the ability of cells and novel constructs to promote the body’s natural healing. Until it was sold, our Therapeutics business focused on developing biologic stem cell drug candidates from a readily available and non-controversial source—adult bone marrow.

Our Biosurgery business has continued to grow since its inception, and we have increased our organizational focus on the development and commercialization of products in this segment. Consistent with this organizational focus, as discussed further in Note 2— Discontinued Operations, on October 10, 2013, we entered into a Purchase Agreement to sell our Therapeutics segment, including all of our culture expanded mesenchymal stem cell business, including Prochymal and other related assets. We eliminated the Therapeutics segment from our continuing operations as a result of the disposal transaction, and have presented the assets, liabilities, and results of the segment’s operations as a discontinued operation for all periods presented. Our continuing operations now represent the portion of our business previously referred to as our Biosurgery segment.

Unaudited Interim Financial Statements

Except for the Balance Sheet as of December 31, 2013, which was derived from audited financial statements, the accompanying condensed financial statements are unaudited.  The accompanying condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, these statements include all adjustments (consisting of normal recurring adjustments) considered necessary to present a fair statement of our results of operations, financial position and cash flows. Operating results for any interim period are not necessarily indicative of the results that may be expected for the full year. This Quarterly Report on Form 10-Q should be read in conjunction with our financial statements and footnotes included in our Annual Report on Form 10-K (“2013 10-K”) for the fiscal year ended December 31, 2013.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Due to the inherent uncertainty involved in making those assumptions, actual results could differ from those estimates. We believe that the most significant estimates that affect our financial statements are those that relate to deferred tax assets, inventory valuation, share-based compensation and the value of the derivative obtained in connection with the sale of our former Therapeutics business.

Reclassifications

We have reclassified certain prior-year amounts for comparative purposes. These reclassifications did not affect our results of operations or financial positions for the years presented.

Cash and Cash Equivalents

Amounts listed as cash on our balance sheets are maintained in depository accounts at a commercial bank. Cash and cash equivalents, which include highly liquid investments with maturities of three months or less when purchased, held in our brokerage investment accounts are classified as investments available for sale, as the amounts represent investments that have matured and are anticipated to be reinvested in debt securities in the near future, and are disclosed at fair value, which approximates cost.

7

Table of Contents

OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (continued)

SIX MONTHS ENDED JUNE 30, 2014 AND 2013

1.              Description of Business and Significant Accounting Policies - continued

Investments Available for Sale

Investments available for sale consist primarily of marketable securities with maturities less than one year. Investments available for sale are valued at their fair value, with unrealized gains and losses reported as a separate component of stockholders’ equity in accumulated other comprehensive income. All realized gains and losses on our investments available for sale are recognized in results of operations as Other income (expense), net.

Investments available for sale are evaluated periodically to determine whether a decline in their value is “other than temporary.” The term “other than temporary” is not intended to indicate a permanent decline in value. Rather, it means that the prospects for near term recovery of value are not necessarily favorable, or that there is a lack of evidence to support fair values equal to, or greater than, the carrying value of the security. We review criteria such as the magnitude and duration of the decline, as well as the reasons for the decline, to predict whether the loss in value is other than temporary. If a decline in value is determined to be other than temporary, the carrying value of the security is reduced and a corresponding charge to earnings is recognized.

Trading Securities - Derivative and Securities Received in Business Disposition

As discussed in Note 2 — Discontinued Operations, we disposed of our Therapeutics segment in October 2013.  A portion of the consideration for the sale of that business was stock of Mesoblast Limited (“Mesoblast”), the parent of the purchaser.  We are required to hold that stock for one year from the date of receipt.  We currently intend to dispose of the Mesoblast stock as soon as we are able to do so in December 2014.  As such, we have reflected the investment as a current asset in Trading Securities.  Mesoblast is a public company and its stock is traded on the Australian stock exchange.

The Mesoblast stock is subject to limited price protection for the one year required holding period. To the extent the value of those shares decreases during the holding period, Mesoblast is required to pay us for the decrease in value.  This payment is to be made at least one half in cash and at the option of Mesoblast, up to one half in additional shares of Mesoblast stock. Any additional Mesoblast stock will also have to be held for one year during which period there is no further price protection. The price protection is accounted for as a derivative under ASC 815, Derivatives and Hedging, and, as such is recorded on the balance sheet at fair value, with changes in value recognized in Other income (expense), net. We have elected to measure the Mesoblast stock at fair value with changes in fair value reflected in Other income (expense), net, as permitted under ASC 825-10, Financial Instruments — Fair Value Option.

Our only derivative instrument is the price protection guarantee regarding the payment received in restricted shares of Mesoblast stock.  We do not hold derivative financial instruments for trading purposes.

Restricted Cash

We periodically are required under the terms of various agreements to provide letters of credit which are collateralized by cash deposits. The restricted cash relates to a letter of credit that we caused to be issued in lieu of a security deposit under the operating lease for our Columbia, Maryland facility.

Trade Accounts Receivable

Trade accounts receivable are reported at their net realizable value. We charge off uncollectible receivables when the likelihood of collection is remote. We set credit terms with individual customers, and consider receivables outstanding longer than the time specified in the respective customer’s contract, typically 45-days, to be past due. As of June 30, 2014 and December 31, 2013, accounts receivable in the accompanying balance sheets are reported net of a $128,000 and $78,000 allowance for doubtful accounts, respectively. We believe the reported amounts are fully collectible. Trade accounts receivable balances are not collateralized. We incurred $50,000 of bad debt expense in the first half of fiscal 2014. We did not incur any bad debts expense in the first half of fiscal 2013.

Other Receivables

Other receivables include reimbursements due us from Mesoblast for goods and services provided to them in connection with the Transition Services Agreement entered into as part of the sale transaction.  The Transition Services Agreement has been extended so that we will provide some services to Mesoblast through October 10, 2014, and will continue to be reimbursed for the costs incurred. Other receivables also include accrued interest from the company’s investments and federal income tax refunds expected.

8

Table of Contents

OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (continued)

SIX MONTHS ENDED JUNE 30, 2014 AND 2013

1.  Description of Business and Significant Accounting Policies - continued

Inventory

We began carrying inventory of our Biosurgery products on our balance sheet following commercial launch of such products. Inventory consists of raw materials, biologic products in process, and products available for distribution. We determine our inventory values using the first-in, first-out method. Inventory is valued at the lower of cost or market, and excludes units that we anticipate distributing for clinical evaluation. Materials and supplies purchased for product development and product improvement activities are expensed as incurred.

Property and Equipment

Property and equipment, including improvements that extend useful lives, are valued at cost, while maintenance and repairs are charged to operations as incurred. Depreciation is calculated using the straight-line method based on estimated useful lives ranging from three to seven years for furniture, equipment and internal use software. Leasehold improvements and assets under capital leases are amortized over the shorter of the estimated useful life of the asset or the term of the lease.

Valuation of Long-lived Assets

We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or group of assets may not be fully recoverable. These events or changes in circumstances may include a significant deterioration of operating results, changes in business plans, or changes in anticipated future cash flows. If an impairment indicator is present, we evaluate recoverability by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated by the assets. Assets are grouped at the lowest level for which there is identifiable cash flows that are largely independent of the cash flows generated by other asset groups. If the total of the expected undiscounted future cash flows is less than the carrying amount of the asset, an impairment loss is recognized for the difference between the fair value and carrying value of assets. Fair value is generally determined by estimates of discounted cash flows. The discount rate used in any estimate of discounted cash flows would be the rate required for a similar investment of like risk. There were no impairment losses recognized during the first half of fiscal 2014 or during fiscal year 2013.

Biosurgery Revenue Recognition

We recognize revenue from product distribution when title passes to the customer.  Title usually passes when the product is shipped to the customer and leaves our loading dock.  In some situations, we store consigned inventory on site in freezers at hospital or clinic facilities and title  passes to the customer when the product is used in a surgical procedure.  In these instances we recognize the revenue upon notification of the completed surgical procedure.  We verify the condition and status of all consigned inventory on at least a quarterly basis.   Due to the nature of our products and the need to ensure they are maintained at the proper frozen temperature, we generally do not allow product returns.

Therapeutics Revenue Recognition

In our former Therapeutics business, we evaluated revenues from agreements that have multiple elements to determine whether the components of the arrangement represent separate units of accounting. To recognize a delivered item in a multiple element arrangement, the delivered items must have value on a standalone basis and the delivery or performance must be probable and within our control for any delivered items that have a right of return. The determination of whether multiple elements of a collaboration agreement meet the criteria for separate units of accounting requires us to exercise judgment. We account for the activities of our former Therapeutics business as discontinued operations.

Revenues from research licenses associated with our former Therapeutics business were recognized as earned upon either the incurring of reimbursable expenses directly related to the particular research plan or the completion of certain development milestones as defined within the terms of the agreement. Payments received in advance of research performance were designated as deferred revenue. Non-refundable upfront license fees and certain other related fees associated with our former Therapeutics business were recognized on a straight-line basis over the development periods of the contract deliverables. Fees associated with substantive at risk performance based milestones are recognized as revenue upon their completion, as defined in the respective agreements. Incidental assignment of technology rights were recognized as revenue when and if it was earned and received.

Research and Development Costs

We expense internal and external research and development (“R&D”) costs, including costs of funded R&D arrangements and the manufacture of clinical batches of Biosurgery products used in clinical trials, in the period incurred.

9

Table of Contents

OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (continued)

SIX MONTHS ENDED JUNE 30, 2014 AND 2013

1.  Description of Business and Significant Accounting Policies - continued

Income Taxes

Deferred tax liabilities and assets are recognized for the estimated future tax consequences of temporary differences, income tax credits and net operating loss carry-forwards. Temporary differences are primarily the result of the differences between the tax bases of assets and liabilities and their financial reporting values. Deferred tax liabilities and assets are measured by applying the enacted statutory tax rates applicable to the future years in which deferred tax liabilities or assets are expected to be settled or realized. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense, if any, consists of the taxes payable for the current period and the change during the period in deferred tax assets and liabilities.

We recognize in our financial statements the impact of a tax position, if that position is more likely than not to be sustained upon an examination, based on the technical merits of the position. Interest and penalties related to income tax matters are recorded as income tax expense. At June 30, 2014 and December 31, 2013 we had no accruals for interest or penalties related to income tax matters.

Income per Common Share

Basic income per common share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted income per common share adjusts basic income per share for the potentially dilutive effects of common share equivalents, using the treasury stock method, and includes the incremental effect of shares that would be issued upon the assumed exercise of stock options and warrants.

Diluted loss per common share for the three and six months ended June 30, 2014 excludes all 1,536,945 of our outstanding options as of that date, as their impact on our net loss is anti-dilutive.

Diluted loss per common share for the three and six months ended June 30, 2013 excludes the 1,000,000 shares issuable upon the exercise of an outstanding warrant, and all 2,042,914 of our outstanding options as of that date, as their impact on our net loss is anti-dilutive.

Share-Based Compensation

We account for share-based payments using the fair value method.

We recognize all share-based payments to employees and non-employee directors in our financial statements based on their grant date fair values, calculated using the Black-Scholes option pricing model. Compensation expense related to share-based awards is recognized on a straight-line basis for each vesting tranche based on the value of share awards that are expected to vest on the grant date, which is revised if actual forfeitures differ materially from original expectations.

Comprehensive Income (Loss)

Comprehensive income (loss) consists of net income and all changes in equity from non-stockholder sources, which consist of changes in unrealized gains and losses on investments.

Concentration of Risk

We maintain cash and short-term investment balances in accounts that exceed federally insured limits, although we have not experienced any losses on such accounts. We also invest excess cash in investment grade securities, generally with maturities of one year or less.

We have historically provided credit in the normal course of business to contract counterparties and to the distributors of our product. Trade accounts receivable in the accompanying balance sheets consist primarily of amounts due from end user customers and distributors of our Biosurgery products within the United States. During the first half of fiscal 2014 and 2013, revenues from one of the distributors of our Biosurgery products, Stability Biologics, comprised approximately 11% and 43%, respectively, of our total Biosurgery product revenues. As of June 30, 2014 and December 31, 2013, receivables from this distributor comprised 11% and 57%, respectively, of our trade receivables. We expect all of our reported receivables to be fully collected. As discussed under “Trade Accounts Receivable,” we have incurred $50,000 bad debt expense for the three months ended June 30, 2014. We did not incur any bad debts expense in the first half of fiscal 2013.

10

Table of Contents

OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (continued)

SIX MONTHS ENDED JUNE 30, 2014 AND 2013

1.  Description of Business and Significant Accounting Policies - continued

Recently Adopted Accounting Guidance at June 30, 2014

In July 2013, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) related to the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists.  The ASU requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as either a reduction to a deferred tax asset or separately as a liability depending on the existence, availability and/or use of an operating loss carryforward, a similar tax loss, or a tax credit carryforward. This ASU was adopted at January 1, 2014. This ASU did not have an impact on our consolidated financial statements as we currently do not have any unrecognized tax benefits in the same jurisdictions in which we have tax loss or credit carryovers.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” which requires an entity to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services.  The new standard will replace most of the existing revenue recognition standards in U.S. GAAP when it becomes effective on January 1, 2017.  Early adoption is not permitted.  The new standard can be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of the change recognized at the date of the initial application.  We are currently assessing the impact the adoption of ASU 2014-09 will have on our condensed consolidated financial position, results of operations and cash flows.

2. Discontinued Operations

On October 10, 2013, we entered into a Purchase Agreement with a wholly-owned subsidiary of Mesoblast Limited, pursuant to the terms of which we sold our culture expanded mesenchymal stem cell (ceMSC) business, including Prochymal and other related assets. The Purchase Agreement provides for payment to us of $50.0million in initial consideration, and payment of up to an additional $50.0 million upon the achievement by Mesoblast of certain clinical and regulatory milestones. Additionally, we will be entitled to earn low single to double digit cash royalties on future sales by Mesoblast of Prochymal and other products utilizing the acquired ceMSC technology.

The Purchase Agreement provides for the $50.0 million of initial payments and up to $50.0 million of contingent additional payments to us upon our achievement of milestone events, as follows:

Of the $50 million in total initial consideration, we had received at December 31, 2013, payments of $20 million in cash, and $15 million in Mesoblast ordinary shares, which were delivered to us upon completed delivery of the ceMSC assets.  The remaining $15 million of the initial consideration was received in cash on April 9, 2014.  The Mesoblast shares received by us are subject to a one year holding period from the date of receipt, but are afforded limited downside protection for a drop in the Mesoblast share price over the holding period.  We have evaluated this downside protection, and determined that it meets the criteria of a derivative instrument.  The fair value of the protection at the time of the disposition of our Therapeutics business was $1.7 million.  We recognized the price protection derivative as an asset at June 30, 2014 and December 31, 2013 at its then fair value of $3.2 million and $1.7 million respectively. The initial $1.7 million value of the derivative was reflected in the calculation of the gain on sale of the Therapeutics business.

11

Table of Contents

OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (continued)

SIX MONTHS ENDED JUNE 30, 2014 AND 2013

2. Discontinued Operations - continued

Our ability to receive the second $50.0 million is subject to satisfaction of the milestones indicated above, all of which are largely dependent upon the clinical and regulatory success of Mesoblast and other factors not in our control. These include many, if not all, of the risks and uncertainties that our ceMSC business was subject to prior to its sale to Mesoblast, including product development, efficacy and regulatory risks. We have received no such payments thus far, nor do we have any expectation of receiving any such payments in the foreseeable future. Our ability to earn royalties from Mesoblast is subject to these same risks and will require performance by Mesoblast that results in its meeting some or all of the milestones referred to above, and is thereafter also dependent upon the commercial success of Mesoblast’s ceMSC business. Royalties, if any, are payable to us in cash. Any portion of the second $50.0 million that becomes payable to us will be payable, at the discretion of Mesoblast, in Mesoblast ordinary shares, based on a then current valuation of such shares.  Any such Mesoblast ordinary shares that we receive will also be subject to a one year holding period, with the same limited downside protection described above.

We eliminated the Therapeutics segment from our continuing operations as a result of the disposal transaction and have presented the assets, liabilities, and results of the segment’s operations as a discontinued operation for all periods.  Our continuing operations now represent the portion of our business previously referred to as our Biosurgery segment.

As a result of the disposal of our Therapeutics segment, we have presented the assets, liabilities, and results of the segment’s operations as a discontinued operation for all periods presented.  Our only continuing involvement in our former Therapeutics business is to wind down our prior research and development activities and to assist Mesoblast in absorbing this business under a Transition Services Agreement entered into as part of the Purchase Agreement. The only continuing cash flows to us related to our former Therapeutics business will be the contingent consideration and royalties provided for under the purchase agreement, as described above.  We received no such contingent payments or royalties in the second quarter of fiscal 2014 or full fiscal year 2013.

We recognized a gain of approximately $49.4 million of the sale of discontinued operations during the year ended December 31, 2013, representing the $50.0 million in initial payments received under the Purchase Agreement and the $1.7 million fair value of the derivative instrument received, net of transaction costs of approximately $600,000, including legal, accounting and advisory fees, and income tax expense of $1.7 million.

The net assets allocable to the Therapeutics business at June 30, 2014 and December 31, 2013 were as follows:

Summarized operating results of discontinued operations are as follows:

12

Table of Contents

OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (continued)

SIX MONTHS ENDED JUNE 30, 2014 AND 2013

2. Discontinued Operations - continued

Revenues from our former Therapeutics business have historically consisted primarily of collaborative research agreements and royalties. Because of the disposition of our Therapeutics business in 2013, we will no longer incur related research and development expenses related to these discontinued operations. Our discontinued operations earned royalty revenues and cost reimbursement under an adult expanded access program. Royalties were earned on the sale of human mesenchymal stem cells sold for research purposes. We recognized this revenue as sales were made.

3. Segment Reporting

Historically, we managed our business in two operating segments: our Biosurgery segment and our Therapeutics segment.

Our Biosurgery segment is focused on the development, manufacture and distribution of biologic products for wound care, cartilage repair, and orthopedics to harness the ability of cells and novel constructs to promote the body’s natural healing. We launched Grafix for commercial distribution in 2010, began distribution of Ovation in early fiscal 2011, and began distribution of Cartiform and OvationOS during 2013.  We have continued to increase our distribution volume of these products since their respective commercial launches and are developing additional products for future commercialization.

Our Therapeutics segment focused on developing and marketing products to treat medical conditions in the inflammatory and cardiovascular disease areas. Its operations have focused on clinical trials and discovery efforts.  As disclosed in Note 2 — Discontinued Operations, in October 2013 we entered into a Purchase Agreement with Mesoblast, pursuant to the terms of which we sold our culture expanded mesenchymal stem cell business, including Prochymal and other related assets.

Given the sale of our former Therapeutics segment, we now have only one operating segment.  As such, our financial statements present the assets, liabilities, and results of the former Therapeutics segment as discontinued operations for all periods presented, and our continuing operations now represent what was formerly our Biosurgery segment.

4. Property and Equipment

Property and equipment at June 30, 2014 and December 31, 2013 are as follows:

13

Table of Contents

OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (continued)

SIX MONTHS ENDED JUNE 30, 2014 AND 2013

5. Inventory

As of June 30, 2014 and December 31, 2013, inventory for our Biosurgery business consists of the following:

Prior to the transaction described in Note 2—Discontinued Operations, we did not carry any inventory for our Therapeutics products, as we had yet to launch Prochymal for commercial distribution.

6. Share-Based Compensation

In April 2006, we adopted our 2006 Omnibus Plan. We amended and restated this plan in 2008 and 2010, and amended it further in 2012, in each case to, among other things, increase the number of shares available for grant. Most recently, as our 2014 Annual Meeting of Stockholders, held on May 6, 2014, an amendment to the Amended and Restated 2006 Omnibus Plan was approved that, among other things, increased the maximum number of shares that may be awarded under the Plan to 3,000,000 shares. In addition, we had previously established our Amended and Restated 1994 Stock Incentive Plan. Both Plans authorize the issuance of various forms of stock-based awards, including incentive and non-qualified stock options, stock purchase rights, stock appreciation rights and restricted and unrestricted stock awards. A total of 3,000,000 shares of our common stock have been reserved for issuance under the Amended and Restated 2006 Omnibus Plan, and 736,378 shares were reserved under our Amended and Restated 1994 Stock Incentive Plan. We ceased all grants under the Amended and Restated 1994 Stock Incentive Plan concurrent with our initial public offering in August 2006. As a result, no shares are currently available for future awards under the Amended and Restated 1994 Stock Incentive Plan. At June 30, 2014, there were 621,406 shares available for future awards under the Amended and Restated 2006 Omnibus Plan.

In connection with the stock options exercised during the three months ended June 30, 2014, we received cash proceeds of $1,417,000. At June 30, 2014,  there was $4.0 million of total unrecognized compensation costs related to non-vested stock options, which is expected to be recognized through fiscal 2018.

A summary of stock option activity for the three months ended June 30, 2014 is as follows:

The weighted fair value of options granted during the six months ended June 30, 2014 was $7.85 per share.

14

Table of Contents

OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (continued)

SIX MONTHS ENDED JUNE 30, 2014 AND 2013

7. Income Taxes

We calculate our interim tax provision in accordance with the guidance for accounting for income taxes in interim periods. At the end of each interim period, we estimate the annual effective tax rate and apply that tax rate to our ordinary quarterly pre-tax income from continuing operations. The tax expense or benefit related to significant, unusual or extraordinary discrete events (including discontinued operations) during the interim period is recognized in the interim period in which those events occurred. In addition, the effect of changes in enacted tax laws or rates or tax status is recognized in the interim period in which the change occurs.  For the six months ended June 30, 2014 and 2013, there was no income tax expense or benefit from continuing operations due to losses from both continuing operations and discontinued operations for which no benefit was provided.

8. Investments Available for Sale

Investments available for sale consisted of the following as of June 30, 2014 and December 31, 2013: