Item 1.Financial Statements (Unaudited)
VERICEL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED SEPTEMBER 30, 2017 (UNAUDITED)
Vericel Corporation, a Michigan corporation (the(together with its consolidated subsidiaries referred to herein as the Company, Vericel, we, us or our)Vericel), was incorporated in March 1989 and began employee-based operations in 1991. On May 30, 2014, Vericel completed the acquisition of certain assets and assumed certain liabilities of Sanofi, a French société anonyme (Sanofi), including all of the outstanding equity interests of Genzyme Biosurgery ApS (Genzyme Denmark or the Danish subsidiary) (now known as Vericel Denmark ApS), a wholly-owned subsidiary of Sanofi, and over 250 patent applications of Sanofi and certain of its subsidiaries for purposes of acquiring the portion of the cell therapy and regenerative medicine business (the CTRM Business), which researches, develops, manufactures, markets and sells the Carticel®, MACI®, and Epicel® products. The Company is a fully integrated,fully-integrated, commercial-stage biopharmaceutical company dedicated to the identification, development and commercialization of innovative therapies that enable the body to repair and regenerate damaged tissues and organs to restore normal structure and function. Vericel has marketed products and developmental stage product candidates, and the Company’s goal is to become thea leader in advanced therapies for the sports medicine and severe burn care markets. Vericel currently markets 2 cell therapy products in the U.S., MACI® (autologous cultured chondrocytes on porcine collagen membrane) and regenerative medicine by developing, manufacturingEpicel® (cultured epidermal autografts).
MACI is an autologous cellularized scaffold product indicated for the repair of symptomatic, single or multiple full-thickness cartilage defects of the knee with or without bone involvement in adults. Epicel is a permanent skin replacement for the treatment of adult and marketing best-in-class therapies forpediatric patients with significant unmet medical needs.
deep-dermal or full-thickness burns comprising greater than or equal to 30 percent of total body surface area (“TBSA”). The Company also holds an exclusive license from MediWound Ltd. (“MediWound”) for North American rights to NexoBrid®, a registration-stage biological orphan product designed for the debridement of severe thermal burns. The Company operates its business primarily in the U.S. in one1 reportable segment — the research, product development, manufacture and distribution of patient-specific, expanded cellular therapies for use in the treatment of specific diseases.
COVID-19
The ongoing pandemic caused by the spread of a novel strain of coronavirus (“COVID-19”) has created significant disruptions to the U.S. and global economy and has contributed to significant volatility in financial markets. The global impact of the outbreak has fluctuated since early 2020. At times, many state, local and national governments – including those in Massachusetts and Michigan, where the Company’s operations are located – have responded by issuing, extending and supplementing orders requiring quarantines, restrictions on travel, and the mandatory closure of certain non-essential businesses, among other actions. In the U.S., the status and application of these orders have varied on a state-by-state basis since the early days of the pandemic. Many of the restrictions have been periodically updated as infection rates in the U.S. have risen and fallen, as new virus variants have emerged, as vaccines have been distributed and administered, and as world health leaders learn more about the virus, its transmission pathway and who is most at risk. Because Vericel is deemed an essential business, the Company has been exempted from government orders requiring the closure of workplaces and the cessation of business operations.
Notwithstanding being an essential business, the Company’s business and operations at times have been adversely impacted by the ongoing effects of the COVID-19 pandemic. For example, as a result of periodic restrictions placed on the performance of elective surgical procedures, Vericel experienced a significant increase in cancellations of scheduled MACI procedures as well as a slowdown in new MACI orders during March and April of 2020. The widespread suspension of surgical procedures impacted the Company’s business and operations during the first and second quarters of 2020. The level and degree of restriction on elective surgeries, on the ability of patients to seek treatment and on U.S. business operations generally fluctuated throughout 2020 as COVID-19 infection rates rose and fell during the summer months and into the autumn. By the first quarter of 2021, the pandemic’s effects on the Company’s MACI business had largely dissipated. During the summer of 2021, however, the pandemic’s direct and ancillary effects again began to cause some disruption to the Company’s MACI business. Following the cessation of COVID-19-related travel restrictions in many parts of the U.S. and the availability of vaccinations in May and June 2021, some MACI patients postponed or delayed treatment. Further, surges of new COVID-19 cases during the second half of 2021 caused by the spread of the “Delta” and “Omicron” variants again caused disruptions to health care networks including restrictions on the performance of elective procedures, the availability of physicians and/or their treatment prioritizations, the level of healthcare facility staffing and, in some instances, the willingness or ability of patients to seek treatment. Consequently, and notwithstanding the widespread distribution of vaccines, these factors contributed to a slowdown of MACI procedures during the third and fourth quarters of 2021 and during the first months of 2022. Although hospitals are now better prepared for subsequent surges in COVID-19 patients, the risk remains that regional or local restrictions could again be placed on the performance of elective surgical procedures if the number of COVID-19 infections in the U.S. were to rise, or if new or existing COVID-19 variants render current vaccine treatments ineffective.
Because Epicel is used almost exclusively in an emergent setting by burn centers and surgeons throughout the country, Epicel revenue and procedure volumes have been less affected by the pandemic. Nevertheless, the number of large burns and burn admissions can be affected by restrictions on human activity resulting from more severe government lockdown orders.
At the outset of the pandemic, the Company put in place a comprehensive workplace protection plan, which instituted protective measures in response to COVID-19. Vericel’s workplace protection plan has closely followed guidance issued by the Centers for Disease Control and Prevention (“CDC”) and has complied with applicable federal and state law. To date, Vericel
has been successful in sustaining its operations and providing MACI and Epicel to patients in need. The Company continues to review its policies and procedures regularly, including its workplace protection plan, as the pandemic evolves and the Company may take additional actions to the extent required.
The Company continues to manufacture MACI and Epicel and is maintaining a significant safety stock of all key raw materials. Vericel does not expect current supply chain interruptions will impact its ongoing manufacturing operations. With respect to customer delivery, MACI final product has an established shelf life of six (6) days and an established shipping shelf life of three (3) days. Currently, MACI is picked up by courier and shipped by commercial air or ground transportation to customer surgical sites. Epicel final product has an established shelf life of 48 hours and is hand carried to customer hospitals by courier. Transportation is primarily by commercial or charter airline. Although the Company has not experienced material shipping delays or materially increased costs to date, significant disruption of air travel could result in the inability to deliver MACI or Epicel final products to customer sites within appropriate timeframes, which could further adversely impact the Company’s business. At this time, the Company is not aware of COVID-19 related impacts on its distributors, operations or third-party service providers’ ability to manage patient cases. The Company believes it is possible that it could experience variable impacts on our business, should a new resurgence of COVID-19 infections occur in the future.
Liquidity
The accompanying condensed consolidated financial statements have been prepared on a basis which assumes that the Company will continue as a going concern and contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. As of September 30, 2017,March 31, 2022, the Company hashad an accumulated deficit of $361.2$390.4 million and had a net loss of $5.4$7.1 million during the quarterthree months ended September 30, 2017. March 31, 2022. The Company had cash and cash equivalents of $15.5$55.7 million and investments of $67.7 million as of September 30, 2017.March 31, 2022. The Company expects that cash from the sales of its products and existing cash, together with its term loancash equivalents and revolving line of credit agreement with Silicon Valley Bank (SVB) and MidCap Financial Services (MidCap) (the SVB-MidCap facility),investments will be sufficient to support the Company's Company’s current operations through at least twelve12 months followingfrom the filingissuance of this Form 10-Q. In connection withthese condensed consolidated financial statements. The effects of the SVB-MidCap facility, COVID-19 pandemic continue to evolve, however. To the extent the U.S. experiences a worsening in COVID-19 infections or the emergence of additional virus variants that result in more serious disease or limit the effectiveness of existing vaccines, subsequent healthcare measures – to include the postponement or cessation of elective and other surgical procedures – may cause the Company must remainto experience a reduction in compliance with minimum monthly net revenue covenants (determined in accordance with U.S. GAAP), measured on a trailing twelve month basis. SVBbusiness and MidCap also have the ability to call debt based on material adverse change clauses which are subjectively determinable andresulting revenue. This, consequently, may result in a subjective acceleration clause. Ifirrecoverable losses of customers and significantly impact the Company's cash requirements exceed its current expectations, or if it is not in compliance with the monthly net revenue covenants or the subjective acceleration clauses are triggered under the SVB-MidCap facility, then SVB may call the debt resulting inCompany’s long-term liquidity, potentially requiring the Company immediately needing additional funds. As of September 30, 2017, the Company wasto engage in compliance with the minimum revenue covenant set forthlayoffs, furloughs and/or reductions in the Second Loan Modification Agreement between the Company, SVB and MidCap.salaries. The Company also may seekneed to access additional funding through debt or equity financings including the at-the-market sales agreement in place with Cowen and Company, LLC. However,capital; however, the Company may not be able to obtain financing on acceptable terms or at all.all, particularly in light of the impact of COVID-19 on the global economy and financial markets. The terms of any financing may adversely affect the holdings or the rights of the Company'sCompany’s shareholders. If the Company needs additional funds and is unable to obtain funding on a timely basis, the Company may need to significantly curtail its operations including its research and development programs in an effort to provide sufficient funds to continue its operations, which could adversely affect its business prospects.
2. Basis of Presentation
The condensedaccompanying condensed consolidated financial statements included herein of Vericel are unaudited and have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (SEC)(“SEC”). The preparation of condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles in the United States of America (U.S. GAAP)(“GAAP”) requires management to make estimates, judgments, and assumptions that may affect the reported amounts of assets, liabilities, equity, revenuesrevenue and expenses. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to such rules and regulations.
The financial statements reflect, in the opinion of management, all adjustments (consisting only of normal, recurring adjustments) necessary to state fairly the financial position and results of operations as of and for the periods indicated. The Company bases its estimates on historical experience and on various other assumptions that it believes are reasonable, the results of which form the basis for making judgments about the carrying values of assets, liabilities and equity and the amount of revenue and expenses. The full extent to which the COVID-19 pandemic will continue to directly or indirectly impact its business, results of operations forand financial condition, including sales, expenses, reserves and allowances, manufacturing, clinical trials, research and development costs and employee-related amounts, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning the threeCOVID-19 pandemic and nine months ended September 30, 2017, are not necessarily indicativethe actions taken to continue to contain or treat COVID-19, as well as the economic impact on its customers. The Company has made estimates of the impact of the COVID-19 pandemic within these financial statements and there may be changes to those estimates in future periods. Actual results may differ from these estimates. As of March 31, 2022, the Company has not recorded impairments to be expected forinvestments, inventory, other current assets or long-lived assets as a result of the full year or for any other period. COVID-19 pandemic.
The September 30, 2017 condensed consolidated balance sheet data wasat December 31, 2021 has been derived from the Company’s audited consolidated financial statements at that date, but does not include all disclosuresthe information and notes required by U.S. GAAP.GAAP for complete financial
statements. These condensedcondensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016,2021, as filed with the SEC on March 13, 2017 (Annual Report)February 24, 2022 (“Annual Report”).
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3. | Recent Accounting Pronouncements |
Revenue Recognition
In May 2014, the FinancialNo new Accounting Standards Board (FASB) issued authoritative guidance requiring entities to apply a new model for recognizing revenue from contracts with customers. The guidance will supersedewere adopted during the current revenue recognition guidance and require entities to evaluate their revenue recognition arrangements using a five step model to determine when a customer obtains control of a transferred good or service. The guidance is currently effective for annual reporting periods beginning after December 15, 2017 and may be adopted using a full or modified retrospective application. The Company does not expect a material impact to its consolidated financial statements following its initial evaluation of its revenue arrangements under the issued guidance. The Company will implement the guidance under the modified retrospective approach.quarter ended March 31, 2022.
Accounting for Leases
The FASB issued guidance to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. In accordance with the updated guidance, lessees are required to recognize the assets and liabilities arising from operating leases on the balance sheet. The guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within 2018. The Company is currently reviewing the potential impact of adopting the new guidance.
Share-based Payment Accounting
The FASB issued guidance to simplify the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new standard became effective and was implemented for the Company beginning January 1, 2017. Consistent with prior periods, the Company will continue to estimate forfeitures and therefore, the guidance did not have an impact on the Company's consolidated financial statements.
4.3. Revenue
Revenue Recognition and Net Product Sales
The Company sellsrecognizes product revenue from sales of MACI biopsy kits, MACI implants, Epicel grafts and surgicalother sources following the five-step model in Accounting Standards Codification 606, Revenue Recognition.
MACI Biopsy Kits
MACI biopsy kits are sold directly to the customerhospitals and ambulatory surgical centers based on contracted amounts. Revenue fromrates in an approved contract or sales order. The Company recognizes MACI kit revenue upon delivery of the biopsy kit, at which time the customer (the facility) is in control of the kit. The kit is used by the doctor to provide a sample of cartilage tissue to the customers is recognized in accordance with ASC 605, Revenue Recognition and SAB Topic 104, Revenue Recognition, when (i) persuasive evidenceCompany, which can later be used to manufacture a MACI implant. The ordering of an arrangement exists, (ii) the goods are shipped or delivered and implanted, depending on shipping terms, (iii) title and risk of loss pass to the customer and (iv) collectability is reasonably assured. Shipping and handling costs are included as a component of revenue.
Prior to July 1, 2016,kit does not obligate the Company sold Carticel to a distributor and followed ASC 605, Revenue Recognition and SAB Topic 104 Revenue Recognition to record revenue. This distributor purchased and took title to Carticel upon shipmentmanufacture an implant nor does the receipt of the product and assumed credit and collection risk related to the end customers. The distributor worked with the payers on behalf of patients and surgeons to ensure medical coverage and to obtain reimbursement for Carticel implantation procedures. The Company retained responsibility for shipment of the product to the surgical suite. Revenue was recorded for Carticel upon occurrence of the surgery, net of provisions for rebates and cash discounts. Such rebates and discounts were $0.5 million for the nine months ended September 30, 2016. There were no rebates or cash discounts for the three months ended September 30, 2016. These rebates and prompt payment cash discounts were establishedcartilage tissue by the Company atfrom the timecustomer following biopsy. The customer’s order of an implant is separate from the process of ordering the biopsy kit. Therefore, the sale based on actual experience adjustedof the biopsy kit and any subsequent sale of an implant are distinct contracts and are accounted for separately.
MACI Implants
The Company contracts with 2 specialty pharmacies, Orsini Pharmaceutical Services, Inc. (“Orsini”) and AllCare Plus Pharmacy, Inc. (“AllCare”) to reflect known changesdistribute MACI in the factors that impact such reserves. Adjustments to these reserves have historically not been significant.
On June 30, 2016,a manner in which the Company reducedretains the scope of the agreement with its exclusive distributor by terminating their services for a significant portion of its Carticel sales. On July 1, 2016, the Company transitioned to a direct sales model for Carticel and MACI after launch whereby the Company retained credit and collection risk from the patient as the end customer. The Company utilizedpays both specialty pharmacies a new provider, Dohmen Life Science Services, LLC (DLSS),fee for each patient to whom MACI is dispensed. Both Orsini and AllCare perform collection activities to collect payment from customers. The Company engages a third party to provide services in connection with a patient support services but this provider did not purchaseprogram to manage patient cases and take title to Carticel or MACI. On May 15, 2017,ensure complete and correct billing information is provided to the Companyinsurers and DLSS mutually terminated the agreement effective June 30, 2017.hospitals. In addition, the Company utilized Vital Carealso sells MACI directly to DMS Pharmaceutical Group, Inc. and its franchisees as(“DMS”) for patients treated at military treatment facilities. The sales directly to DMS are made at a second provider to expand the available network of contracted third-party payers for Carticel and MACI. Under this direct sales model, the patient bears the ultimate financial responsibility for the purchase of Carticel or MACI and as such the Company recognized revenue in accordance with ASC 954-605, Health Care Entities - Revenue Recognition. The third party payer (insurance company, government, etc.) pays all or some of the product price on the patient’s behalf.rate.
Under the direct sales model, the Company recognized product revenues from sales of Carticel and MACI upon implantation at which time the claim is billable to patient’s insurance provider on behalf of the patient and is billed by either DLSS or Vital Care. The Company assumed counterparty risk for the third party reimbursement payment from the payer and from the patient co-pay. Prior authorization orand confirmation of coverage level by the patient’s private insurance plan, hospital or government payer is a prerequisite to the shipment of product to a patient. The Company'sCompany recognizes product revenue from sales of all MACI implants upon delivery at which time the customer obtains control of the implant and the claim is billable. The total consideration which the Company expects to collect in exchange for MACI implants (the “Transaction Price”) may be fixed or variable. Direct sales to hospitals or distributors are recorded at a contracted price, and there are typically no forms of variable consideration.
When the Company sells MACI, the patient is responsible for payment; however, the Company is typically reimbursed by a third-party insurer or government payer, subject to a patient co-pay amount. Reimbursements from third-party insurers and government payers vary by patient and payer and are based on either contracted rates, publicly available rates, fee schedules or past payer precedents. Net product revenue is recognized net product revenues are calculated by estimatingof estimated contractual allowances, which considers historical collection experience from both the payer and patient, denial rates and the terms of the Company’s contractual arrangements. The Company estimates expected paymentscollections for insurance, hospital or patient paymentsthese transactions using the portfolio approach. The Company records a reduction to revenue at the time it invoicesof sale for its estimate of the amount of consideration that will not be collected. In addition, potential credit risk exposure has been evaluated for the Company’s accounts receivable in accordance with ASC 326, Financial Instruments - Credit Losses. The Company assesses risk and determines a loss percentage by pooling account receivables based on similar risk characteristics. The loss percentage is calculated through the use of forecasts that are based on current and historical economic and financial information. This loss percentage was applied to the accounts receivables as of March 31, 2022. The total allowance for uncollectible consideration as of March 31, 2022 and December 31, 2021 was $6.7 million and $7.0 million, respectively. Changes to the estimate of the amount of consideration that will not be collected could have a material impact on the revenue recognized. A 50 basis points change to the estimated uncollectible percentage could result in an approximately $0.3 million decrease or increase in the revenue recognized for the three months ended March 31, 2022.
Changes in estimates of the Transaction Price are recorded through revenue in the period in which such change occurs. Changes in estimates related to prior periods are shown in the Revenue by Product and Customer table below and relate primarily to changes in the initial expected reimbursement or collection expectation upon completion of the billing claims process for MACI implants that occurred in a prior year.
Epicel
The Company sells Epicel directly to hospitals and burn centers based on contracted rates stated in an approved contract or purchase order. Similar to MACI, there is no obligation to manufacture Epicel grafts upon receipt of a skin biopsy, and Vericel has no contractual right to receive payment until the product is delivered to the hospital. The Company recognizes revenue.To support this directproduct revenue from sales model,of Epicel upon delivery to the hospital, at which time the customer is in control of the Epicel grafts and the claim is billable to the hospital.
NexoBrid
The Company entered into exclusive license and supply agreements with MediWound in May 2019, under which MediWound will manufacture and supply NexoBrid on a unit price basis, which may be increased pursuant to the terms of the agreements. The U.S. Biomedical Advanced Research and Development Authority (“BARDA”) has committed to procure NexoBrid from MediWound and, as of March 31, 2022, the Company utilized DLSSdid not hold a direct contract or distribution agreement with BARDA, or take title to provide administrative services associated with case management and reimbursement support and to provide billing and collection services.the product. The Company utilized Vital Carerecognizes revenue based on a percentage of gross profits for sales of NexoBrid to provide similar billingBARDA upon delivery, at which time BARDA is in control of the product.
Revenue by Product and collection servicesCustomer
The following table and descriptions below show the products from which the Company generated its revenue:
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| | | Three Months Ended March 31, | | |
| Revenue by product (in thousands) | | 2022 | | 2021 | | | | |
| MACI implants and kits | | | | | | | | |
Implants based on contracted rates sold through a specialty pharmacy (a) | | $ | 15,190 | | | $ | 13,206 | | | | | |
Implants subject to third party reimbursement sold through a specialty pharmacy (b) | | 3,369 | | | 4,280 | | | | | |
Implants sold direct based on contracted rates (c) | | 5,634 | | | 4,466 | | | | | |
Implants sold direct subject to third-party reimbursement (d) | | 861 | | | 849 | | | | | |
| Biopsy kits - direct bill | | 522 | | | 519 | | | | | |
Change in estimates related to prior periods (e) | | 419 | | | 477 | | | | | |
| Total MACI implants and kits | | 25,995 | | | 23,797 | | | | | |
| Epicel | | | | | | | | |
| Direct bill (hospital) | | 9,857 | | | 9,830 | | | | | |
| | | | | | | | |
NexoBrid revenue (f) | | 222 | | | 941 | | | | | |
| Total revenue | | $ | 36,074 | | | $ | 34,568 | | | | | |
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| (a) Represents implants sold through Orsini and AllCare whereby such specialty pharmacies have a direct contract with the underlying insurance provider. The amount of reimbursement is based on contracted rates at the time of sale supported by the pharmacy’s direct contracts. |
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| (b) Represents implants sold through Orsini or AllCare whereby such specialty pharmacy does not have a direct contract with the underlying payer. The amount of reimbursement is established based on a payer or state fee schedule and/or payer history. |
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| (c) Represents implants sold directly from the Company to the facility based on a contract and known price agreed upon prior to the surgery date. Also represents direct sales under a contract to specialty distributor DMS. |
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| (d) Represents implants sold directly from the Company to the facility based on a contract and known price agreed upon prior to the surgery date. The payment terms are subject to third-party reimbursement from an underlying insurance provider. |
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| (e) Primarily represents changes in estimates related to implants sold through Orsini or AllCare in which such specialty pharmacy does not have a direct contract with the underlying payer. The initial estimate of the amount of reimbursement is established based on a payer or state fee schedule and/or payer history. The change in estimates is a result of additional information, changes in collection expectations or actual cash collections received in the current period. |
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| (f) Represents revenue based on a percentage of gross profits for sales of NexoBrid to BARDA, pursuant to the license agreement between the Company and MediWound. |
Concentration of Credit Risk
The Company’s total revenue concentration from an Epicel customer for the three months ended March 31, 2022 and 2021 was 8% and 14%, respectively. For the Company’s total accounts receivable balances, there were no customers as of March 31, 2022 or December 31, 2021, with a concentration greater than 10%.
4. Selected Balance Sheet Components
Inventory
Inventory as of March 31, 2022 and December 31, 2021:
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| (In thousands) | | March 31, 2022 | | December 31, 2021 |
| Raw materials | | $ | 13,264 | | | $ | 12,676 | |
| Work-in-process | | 1,057 | | | 644 | |
| Finished goods | | 64 | | | 61 | |
| Total inventory | | $ | 14,385 | | | $ | 13,381 | |
Property and Equipment
Property and Equipment, net as of March 31, 2022 and December 31, 2021:
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| (In thousands) | | March 31, 2022 | | December 31, 2021 |
| Machinery and equipment | | $ | 4,514 | | | $ | 4,522 | |
| Furniture, fixtures and office equipment | | 1,551 | | | 1,551 | |
| Computer equipment and software | | 7,934 | | | 7,769 | |
| Leasehold improvements | | 10,616 | | | 10,617 | |
| Construction in process | | 4,966 | | | 3,097 | |
| Financing right-of-use lease | | 65 | | | 74 | |
| Total property and equipment, gross | | 29,646 | | | 27,630 | |
| Less accumulated depreciation | | (15,195) | | | (14,322) | |
| Total property and equipment, net | | $ | 14,451 | | | $ | 13,308 | |
Depreciation expense for the three months ended March 31, 2022 and 2021 was $0.9 million and $0.8 million, respectively.
Accrued Expenses
Accrued Expenses as of March 31, 2022 and December 31, 2021 are as follows:
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| (In thousands) | | March 31, 2022 | | December 31, 2021 |
| Bonus related compensation | | $ | 2,483 | | | $ | 6,305 | |
| Employee related accruals | | 3,112 | | | 3,616 | |
| Insurance reimbursement-related liabilities | | 5,111 | | | 3,973 | |
| Other accrued expenses | | 87 | | | 151 | |
| Total accrued expenses | | $ | 10,793 | | | $ | 14,045 | |
5. Leases
The Company leases facilities in Ann Arbor, Michigan and Cambridge, Massachusetts. The Ann Arbor facility includes office space, and the Cambridge facilities include clean rooms, laboratories for MACI and Epicel manufacturing, and office space. The Company also leases offsite warehouse space, vehicles and computer equipment.
On January 28, 2022, the Company entered into a Lease Agreement (the “Burlington Lease”) to lease approximately 126,000 square feet of to-be-constructed manufacturing, laboratory and office space in Burlington, Massachusetts (the “Premises”). Once constructed, the Premises will serve as the Company’s new corporate headquarters and primary manufacturing facility.
The term of the Burlington Lease is scheduled to begin 12 months following the landlord’s commencement of construction of the core and shell of the building in which the Premises are located, which is currently expected to be February 28, 2023 (the “Commencement Date”). The Company’s obligation to pay rent for the Premises will begin on the earlier of: 13 months from the Commencement Date; or the date on which the Company first occupies the Premises to conduct operations (the “Rent Commencement Date”). The initial term of the Lease is 144 months following the Rent Commencement Date. The Company has a one-time option to extend the term of the Lease for an additional 10 years, exercisable under certain conditions and at a market rate determined in accordance with the Burlington Lease.
The annual base rent of the Burlington Lease is initially $57 per square foot per year, subject to annual increases of 2.5%. Monthly contractual payments are expected to range from $0.6 million to $0.8 million. Additionally, the Company is responsible for reimbursing the landlord for the Company’s share of the Premises’ property taxes and certain other operating expenses. The Burlington Lease also provides for a subsettenant improvement allowance from the landlord in an amount equal to $200 per square foot of insurance payersthe Premises, or approximately $25.1 million in total, towards the design and patients.construction of certain tenant improvements made to the Premises, subject to the terms set forth in the Burlington Lease.
The Company is not involved in the initial construction of the core and shell of the building and will record the lease liability and right-of-use asset on its condensed consolidated balance sheet, when the construction is substantially completed and it obtains control of the Premises, which is currently expected to be on or around the Commencement Date.
In April 2017,January 2022, in connection with the execution of the Burlington Lease, the Company issued a letter of credit collateralized by cash deposits of approximately $6.0 million. Such letter of credit shall be reduced to approximately $4.2 million and $1.8 million at the conclusion of the third and sixth lease years, respectively, provided certain conditions set forth in the Burlington Lease are satisfied.
For the three months ended March 31, 2022 and 2021, lease expense of less than $0.1 million was notifiedrecorded related to short-term leases. For the three months endedMarch 31, 2022 and 2021, the Company recognized $1.7 million and $1.9 million, respectively, of a contractual dispute between Vital Careoperating lease expense. For the three months endedMarch 31, 2022 and a third-party payer2021, the Company recognized less than $0.1 million of financing lease expense.
Operating and finance lease assets and liabilities are as a result,follows:
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| (In thousands) | | Classification | | March 31, 2022 | | December 31, 2021 | | |
| Assets | | | | | | | | |
| Operating | | Right-of-use assets | | $ | 44,653 | | | $ | 45,720 | | | |
| Finance | | Property and equipment, net | | 65 | | | 73 | | | |
| Total leased assets | | $ | 44,718 | | | $ | 45,793 | | | |
| Liabilities | | | | | | | | |
| Current | | | | | | | | |
| Operating | | Current portion of operating lease liabilities | | $ | 3,147 | | | $ | 2,950 | | | |
| Finance | | Other current liabilities | | 41 | | | 41 | | | |
| | | | $ | 3,188 | | | $ | 2,991 | | | |
| Non-current | | | | | | | | |
| Operating | | Operating lease liabilities | | $ | 46,053 | | | $ | 47,147 | | | |
| Finance | | Other long-term liabilities | | 19 | | | 44 | | | |
| Total leased liabilities | | $ | 46,072 | | | $ | 47,191 | | | |
6. Stock-Based Compensation
The 2022 Omnibus Incentive Plan (“2022 Plan”) was approved on April 27, 2022, and provides incentives through the grant of stock options, stock appreciation rights, restricted stock awards and restricted stock units. The exercise price of stock options granted under the 2022 Plan shall not be less than the fair market value of the Company’s common stock on the date of grant. The 2022 Plan replaced the 1992 Stock Option Plan, the 2001 Stock Option Plan, the Amended and Restated 2004 Equity
Incentive Plan, the 2009 Second Amended and Restated Omnibus Incentive Plan, the 2017 Omnibus Incentive Plan, and the Amended and Restated 2019 Omnibus Incentive Plan (“Prior Plans”), and no new grants have been granted under the Prior Plans after approval. However, the expiration or forfeiture of options previously granted under the Prior Plans will increase the number of shares available for issuance under the 2022 Plan.
Stock Compensation Expense
Non-cash stock-based compensation expense (service-based stock options, restricted stock units and employee stock purchase plan) is summarized in the following table:
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| | | Three Months Ended March 31, | | |
| (in thousands) | | 2022 | | 2021 | | | | |
| Cost of product sales | | $ | 1,118 | | | $ | 911 | | | | | |
| Research and development | | 1,350 | | | 863 | | | | | |
| Selling, general and administrative | | 7,063 | | | 5,245 | | | | | |
| Total non-cash stock-based compensation expense | | $ | 9,531 | | | $ | 7,019 | | | | | |
Service-Based Stock Options
During the three months ended March 31, 2022 and 2021, the Company granted service-based options to purchase common stock of 993,589 and 1,337,955, respectively. The weighted-average grant-date fair value of service-based options granted during the three months ended March 31, 2017, the Company increased its estimated revenue allowances, reducing revenue by $2.1 million related to 2016 sales2022 and $0.7 million related to 2017 sales to reflect the lower reimbursement that would be obtained if the claims are ultimately required to be treated as out-of-network. 2021 was $20.99 and $32.02 per option, respectively.
Restricted Stock Units
During the three months ended June 30, 2017, the dispute was resolvedMarch 31, 2022 and the negotiated reimbursement resulted in the Company’s ability to reduce its estimated sales allowances by $1.4 million which resulted in additional revenue in the second quarter related to sales which originated primarily in 2016. As a result of the continuing evaluation and assessment of these expected payments, our estimates for expected payments could change.
On May 15, 2017,2021, the Company entered into a distribution agreement with Orsini Pharmaceutical Services, Inc. (Orsini) to appoint Orsini as a specialty pharmacy distributor of MACI to patients' physiciansgranted 343,022 and other healthcare providers. The initial term of the distribution agreement will end on May 15, 2019 with the option of two additional two-year terms. The Company ships the product directly to the surgical suite. Orsini purchases and takes title to MACI upon shipment of the product at which point the Company recognizes revenue. Orsini assumes credit and collection risk related to the end customers. In 2017, there are no material chargebacks, rebates or other types of sales incentives that would impact revenue under the agreement with Orsini. The Company and Orsini amended their agreement in August 2017, and further amended the agreement in October 2017 to provide Orsini with a prompt pay discount beginning on January 1, 2018. Under the Orsini arrangement, Orsini is the customer and the Company is recognizing revenue in accordance with ASC 605 and SAB 104.
Concentration of Credit Risk
On May 15, 2017, the Company and DLSS mutually terminated their agreement effective June 30, 2017. On May 15, 2017, the Company entered into a distribution agreement with Orsini as a specialty pharmacy distributor of MACI and has engaged a third party services provider to provide the patient support program previously provided by DLSS and to manage patient cases for MACI. The Company’s receivables risk is now more concentrated, and the concentration of credit risk also shifted for the Company.
Revenue from one customer, the MACI distributor in the U.S., represented approximately 55% and 25% during the three and nine months ended September 30, 2017, respectively. Accounts receivable from the same customer accounted for 48% of the outstanding accounts receivable as of September 30, 2017. For the three and nine months ended September 30, 2016, the Company's largest customer represented 67% and 46% of total revenue,214,113 restricted stock units, respectively. The next largest customer represented approximately 10% and 13%weighted-average grant-date fair value of revenue for the three and nine ended September 30, 2017, respectively, and 8% and 13% of total revenuerestricted stock units granted during the three and nine months ended September 30, 2016, respectively. No other customer accounted for more than 10% of revenue or accounts receivable in 2017 or as of December 31, 2016.
| |
5. | Selected Balance Sheet Components |
Inventory as of September 30, 2017 and December 31, 2016:
|
| | | | | | | |
| (In thousands) | September 30, 2017 | | December 31, 2016 |
| Raw materials | $ | 3,727 |
| | $ | 3,214 |
|
| Work-in-process | 279 |
| | 257 |
|
| Finished goods | 43 |
| | 17 |
|
| Inventory | $ | 4,049 |
| | $ | 3,488 |
|
Property and equipment, net as of September 30, 2017 and December 31, 2016:
|
| | | | | | | |
| (In thousands) | September 30, 2017 | | December 31, 2016 |
| Machinery and equipment | $ | 3,264 |
| | $ | 3,150 |
|
| Furniture, fixtures and office equipment | 981 |
| | 931 |
|
| Computer equipment and software | 3,485 |
| | 3,147 |
|
| Leasehold improvements | 3,908 |
| | 3,332 |
|
| Construction in process | 608 |
| | 408 |
|
| Total property and equipment, gross | 12,246 |
| | 10,968 |
|
| Less: Accumulated depreciation | (8,279 | ) | | (7,093 | ) |
| | $ | 3,967 |
| | $ | 3,875 |
|
Depreciation expense for both the three months ended September 30, 2017March 31, 2022 and September 30, 20162021 was $0.4 million$34.97 and depreciation expense for both the nine months ended September 30, 2017 and September 30, 2016 was $1.2 million.$50.81 per unit, respectively.
Accrued expenses as of September 30, 2017 and December 31, 2016:
|
| | | | | | | |
| (In thousands) | September 30, 2017 | | December 31, 2016 |
| Bonus related compensation | $ | 1,608 |
| | $ | 2,433 |
|
| Employee related accruals | 2,021 |
| | 1,668 |
|
| Clinical trial related accruals | 379 |
| | 422 |
|
| Other | 506 |
| | — |
|
| | $ | 4,514 |
| | $ | 4,523 |
|
| |
6. | Stock Purchase Warrants |
The Company has historically issued warrants to purchase shares of the Company’s common stock in connection with certain of its common stock offerings and in September 2016 the Company issued warrants in connection with the updatedMarketable debt agreement (September 2016 Warrants) discussed in note 7. The warrants issued in August 2013 (August 2013 Warrants) include anti-dilution price protection provisions that could require cash settlement of the warrants and accordingly require the warrants to be recorded as liabilities of the Company at the estimated fair value at the date of issuance, with changes in estimated fair value recorded as income or expense (non-cash) in the Company’s statement of operations in each subsequent period. The September 2016 Warrants meet the requirements for equity classification. The following table describes the outstanding warrants:
|
| | | | |
| | | August 2013
Warrants | | September 2016 Warrants |
| Exercise price | | $4.80 | | $2.48 |
| Expiration date | | August 16, 2018 | | September 9, 2022 |
| Total shares issuable on exercise | | 724,950 | | 117,074 |
On September 9, 2016, the Company issued 117,074 warrants to two holders in conjunction with the loan agreement described in note 7. The initial valuation of the September 2016 Warrants was recorded as debt issuance costs and is being amortized over the remaining life of the loan agreement to interest expense. The September 2016 Warrants are treated as equity instruments recorded at fair value with no subsequent remeasurement. Pursuant to the warrants, the holders may exercise their warrants for an aggregate of 117,074 shares of the Company’s common stock.
The fair value of the warrants described in the table above is measured using the Black-Scholes valuation model. Inherent in the Black-Scholes valuation model are assumptions related to expected stock-price volatility, expected life, risk-free interest rate and dividend yield. The Company estimates the volatility of its common stock based on historical volatility that matches the expected remaining life of the warrants. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield curve on the grant date for a maturity similar to the expected remaining life of the warrants. The expected life of the warrants is assumed to be equivalent to their remaining contractual term. The dividend rate is based on the historical rate, which the Company anticipates to remain at zero. See further detail in note 9 of the condensed consolidated financial statements.
The assumptions usedsecurities held by the Company are summarizedclassified as available-for-sale pursuant to ASC 320, Investments – Debt and Equity Securities, and carried at fair value in the following tables:
|
| | | | | | | | |
| August 2013 Warrants | | September 30, 2017 | | December 31, 2016 |
| Closing stock price | | $ | 6.00 |
| | $ | 3.00 |
|
| Expected dividend rate | | — | % | | — | % |
| Expected stock price volatility | | 50.6 | % | | 97.9 | % |
| Risk-free interest rate | | 1.3 | % | | 1.0 | % |
| Expected life (years) | | 0.88 |
| | 1.62 |
|
|
| | | | |
| September 2016 Warrants | | September 9, 2016 |
| Closing stock price | | $ | 2.20 |
|
| Expected dividend rate | | — | % |
| Expected stock price volatility | | 89.8 | % |
| Risk-free interest rate | | 1.4 | % |
| Expected life (years) | | 6.00 |
|
On March 8, 2016, the Company entered into a $15.0 million debt financing with SVB which on September 9, 2016, was replaced by an expanded term loan and revolving line of credit agreement with SVB and MidCap, which together initially provided access to up to $20 million. The updated debt financing consists of a $4.0 million term loan which was drawn at the closing, a $4.0 million term loan which was drawn upon in November 2016, a $2.0 million term loan which is no longer available as it was not drawn upon by April 12, 2017 and up to $10.0 million of a revolving line of credit. The term loans are interest only (indexed to Wall Street Journal (WSJ) Prime plus 5.00%) until September 1, 2017 followed by 36 equal monthly payments of principal plus interest maturing September 9, 2020. The revolving line of credit is limited to a borrowing base calculated using eligible accounts receivable and maturing September 9, 2020 with an interest rate indexed to WSJ Prime plus 1.25%. The Company is subject to various financial and nonfinancial covenants including but not limited to monthly minimum net revenue covenants (determined in accordance with U.S. GAAP), measuredaccompanying condensed consolidated balance sheets on a trailing twelve month basis. SVBsettlement date basis. The following tables summarize the gross unrealized gains and MidCap have the ability to call debt based on material adverse change clauses which are subjectively determinable and result in a subjective acceleration clause. The Company has not been informed of any material adverse changes that have occurred. SVB and MidCap have a shared first priority perfected security interest in all assets of the Company other than intellectual property. As of September 30, 2017, there was an outstanding balance of $7.8 million under the term loan and $2.5 million under the revolving line of credit (net of total deferred costs of $0.3 million). The weighted average interest rate on the outstanding term and revolving credit loans as of September 30, 2017 was 7.8%. On December 30, 2016, the Company entered into an amendment to the SVB-MidCap facility to amend certain financial covenants and to modify the final payment of the term loan advance. The Company further amended the SVB-MidCap facility on May 9, 2017 to update the monthly net revenue requirement covenants, measured on a trailing twelve month basis. The amendment decreased the monthly 12 month trailing minimum revenue covenant and revised the December 31, 2017 minimum revenue covenant to $51.7 million. As of September 30, 2017, the Company was in compliance with the minimum revenue covenant. As of September 30, 2017, there was $3.3 millionremaining capacity under the revolving line of credit.
| |
8. | Stock-based Compensation |
Stock Option and Equity Incentive Plans
The Company can issue nonqualified and incentive stock options as well as other equity awards pursuant to its Second Amended and Restated 2009 Omnibus Incentive Plan (Option Plan). Such awards pursuant to the Option Plan may be granted by the Company’s Board of Directors to certainlosses of the Company’s employees, directorsmarketable securities as of March 31, 2022 and consultants.December 31, 2021:
During the three | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2022 |
| | | | Gross Unrealized | | | | Estimated Fair Value |
| (In thousands) | | Amortized Cost | | Gains | | Losses | | Credit Losses | |
| Commercial paper | | $ | 15,241 | | | $ | — | | | $ | (38) | | | $ | — | | | $ | 15,203 | |
| Corporate notes | | 53,063 | | | — | | | (575) | | | — | | | 52,488 | |
| | $ | 68,304 | | | $ | — | | | $ | (613) | | | $ | — | | | $ | 67,691 | |
| Classified as: | | | | | | | | | | |
| Short-term investments | | | | | | | | | | $ | 44,888 | |
| Long-term investments | | | | | | | | | | 22,803 | |
| | | | | | | | $ | 67,691 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| | | | Gross Unrealized | | | | Estimated Fair Value |
| (In thousands) | | Amortized Cost | | Gains | | Losses | | Credit Losses | |
| Commercial paper | | $ | 10,243 | | | $ | — | | | $ | (12) | | | $ | — | | | $ | 10,231 | |
| Corporate notes | | 50,666 | | | — | | | (142) | | | — | | | 50,524 | |
| | $ | 60,909 | | | $ | — | | | $ | (154) | | | $ | — | | | $ | 60,755 | |
| Classified as: | | | | | | | | | | |
| Short-term investments | | | | | | | | | | $ | 35,068 | |
| Long-term investments | | | | | | | | | | 25,687 | |
| | | | | | | | $ | 60,755 | |
As of March 31, 2022 and nine months ended September 30, 2017,December 31, 2021, all marketable securities held by the Company granted 127,200 and 1,677,760, respectively, service-based options to purchase common stock. The options were granted with exercise prices equal to the fair market valuehad remaining contractual maturities of three years or less. There have been no impairments of the Company’s stockassets measured and carried at the grant date, and other than those granted to non-employee directors, vest over four years, under a graded-vesting methodology, following the date of grant, and expire after ten years. The Company issues new shares upon the exercise of stock options. The weighted average grant-date fair value of service-based options granted under the Option Plan during the three and nine month periods ended September 30, 2017 was $2.53 and $1.99, respectively and, $1.77 and $2.15, respectively for the same periods in 2016.
Non-cash stock-based compensation expense included in cost of goods sold, research and development expenses and selling, general and administrative expenses is summarized in the following table:
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
| Cost of goods sold | | $ | 119 |
| | $ | 117 |
| | $ | 316 |
| | $ | 330 |
|
| Research and development | | 177 |
| | 133 |
| | $ | 391 |
| | $ | 392 |
|
| Selling, general and administrative | | 459 |
| | 404 |
| | 1,346 |
| | 1,251 |
|
| Total non-cash stock-based compensation expense | | $ | 755 |
| | $ | 654 |
| | $ | 2,053 |
| | $ | 1,973 |
|
The fair value of each service-based stock option grant for the reported periods is estimated on the date of the grant using the Black-Scholes option-pricing model using the weighted average assumptions noted in the following table.
|
| | | | | | |
| | | Nine Months Ended September 30, |
| Service-Based Stock Options | | 2017 | | 2016 |
| Expected dividend rate | | — | % | | — | % |
| Expected stock price volatility | | 80.1 – 88.2% |
| | 78.7 – 92.2% |
|
| Risk-free interest rate | | 1.8 – 2.3% |
| | 1.1 – 1.8% |
|
| Expected life (years) | | 5.5 – 6.3 |
| | 5.5 – 6.3 |
|
The following table summarizes the activity for service-based stock options for the indicated periods:
|
| | | | | | | | | | | | | |
| Service-Based Stock Options | | Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value |
| Outstanding at December 31, 2016 | | 3,355,692 |
| | $ | 4.66 |
| | 8.2 | | $ | 610 |
|
| Granted | | 1,677,760 |
| | $ | 2.82 |
| | | | |
|
| Exercised | | (165,678 | ) | | $ | 3.12 |
| | | | $ | 362 |
|
| Expired | | (100,131 | ) | | $ | 16.31 |
| | | | |
|
| Forfeited | | (190,766 | ) | | $ | 3.35 |
| | | | |
|
| Outstanding at September 30, 2017 | | 4,576,877 |
| | $ | 3.84 |
| | 8.2 | | $ | 13,336 |
|
| Exercisable at September 30, 2017 | | 1,870,011 |
| | $ | 5.18 |
| | 7.5 | | $ | 4,988 |
|
As of September 30, 2017 there was approximately $3.4 million of total unrecognized compensation cost related to non-vested service-based stock options granted under the Option Plan. That cost is expected to be recognized over a weighted-average period of 3.0 years.
The total fair value of options vested during the three and nine months ended September 30, 2017 was $0.6 millionMarch 31, 2022 and $1.8 million, respectively, and $0.6 million and $1.6 million, respectively, for the same periods in 2016.2021.
Employee Stock Purchase Plan
8. Fair Value Measurements
Employees are able to purchase stock under the Vericel Corporation Employee Stock Purchase Plan (ESPP), which was implemented effective October 1, 2015. Participation in this plan is available to substantially all employees. Compensation expense is recorded based on the fair market value of the purchase options at the grant date, which corresponds to the first day of each purchase period and is amortized over the purchase period. On October 2, 2017, employees purchased 40,683 shares resulting in proceeds from the sale of common stock of $0.1 million under the ESPP. The total share-based compensation expense for the ESPP for the nine months ended September 30, 2017 was approximately $0.1 million.
| |
9. | Fair Value Measurements |
The Company’s fair value measurements are classified and disclosed in one of the following three categories:
•Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
•Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
•Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The commercial paper and corporate notes are classified as Level 2 as they were valued based upon quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets. There waswere no movement between level 1transfers into or out of Level 3 from December 31, 2021 to level 2 or between level 2 to level 3. March 31, 2022.
The following table summarizes the valuation of the Company’s financial instruments that are measured at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | March 31, 2022 | | December 31, 2021 |
| | | | | Fair value measurement category | | | | Fair value measurement category |
| (In thousands) | | Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 |
| Assets: | | | | | | | | | | | | | | | | |
| Money market funds | | $ | 1,884 | | | $ | 1,884 | | | $ | — | | | $ | — | | | $ | 1,258 | | | $ | 1,258 | | | $ | — | | | $ | — | |
Commercial paper (a) | | 15,203 | | | — | | | 15,203 | | | — | | | 18,229 | | | — | | | 18,229 | | | — | |
| Corporate notes | | 52,488 | | | — | | | 52,488 | | | — | | | 50,524 | | | — | | | 50,524 | | | — | |
| | $ | 69,575 | | | $ | 1,884 | | | $ | 67,691 | | | $ | — | | | $ | 70,011 | | | $ | 1,258 | | | $ | 68,753 | | | $ | — | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2017 | | December 31, 2016 |
| | | | | Fair value measurement category | | | | Fair value measurement category |
| (In thousands) | | Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 |
| Liabilities: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Warrant liabilities | | $ | 1,269 |
| | $ | — |
| | $ | 1,269 |
| | $ | — |
| | $ | 757 |
| | $ | — |
| | $ | 757 |
| | $ | — |
|
(a) Approximately $8.0 million of commercial paper had an original maturity of 90 days or less and was recorded as a cash equivalent as of December 31, 2021.
The following table summarizes the change in the estimated fair valuevalues of the Company’s warrant liabilities:
|
| | | |
| Warrant Liabilities (In thousands) | |
| Balance at December 31, 2016 | $ | 757 |
|
| Increase in fair value | 512 |
|
| Balance at September 30, 2017 | $ | 1,269 |
|
Revolvingcash equivalents and Term Loan Credit Agreements
At September 30, 2017 and December 31, 2016, we had a total of $10.0 million and $10.1 million, respectively, outstanding under our revolving and term loan credit agreements, whichmarketable securities are variable rate loans. The fair value of these loans approximates book value based on the borrowing rates currently available for variable rate loans obtained from third party lending institutions. Theseobservable market prices. The Company’s accounts receivables, accounts payable and accrued expenses are valued at cost which approximates fair values represent Level 2 under the three-tier hierarchy described above.value.
At-the-Market Sales Agreement9. Net Loss Per Common Share
A summary of net loss per common share is presented below:
| | | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, | | |
| (Amounts in thousands, except per share amounts) | | 2022 | | 2021 | | | | |
| Net loss | | $ | (7,091) | | | $ | (3,289) | | | | | |
| | | | | | | | |
| Basic weighted-average common shares outstanding | | 46,985 | | | 45,984 | | | | | |
| Effect of dilutive stock options and restricted stock units | | — | | | — | | | | | |
| Diluted weighted-average common shares outstanding | | 46,985 | | | 45,984 | | | | | |
| | | | | | | | |
| Basic loss per common share | | $ | (0.15) | | | $ | (0.07) | | | | | |
| Diluted loss per common share | | $ | (0.15) | | | $ | (0.07) | | | | | |
| | | | | | | | |
| Anti-dilutive shares excluded from diluted net loss per common share: |
| Stock options | | 6,479 | | | 6,183 | | | | | |
| Restricted stock units | | 625 | | | 406 | | | | | |
10. NexoBrid License and Supply Agreements
On October 10, 2016,May 6, 2019, the Company entered into our at-the-market sales agreementexclusive license and supply agreements with Cowen (ATM Agreement), pursuantMediWound to whichcommercialize NexoBrid and any improvements to NexoBrid in North America. NexoBrid is a topically-administered biological product that enzymatically removes nonviable burn tissue, or eschar, in patients with deep partial and full-thickness thermal burns. On June 29, 2021, the Company may sell sharesannounced that MediWound had received a complete response letter from the U.S. Food & Drug Administration (“FDA”) with respect to a biologics license application (“BLA”), which MediWound had previously submitted to the FDA seeking marketing approval for the product in the U.S. As part of our common stock through Cowen,the complete response letter, the FDA communicated to MediWound that it had completed its review of the BLA, as sales agent,amended, and had determined that it cannot approve the BLA in registered transactions from our shelf registration statement filed in June 2015, for aggregate proceeds of up to $25.0 million. Shares of common stock sold under the ATM are to be sold at market prices.its present form. The Company will pay upcontinues to 3%work with MediWound, BARDA and the FDA to address the issues identified in the agency’s complete response letter, to prepare and submit a BLA resubmission to the FDA and to seek the potential approval of the gross proceeds to Cowen as a commission. A total of 2,222,240 shares of common stock have been sold under the ATM Agreement of which 1,864,384 were sold in 2017 for proceeds of $6.7 million (net of $0.3 million in commission and issuance costs) and as of September 30, 2017 had remaining capacity of approximately $17.2 million. We currently intend to use the net proceeds for research, development, manufacturing, and general and administrative expenses, and for other general corporate purposes.NexoBrid.
Series B Convertible Preferred Stock
On February 10, 2017, the Company sent notice to Eastern Capital Limited (Eastern), an existing holder of shares of the Company’s Series B-1 Non-Voting Convertible Preferred Stock or Series B-2 Voting Convertible Preferred Stock (Preferred Stock), informing Eastern of the Company's election to convert all 12,308 of the outstanding shares of Preferred Stock held by Eastern, plus 9,570 shares of Preferred Stock in accumulated but undeclared dividends thereon, into 1,093,892 shares of the Company's common stock pursuantPursuant to the terms of the Amendedlicense agreement, if the BLA is approved, MediWound will transfer the BLA to Vericel and Restated CertificateVericel will market NexoBrid in the U.S. Both MediWound and Vericel, under the supervision of Designations, Preferencesa Central Steering Committee comprised of members of both companies will continue to guide the development of NexoBrid in North America (the “Central Steering Committee”). NexoBrid is approved in the European Union (“EU”) and Rights of Series B-1 Non-Voting Preferred Stockother international markets and Series B-2 Voting Preferred Stockhas been designated as an orphan biologic in the U.S., EU and other international markets.
In May 2019, the Company paid MediWound $17.5 million in consideration for the license, which was recorded as research and development expense during 2019. The Company is also obligated to pay MediWound $7.5 million, which is contingent upon U.S. regulatory approval of the BLA for NexoBrid and up to $125.0 million contingent upon meeting certain sales milestones. The first sales milestone of $7.5 million would be triggered when annual net sales of NexoBrid or improvements to it in North America exceed $75.0 million. As of March 31, 2022, the milestone payments are not yet probable and therefore, not recorded as a liability. The Company (Mandatory Conversion).also will pay MediWound tiered royalties on net sales ranging from mid-high single-digit to mid-teen percentages, subject to customary reductions. The Company also entered into a supply agreement with MediWound under which MediWound will manufacture NexoBrid for the Company on a unit price basis which may be increased based on a published index. MediWound is obligated to supply the Company with NexoBrid for sale in North America on an exclusive basis for the first five years of the term of the supply agreement. After the Mandatory Conversion on March 9, 2017, no shares of Preferred Stock ofexclusivity period or upon supply failure, the Company remain outstanding aswill be permitted to establish an alternate source of September 30, 2017.supply.
| |
12. | Net Loss Per Common Share |
Basic earnings (loss) per share is calculated usingBARDA has committed to procure NexoBrid directly from MediWound under an emergency use authorization, and under such commitment the two-class method, which is an earnings allocation formula that determines earnings (loss) per shareCompany will receive a percentage of gross profit for sales directly to BARDA. If BARDA procures NexoBrid directly from Vericel, the holdersCompany will pay a percentage of gross profits to MediWound on initial committed amounts and a royalty on any additional BARDA purchases of NexoBrid beyond the Company’s common shares and holdersinitial committed amount. As of March 31, 2022, the Series B Preferred Stock. The Series B Preferred Stock shares contain participation rights in undistributed earnings, but doCompany does not share in the losses of the Company. The dividends on the Series B Preferred Stock were treated ashold a reduction of earnings attributable to common shareholders.
The following reflects the net loss attributable to common shareholders and share data used in the basic and diluted earnings per share computations using the two class method: direct contract or distribution agreement with BARDA.
|
| | | | | | | | | | | | | | | | |
| | | Three months ended September 30, | | Nine months ended September 30, |
| (Amounts in thousands except per share amounts) | | 2017 | | 2016 | | 2017 | | 2016 |
| Numerator: | | |
| | |
| | |
| | |
|
| Net loss | | $ | (5,407 | ) | | $ | (6,675 | ) | | $ | (17,573 | ) | | $ | (13,369 | ) |
| Dividends accumulated on convertible preferred stock | | — |
| | (1,931 | ) | | — |
| | (5,591 | ) |
| Net loss attributable to common shareholders | | $ | (5,407 | ) | | $ | (8,606 | ) | | $ | (17,573 | ) | | $ | (18,960 | ) |
| Denominator: | | |
| | |
| | |
| | |
|
| Denominator for basic and diluted EPS: | | |
| | |
| | |
| | |
|
| Weighted-average common shares outstanding | | 33,667 |
| | 22,744 |
| | 32,783 |
| | 22,678 |
|
| Net loss per share attributable to common shareholders (basic and diluted) | | $ | (0.16 | ) | | $ | (0.38 | ) | | $ | (0.54 | ) | | $ | (0.84 | ) |
Common equivalent shares are not included in the diluted per share calculation where the effect of their inclusion would be anti-dilutive. The aggregate number of common equivalent shares (related to options, warrants and preferred stock) that have been excluded from the computations of diluted net loss per common share at September 30, 2017 and 2016 were 5.4 million and 6.5 million, respectively.
13.11. Commitments and Contingencies
The Company leases facilities in Ann Arbor, Michigan and Cambridge, Massachusetts. In March 2016,From time to time, the Company amended its current leasecould be a party to various legal proceedings arising in Cambridgethe ordinary course of business. The costs and outcome of litigation, regulatory, investigatory or other proceedings cannot be predicted with certainty, and some lawsuits, claims, actions or proceedings may be disposed of unfavorably to among other provisions, extend the terms until February 2022. Under the amendment, the landlord will contribute approximately $2.0 million toward the cost of tenant improvements. The contribution toward the cost of tenant improvements is recorded as deferred rentCompany and could have a material adverse effect on the Company's consolidated balance sheet and is amortized to our consolidated statementCompany’s results of operations as reductionsor financial condition. In addition, intellectual property disputes often have a risk of injunctive relief which, if imposed against the Company, could materially and adversely affect its financial condition or results of operations. If a matter is both probable to rent expense overresult in material liability and the lease term. amount of loss can be reasonably estimated, the Company estimates and discloses the possible material loss or range of loss. If such loss is not probable or cannot be reasonably estimated, a liability is not recorded in its condensed consolidated financial statements.
As of September 30, 2017,March 31, 2022, the Company has recorded $1.0 million of leasehold improvements funded by the tenant improvement allowance.
In addition to the property leases,no material ongoing litigation in which the Company also leases an offsite warehouse, various vehicleswas a party or any material ongoing regulatory or other proceedings and computer equipment. The Company's purchase commitments consisthad no knowledge of minimum purchase amounts of materialany investigations by government or regulatory authorities in manufacturing.
As of September 30, 2017, future minimum payments related to leases and other contractual obligations are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | Total | | 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | More than 5 Years |
| Operating leases | | $ | 20,378 |
| | $ | 1,317 |
| | $ | 4,806 |
| | $ | 4,473 |
| | $ | 4,475 |
| | $ | 4,546 |
| | $ | 761 |
|
| Purchase commitments | | 2,940 |
| | 45 |
| | 681 |
| | 576 |
| | 546 |
| | 546 |
| | 546 |
|
| Capital leases | | 43 |
| | 11 |
| | 32 |
| |
|
| |
|
| |
|
| |
|
|
| Total | | $ | 23,361 |
| | $ | 1,373 |
| | $ | 5,519 |
| | $ | 5,049 |
| | $ | 5,021 |
| | $ | 5,092 |
| | $ | 1,307 |
|
Rent expense for the three and nine months ended September 30, 2017 was $1.5 million and $4.1 million, respectively, and $1.2 million and $3.6 million, respectively, for the three and nine months ended September 30, 2016.
License Agreement
On May 10, 2017,which the Company announcedis a target that it has entered intocould have a License Agreement (License Agreement) with Innovative Cellular Therapeutics Co. Ltd, (ICT), a leading cell therapy company and developermaterial adverse effect on its current business.
for the development and distribution of the Vericel product portfolio in Greater China, South Korea, Singapore, and other countries in Asia. ICT will acquire an exclusive license to certain patent rights, know-how and intellectual property relating to Carticel, MACI, ixmyelocel-T, and Epicel as well as enter into a warrant purchase agreement. As part of the license and warrant purchase agreements, the Company will receive an upfront payment of $6.0 million, less any applicable taxes, within 60 days of the effective date of the License Agreement. The initiation of the technology transfer, the license grants in the License Agreement and the warrant purchase are contingent upon Vericel’s receipt of the upfront payment. Vericel is eligible to receive approximately $8.0 million in development and commercial milestones. ICT has also agreed to pay tiered royalties to Vericel equal to a percentage of net sales of each Licensed Product in the low double digits for the commercial life of the applicable Licensed Product. ICT will be responsible for funding the development of the programs and manufacturing of the products for commercialization in China and the rest of the territory. The funding transfer is subject to approval by the State Administration of Foreign Exchange of the People's Republic of China and has not occurred as of issuance date of the financial statements. As a result, the parties have amended the agreement monthly to provide additional time for ICT to pay and reset certain terms of the warrant. The initiation of the technology transfer, the license grants in the License Agreement and the warrant purchase have not occurred. As partial consideration for an amount included in the upfront payment Vericel will issue to ICT a warrant, exercisable for the number of shares of Vericel’s Common Stock equal to $5.0 million less the withholding tax payable thereon divided by $4.90 currently (formerly $3.05), with a strike price of $0.01 per share.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Vericel Corporation is a leading developer of patient-specific expanded cellfully-integrated, commercial-stage biopharmaceutical company and a leader in advanced therapies and for use in the treatment of patients withsports medicine and severe diseases and conditions.burn care markets. We currently havemarket two U.S. Food and Drug Administration (FDA) marketed(“FDA”) approved autologous cell therapy products in the United States.U.S. MACI® (autologous cultured chondrocytes on porcine collagen membrane), is an autologous cellularized scaffold product indicated for the repair of symptomatic, single or multiple full-thickness cartilage defects of the knee with or without bone involvement in adults that was approved by the FDA on December 13, 2016. The first shipment and implantation of MACI occurred on January 31, 2017. At the end of the second quarter, MACI replaced Carticel® (autologous cultured chondrocytes), an autologous chondrocyte implant indicated for the repair of symptomatic cartilage defects of the femoral condyle (medial, lateral or trochlea), caused by acute or repetitive trauma, in patients who have had an inadequate response to a prior arthroscopic or other surgical repair procedure (e.g., debridement, microfracture, drilling/abrasion arthroplasty, or osteochondral allograft/autograft.We also marketadults. Epicel® (cultured epidermal autografts), is a permanent skin replacement Humanitarian Use Device (HUD)(“HUD”) for the treatment of adult and pediatric patients with deep-dermal or full-thickness burns comprising greater than or equal to 30 percent of total body surface area (TBSA)(“TBSA”). Our development stage portfolio includes ixmyelocel-T,We also hold an exclusive license from MediWound for North American rights to NexoBrid®, a patient-specific multicellular therapyregistration-stage biological orphan product designed for the debridement of severe thermal burns. In 2020, MediWound submitted to the FDA a biologics license application (“BLA”) seeking the approval of NexoBrid for eschar removal (debridement) in adults with deep partial-thickness and/or full-thickness thermal burns. The FDA accepted the BLA for filing and assigned a Prescription Drug User Fee Act (“PDUFA”) target date of June 29, 2021. Thereafter, on June 29, 2021, MediWound received a complete response letter from the FDA regarding the BLA through which the FDA communicated to MediWound that it had completed its review of the BLA, as amended, and had determined that it could not approve the BLA in its present form. We continue to work with MediWound, BARDA and the FDA to address the issues identified by the FDA, to prepare and submit a BLA resubmission to the FDA, and to seek the potential approval of NexoBrid.
COVID-19
The ongoing pandemic caused by the spread of a novel strain of coronavirus (“COVID-19”) has created significant disruptions to the U.S. and global economy and has contributed to significant volatility in financial markets. The global impact of the pandemic has fluctuated since early 2020. At times, many state, local and national governments – including those in Massachusetts and Michigan, where our operations are located – have responded by issuing, extending and supplementing orders requiring quarantines, restrictions on travel, and the mandatory closure of certain non-essential businesses, among other actions. In the U.S., the status and application of these orders have varied on a state-by-state basis since the early days of the pandemic. Many of the restrictions have been periodically updated as infection rates in the U.S. have risen and fallen, as new virus variants have emerged, as vaccines have been distributed and administered, and as world health leaders learn more about the virus, its transmission pathway and who is most at risk. Because Vericel is deemed an essential business, we were exempted from government orders requiring the closure of workplaces and the cessation of business operations.
Notwithstanding being an essential business, our business and operations at times have been adversely impacted by the ongoing effects of the COVID-19 pandemic. For example, as a result of periodic restrictions placed on the performance of elective surgical procedures, Vericel experienced a significant increase in cancellations of scheduled MACI procedures as well as a slowdown in new MACI orders during March and April of 2020. The widespread suspension of surgical procedures impacted our business and operations during the first and second quarters of 2020. The level and degree of restriction on elective surgeries, on the ability of patients to seek treatment and on U.S. business operations generally fluctuated throughout 2020 as COVID-19 infection rates rose and fell during the summer months and into the autumn. By the first quarter of advanced heart failure due2021, the pandemic’s effects on our MACI business had largely dissipated. During the summer of 2021, however, the pandemic’s direct and ancillary effects again began to ischemic dilated cardiomyopathy (DCM).cause some disruption to our MACI business. Following the cessation of COVID-19-related travel restrictions in many parts of the U.S. and the availability of vaccinations in May and June 2021, some MACI patients postponed or delayed treatment. Further, surges of new COVID-19 cases during the second half of 2021 caused by the spread of the “Delta” and “Omicron” variants again caused disruptions to health care networks including restrictions on the performance of elective surgical procedures, the availability of physicians and/or their treatment prioritizations, the level of healthcare facility staffing and, in some instances, the willingness or ability of patients to seek treatment. Consequently, and notwithstanding the widespread distribution of vaccines, these factors contributed to a slowdown of MACI procedures during the third and fourth quarters of 2021 and during the first months of 2022. Although hospitals are now better prepared for subsequent surges in COVID-19 patients, the risk remains that regional or local restrictions could again be placed on the performance of elective surgical procedures if the number of COVID-19 infections in the U.S. were to continue to rise, or if new or existing COVID-19 variants render current vaccine treatments ineffective.
Because Epicel is used almost exclusively in an emergent setting by burn centers and surgeons throughout the country, Epicel revenue and procedure volumes have been less affected by the pandemic. Nevertheless, the number of large burns and burn admissions can be affected by restrictions on human activity resulting from more severe government lockdown orders.
At the outset of the pandemic, we put in place a comprehensive workplace protection plan, which instituted protective measures in response to COVID-19. Our workplace protection plan has closely followed guidance issued by the Centers for
Disease Control and Prevention (“CDC”) and has complied with applicable federal and state law. To date, Vericel has been successful in sustaining its operations and providing MACI and Epicel to patients in need. We continue to review our policies and procedures regularly, including our workplace protection plan, as the pandemic evolves and we may take additional actions to the extent required.
We continue to manufacture MACI and Epicel and are maintaining a significant safety stock of all key raw materials. We do not expect current supply chain interruptions will impact our ongoing manufacturing operations. With respect to customer delivery, MACI final product has an established shelf life of six (6) days and an established shipping shelf life of three (3) days. Currently, MACI is picked up by courier and shipped by commercial air or ground transportation to customer surgical sites. Epicel final product has an established shelf life of 48 hours and is hand-carried to customer hospitals by courier. Transportation is primarily by commercial or charter airline. Although we have not experienced material shipping delays or materially-increased costs to date, significant disruption of air travel could result in the inability to deliver MACI or Epicel final products to customer sites within appropriate timeframes, which could further adversely impact our business. At this time, we are not aware of COVID-19-related impacts on our distributors, operations or third-party service providers’ ability to manage patient cases.
We believe it is possible that we could continue to experience variable impacts on our business, should a new resurgence of COVID-19 infections occur in the future. Measures taken to limit the impact of COVID-19 at the international, national and local levels, including the availability and effectiveness of COVID-19 vaccines, shelter-in-place orders, social distancing measures, travel bans and restrictions, and business and government shutdowns, may again create significant negative economic impacts on a global basis. Given that uncertainty, we cannot accurately estimate the extent to which the ongoing COVID-19 pandemic may continue to impact utilization and revenue of our products in 2022 and beyond.
Manufacturing
We have a cell-manufacturingcell manufacturing facility in Cambridge, Massachusetts which is used for U.S. manufacturing and distribution of MACI and Epicel, and also was used for manufacturing of MACI for the SUMMIT study conducted for approval in Europe and the U.S. Throughout 2016, we also operated a centralized cell manufacturing facility in Ann Arbor, Michigan. The Ann Arbor facility supported the open label extension portion of the ixCELL-DCM clinical trial conducted in the United States and Canada.Epicel.
Product Portfolio
Our approved and marketed products include two approvedFDA-approved autologous cell therapy products:therapies: MACI, (autologous cultured chondrocytes on a porcine collagen membrane), a third generationthird-generation autologous implant for the repair of symptomatic, full-thickness cartilage defects of the knee in adult patients and Epicel (cultured epidermal autografts), a permanent skin replacement for full thickness burns in adults and pediatrics with greater than or equal to 30% of total body surface area (TBSA) also currently marketed in the U.S. We also own Carticel (autologous cultured chondrocytes), a first-generationcellularized scaffold product for autologous chondrocyte implantation (ACI) which is no longer marketed in the U.S. Our product candidate portfolio included ixmyelocel-T, a patient-specific multicellular therapy for the treatment of advanced heart failure due to DCM. On September 29, 2017, the FDA indicated we would be required to conduct an additional clinical study to support a Biologics License Application (BLA) for ixmyelocel-T. We have decided we will not conduct any additional clinical studies for ixmyelocel-T unless fully funded by a partner.
Carticel and MACI
Carticel, a first-generation ACI product for the treatment and repair of cartilage defects in the knee, was the first FDA-approved autologous cartilage repair product. Carticel is indicated for the repair of symptomatic cartilage defects of the femoral condyle (medial, lateral or trochlea) caused by acute or repetitive trauma, in patients who have had an inadequate response to a prior arthroscopic or other surgical repair procedure such as debridement, microfracture, drilling/abrasion arthroplasty, or osteochondral allograft/autograft. Carticel received a BLA approval in 1997 and is no longer marketed in the U.S. It was generally used on patients with larger lesions (greater than 3 cm2). Carticel was replaced at the end of the second quarter of 2017 by MACI, which was approved on December 13, 2016 by the FDA. MACI is a third generation autologous implant for the repair of symptomatic, single or multiple full-thickness cartilage defects of the knee with or without bone involvement in adults. The first shipmentadults, and Epicel, a permanent skin replacement for the treatment of adult and pediatric patients with deep-dermal or full-thickness burns comprising greater than or equal to 30 percent of TBSA. Both products are currently marketed in the U.S. In addition, we have entered into exclusive license and supply agreements with MediWound to commercialize NexoBrid in North America, if approved by the FDA.
MACI
MACI is a third-generation autologous chondrocyte implantation (“ACI”) product indicated for the repair of MACI occurred on January 31, 2017, and we stopped manufacturing and marketing Carticel at the endsymptomatic, single or multiple full-thickness cartilage defects of the second quarterknee with or without bone involvement in 2017.adults.
In the U.S., the orthopedic physicianOur target audience of U.S. physicians is very concentrated, withapproximately 5,000 orthopedic surgeons and is divided into two thirds of our 2016 Carticel business originating from approximately 150 physicians. Our target Carticel and MACI audience issegments: a group of physiciansorthopedic surgeons who self-identify as and/or have thea formal specialty ofas sports medicine physicians. We believephysicians, and a subpopulation of general orthopedic surgeons who perform a high volume of cartilage repair procedures. As of the date of this report, we have 76 MACI sales representatives to enable the sales force to reach our target audience is approximately 500 physicians. At the end of 2016 we expanded our field force from 21 to 28 representatives.audience. Most private payers have a medical policy that allowscovers treatment with Carticel and we are actively workingMACI with payers to ensure reimbursement for MACI. 28 of the top 30 largest commercial payers for Carticel havehaving a formal medical policy for MACI or ACI in general. For thoseWith respect to private commercial payers whichthat have not yet approved a medical policy for MACI, for medically appropriate cases we can often obtain approval on a case by casecase-by-case basis.For the nine months ended September 30, 2017, net revenues were $27.8 million for Carticel and MACI.
Epicel
Epicel (cultured epidermal autografts) is a permanent skin replacement for full thicknessdeep-dermal or full-thickness burns greater than or equal to 30%30 percent of TBSA. Epicel is regulated by the CBERCenter for Biologics Evaluation and Research (“CBER”) of the FDA under medical device authorities, and is the only FDA-approved autologouscultured epidermal autograft product available for large total surface area burns. Epicel was designated as a HUD in 1998 and an HDE application for the product was submitted in 1999. HUDs are devices that are intended for diseases or conditions that affect fewer than 4,0008,000 individuals annually in the United States.U.S. Under an HDE approval, a HUD cannot be sold for an amount that exceeds the cost of research and development, fabrication and distribution unless certain conditions are met. Currently, fewer than 100 patients are treated with Epicel in the U.S. each year. For the nine months ended September 30, 2017, net revenues were $12.8 million for Epicel.
A HUD is eligible to be sold for profit after receiving HDE approval if the device meets certain
eligibility criteria, including where the device is intended for the treatment of a disease or condition that occurs in pediatric patients and such device is labeled for use in pediatric patients. If the FDA determines that a HUD meets the eligibility criteria, the HUD is permitted to be sold for profit asso long as the number of devices distributed in any calendar year does not exceed the annual distribution number (ADN)Annual Distribution Number (“ADN”). The ADN is defined as the number of devices reasonably needed to treat a population of 4,0008,000 individuals per year in the United States.U.S.
On February 18, 2016, the FDA approved our HDE supplement to revise the labeled indications of use for Epicel to specifically include pediatric patients and to add pediatric labeling.patients. The revised product label also now specifies that the probable benefit of Epicel, mainly related to survival, was demonstrated in two Epicel clinical experience databases and a physician-sponsored study comparing outcomes in patients with massive burns treated with Epicel relative to standard care. Due toBecause of the change in the label to specifically include use in pediatric patients, Epicel is no longer subject to the HDE profit restrictions. In conjunction with adding the pediatric labeling and meeting the pediatric eligibility criteria, the FDA has determined the ADN number for Epicel isto be 360,400 which is approximately 5030 times larger than the volume of grafts sold in 2016.2021. We currently have a 5-personthirteen-person burn field force.force comprised of seven account managers and six burn clinical specialists, led by a regional and a national sales director.
Ixmyelocel-TNexoBrid
Our preapproval stagedevelopment portfolio includes ixmyelocel-T,NexoBrid, a unique patient-specific multicellular therapy derivedregistration-stage, topically-administered biological product that enzymatically removes nonviable burn tissue, or eschar, in patients with deep partial and full-thickness thermal burns. We have entered into exclusive license and supply agreement with MediWound to commercialize NexoBrid and any improvements to the product in North America, if approved. On June 29, 2021, the Company announced that MediWound had received a complete response letter from an adult patient’s own bone marrowthe FDA with respect to BLA, which utilizes our proprietary, highly automated and scalable manufacturing system. The patient-specific multicellular therapy was developedMediWound had previously submitted to the FDA seeking marketing approval for the treatmentproduct in the U.S. As part of advanced heart failure duethe complete response letter, the FDA communicated to DCM.MediWound that it had completed its review of the BLA, as amended, and had determined that it cannot approve the BLA in its present form. We continue to work with MediWound, BARDA and the FDA to address the issues identified in the agency’s complete response letter, to prepare and submit a BLA resubmission to the FDA and to seek the potential approval of NexoBrid.
Ixmyelocel-TNexoBrid is approved in the European Union (“EU”) and other international markets and has been granteddesignated as an orphan biologic in the U.S., EU and other international markets. Pursuant to the terms of our existing license agreement, if the BLA is approved, MediWound will transfer the BLA to us and we will market NexoBrid in the U.S. Both MediWound and Vericel, under the supervision of a U.S. Orphan Drug designationCentral Steering Committee comprised of members of both companies will continue to guide development of NexoBrid in North America. Under our license agreement with MediWound, NexoBrid is being manufactured for BARDA prior to approval by the FDA for the treatment of DCM. We completed enrolling and treating patients in our completed Phase 2b ixCELL-DCM study in February, 2015. Patients were followed for 12 months for the primary efficacy endpoint of major cardiac adverse events, or MACE. On March 10, 2016, we announced the trial had met its primary endpoint of reduction in clinical cardiac events and that the incidence of adverse events, including serious adverse events, in patients treated with ixmyelocel-T was comparable to patients in the placebo group. Patients were then followed forunder an additional 12 months for safety. Because the trial met the primary endpoint, patients who received placebo or were randomized to ixmyelocel-T in the double-blind portion of the trial but did not receive ixmyelocel-T have been offered the option to receive ixmyelocel-T. We successfully treated the last patients in February, 2017, and the last follow-up visit will occur approximately one year later. In addition, we have conducted clinical studies for the treatment of critical limb ischemia, and an ixmyelocel-T investigator-initiated clinical study was conducted for the treatment of craniofacial reconstruction.emergency use authorization.
On September 29, 2017, the FDA indicated we would be required to conduct an additional clinical study to support a BLA for ixmyelocel-T. Given the expense required to conduct further development and our focus on growing our existing commercial products and becoming profitable, at this time we have no current plans to initiate or fund a Phase 3 trial on our own but instead are seeking a partner to fund further development.
Results of Operations
Net LossThe following is a summary of our condensed consolidated results of operations:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, | | |
| (In thousands) | | 2022 | | 2021 | | Change $ | | Change % | | | | |
| Total revenue | | $ | 36,074 | | | $ | 34,568 | | | $ | 1,506 | | | 4.4 | % | | | | |
| Cost of product sales | | 12,622 | | | 11,583 | | | 1,039 | | | 9.0 | % | | | | |
| Gross profit | | 23,452 | | | 22,985 | | | 467 | | | 2.0 | % | | | | |
| Research and development | | 4,860 | | | 3,630 | | | 1,230 | | | 33.9 | % | | | | |
| Selling, general and administrative | | 25,865 | | | 22,660 | | | 3,205 | | | 14.1 | % | | | | |
| Total operating expenses | | 30,725 | | | 26,290 | | | 4,435 | | | 16.9 | % | | | | |
| Loss from operations | | (7,273) | | | (3,305) | | | (3,968) | | | 120.1 | % | | | | |
| Total other income | | 182 | | | 159 | | | 23 | | | 14.5 | % | | | | |
| Income tax expense | | — | | | 143 | | | (143) | | | (100.0) | % | | | | |
| Net loss | | $ | (7,091) | | | $ | (3,289) | | | $ | (3,802) | | | 115.6 | % | | | | |
Our net loss for the three and nine months ended September 30, 2017 totaled $5.4 million and $17.6 million, respectively. Our net loss for the three and nine months ended September 30, 2016 totaled $6.7 million and $13.4 million, respectively.
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
| Total revenues | | $ | 14,260 |
| | $ | 10,929 |
| | $ | 40,574 |
| | $ | 37,860 |
|
| Cost of product sales | | 7,186 |
| | 6,856 |
| | 21,965 |
| | 20,716 |
|
| Gross profit | | 7,074 |
| | 4,073 |
| | 18,609 |
| | 17,144 |
|
| Total operating expenses | | 11,105 |
| | 10,453 |
| | 34,784 |
| | 30,500 |
|
| Loss from operations | | (4,031 | ) | | (6,380 | ) | | (16,175 | ) | | (13,356 | ) |
| Other income (expense) | | (1,376 | ) | | (295 | ) | | (1,398 | ) | | (13 | ) |
| Net loss | | $ | (5,407 | ) | | $ | (6,675 | ) | | $ | (17,573 | ) | | $ | (13,369 | ) |
Net RevenuesTotal Revenue
Net revenues increasedRevenue by product for the three months ended September 30, 2017March 31, 2022 and 2021 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, | | |
| Revenue by product (In thousands) | | 2022 | | 2021 | | Change $ | | Change % | | | | |
| MACI | | $ | 25,995 | | | $ | 23,797 | | | $ | 2,198 | | | 9.2 | % | | | | |
| Epicel | | 9,857 | | | 9,830 | | | 27 | | | 0.3 | % | | | | |
| NexoBrid | | 222 | | | 941 | | | (719) | | | (76.4) | % | | | | |
| Total Revenue | | $ | 36,074 | | | $ | 34,568 | | | $ | 1,506 | | | 4.4 | % | | | | |
Total revenue increase for the three months ended March 31, 2022 compared to the same period in 2021, was driven by MACI volume and price growth, partially offset by lower revenues associated with the previous year due primarilydelivery of NexoBrid to an increaseBARDA for emergency response preparedness.
Seasonality. The effects of the ongoing COVID-19 pandemic have disrupted the normal seasonality of our MACI business at times over the past twenty-five months. These effects have included, among others, periodic restrictions on the performance of elective surgical procedures throughout the country, the unavailability of physicians and/or changes to their treatment prioritizations, reductions in MACIthe levels of healthcare facility staffing and, Epicel sales units and an increase in average sales price per unit.
Net revenues increased forcertain instances, the nine months ended September 30, 2017 primarily duewillingness or ability of patients to higher Carticel, MACI and Epicel sales units and higher average price per unit. In April 2017, we were informed of a contractual dispute between Vital Care, Inc. (Vital Care)seek treatment and the third-party payer relatedinability of our clinical account specialists to certain insurance reimbursement claims associated withcall on surgeon customers. Over the last five years, ACI (MACI and Carticel prior to replacement) sales volumes from the first through the fourth quarter on average represented 19% (16%-21% range), 22% (16%-25% range), 23% (21%-26% range) and 36% (33%-38% range) respectively, of total annual volumes. MACI surgeries performed in 2016 and 2017. This contractual dispute between Vital Care and the third-party payer was resolved. The negotiated reimbursement and related change in estimate, for sales that were originally recorded in 2016, resulted in a decrease of $0.6 million to revenue for the nine months ended September 30, 2017.
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| Revenue by product (in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
| Carticel and MACI | | $ | 9,909 |
| | $ | 8,319 |
| | $ | 27,821 |
| | $ | 26,117 |
|
| Epicel | | 4,351 |
| | 2,610 |
| | 12,753 |
| | 11,743 |
|
| | | $ | 14,260 |
| | $ | 10,929 |
| | $ | 40,574 |
| | $ | 37,860 |
|
Seasonality. Carticel revenue was subject to seasonal fluctuations withorders are normally stronger sales occurring in the fourth quarter and second quarter due to a number ofseveral factors including the satisfaction by patients of insurance copaydeductible limits and the time of year patients prefer to start rehabilitation,rehabilitation. Because of the effects of the COVID-19 pandemic, the MACI business seasonality in 2021 and MACI revenue is expected2020 did not follow our historical patterns, and seasonality in 2022 could continue to be subjectimpacted by COVID-19 related factors. Due to these seasonal fluctuations as well. Over the last five years, the percentagelow incidence and variable occurrence of annual sales by quarter has ranged as follows: first quarter, 20% to 24%; second quarter, 24% to 26%; third quarter, 20% to 23%; and fourth quarter, 28% to 33%. During 2016, the percentage of annual sales by quarter was as follows: 24% in the first quarter; 24% in the second quarter; 20% in the third quarter; and 32% in the fourth quarter.severe burns, Epicel revenue is also subject to seasonal fluctuations mostly associated with the use of heating elements during the colder months, with stronger sales occurring in the winter months of the firsthas inherent variability from quarter-to-quarter and fourth quarters, and weaker sales occurring in the hot summer months of the third quarter. However, in any single year, this trend can be absent due to the extreme variability inherent with Epicel’s low patient volume of fewer than 100 patients per year. Over the last five years, the percentage of annual sales by quarter has ranged as follows: first quarter, 22% to 35%; second quarter, 22% to 28%; third quarter, 17% to 24%; and fourth quarter, 23% to 30%. The variability between the same quarters in consecutive years has been as high as 11% of the annual volume. While the number of patients treated per year remains low, we expect these large swings in revenue in some quarters to continue. These seasonal trends have caused and will likely continue to cause, fluctuations in our quarterly results, including fluctuations in sequential revenue growth rates.does not exhibit significant seasonality.
Gross Profit and Gross Profit Ratio
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
| Gross profit | | $ | 7,074 |
| | $ | 4,073 |
| | $ | 18,609 |
| | $ | 17,144 |
|
| Gross profit % | | 50 | % | | 37 | % | | 46 | % | | 45 | % |
Gross Profit
Gross profit ratio increased for the three and nine months ended September 30, 2017March 31, 2022 compared to the same period in 2016 due primarily to an increase2021, as revenue growth more than offset increases in Carticelstock compensation and MACIoffsite storage costs as well as a reduction of NexoBrid revenue which has no associated cost of product sales described above..
Research and Development CostsExpenses |
| | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
| Research and development costs | | $ | 2,919 |
| | $ | 3,443 |
| | 9,357 |
| | 11,037 |
|
The following table summarizes research and development expenses, which include license fees, materials, professional fees and an allocation of employee-related salary and fringe benefit costs for our research and development projects:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, | | |
| (In thousands) | | 2022 | | 2021 | | Change $ | | Change % | | | | |
| MACI | | $ | 2,989 | | | $ | 1,888 | | | $ | 1,101 | | | 58.3 | % | | | | |
| Epicel | | 1,220 | | | 934 | | | 286 | | | 30.6 | % | | | | |
| NexoBrid | | 651 | | | 808 | | | (157) | | | (19.4) | % | | | | |
| Total research and development expenses | | $ | 4,860 | | | $ | 3,630 | | | $ | 1,230 | | | 33.9 | % | | | | |
Research and development costsexpenses for the three months ended September 30, 2017March 31, 2022 were $2.9$4.9 million, versus $3.4compared to $3.6 million for the same period a year ago, primarily due to a reduction in the ixCELL-DCM clinical trial expenses. Because the trial met the primary endpoint, patients who received placebo or were randomized to ixmyelocel-T in the double-blind portion of the trial but did not receive ixmyelocel-T were offered the option to receive ixmyelocel-T beginning in 2016. We successfully treated the last patients in February 2017 and lower expenses were incurred in the current period. MACI research and development costs increased related to activity incurred as a result of the FDA approval received in December 2016.
2021. Research and development costs continue to be centered around process development, regulatory and medical affairs for MACI and Epicel. The increase is primarily due to an increase of $0.5 million in stock-based compensation expense and additional spend on instrument design for Arthroscopic MACI delivery.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the ninethree months ended September 30, 2017March 31, 2022 were $9.4$25.9 million versus $11.0compared to $22.7 million for the same period a year ago. As described above, the trial expenses for the ixCELL-DCM clinical trial decreased as the trial completed treatment of the patients who received the placebo. Carticel-related expenses decreased as a result of the approved MACI product in December 2016. Additional costs were incurred related to MACI upon the approval.
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
| Dilated Cardiomyopathy | | $ | 909 |
| | $ | 1,875 |
| | $ | 4,050 |
| | $ | 5,732 |
|
| MACI | | 1,385 |
| | 636 |
| | 3,309 |
| | 1,916 |
|
| Carticel | | 45 |
| | 462 |
| | 369 |
| | 1,828 |
|
| Epicel | | 580 |
| | 470 |
| | 1,629 |
| | 1,561 |
|
| Total research and development costs | | $ | 2,919 |
| | $ | 3,443 |
| | $ | 9,357 |
| | $ | 11,037 |
|
Selling, General and Administrative Costs
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
| Selling, general and administrative costs | | $ | 8,186 |
| | $ | 7,010 |
| | $ | 25,427 |
| | $ | 19,463 |
|
Selling, general and administrative costs for the three months ended September 30, 2017 were $8.2 million compared to $7.0 million for the same period a year ago.2021. The increase in selling, general and administrative costs for the three months ended September 30, 2017 isexpenses was primarily due primarilytoan increase of $1.8 million in stock-based compensation expenses in addition to an increase in personnelprofessional services, employee related expenses and employee costs of $0.9 million related to an increase in the MACI sales force.depreciation.
Selling, general and administrative costs for the nine months ended September 30, 2017 were $25.4 million compared to $19.5 million for the same period a year ago. The increase in selling, general and administrative costs in 2017 is driven by an increase in personnel costs of $1.6 million primarily related to an increase in the MACI sales force, consulting and agency fees of $3.0 million related to the launch of MACI and costs associated with our reimbursement and patient support services for MACI of $0.9 million.
Total Other Income (Expense) |
| | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
| Decrease in fair value of warrants | | $ | (1,060 | ) | | $ | (203 | ) | | $ | (512 | ) | | $ | 99 |
|
| Foreign currency translation (loss) | | (6 | ) | | (6 | ) | | (20 | ) | | (17 | ) |
| Other income (expense) | | 5 |
| | — |
| | 6 |
| | (10 | ) |
| Net interest (expense) income | | (315 | ) | | (86 | ) | | (872 | ) | | (85 | ) |
| Total other income (expense) | | $ | (1,376 | ) | | $ | (295 | ) | | $ | (1,398 | ) | | $ | (13 | ) |
The change in other income and expense(expense) for the three and nine months ended September 30, 2017March 31, 2022, compared to 2016 isthe same period in 2021 was due primarily to interest expense on the outstanding revolving credit agreement and term loans, the change in warrant value as a result of the fluctuations in the rates of return on our stock priceinvestments in various marketable debt securities.
Income Tax Expense
For the three months ended March 31, 2021 income tax expense of $0.1 million was recorded, and no expense for income taxes was recognized for the reductionsame period in the time to maturity. Fluctuations in the fair value of the warrants in2022.
Stock-Based Compensation Expense
future periods could result in significant non-cash adjustments to the condensed consolidated financial statements; however, any income or expense recorded will not impact our cash, operating expenses or cash flow.
Stock Compensation
Non-cash stock-based compensation expense included in cost of goods sold, research and development expenses and selling, general and administrative expenses is summarized in the following table:
| | | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | Three Months Ended March 31, | |
| (In thousands) | | 2017 | | 2016 | | 2017 | | 2016 | (In thousands) | | 2022 | | 2021 | | Change $ | | Change % | |
| Cost of goods sold | | $ | 119 |
| | $ | 117 |
| | $ | 316 |
| | $ | 330 |
| |
| Cost of product sales | | Cost of product sales | | $ | 1,118 | | | $ | 911 | | | $ | 207 | | | 22.7 | % | |
| Research and development | | 177 |
| | 133 |
| | $ | 391 |
| | $ | 392 |
| Research and development | | 1,350 | | | 863 | | | 487 | | | 56.4 | % | |
| Selling, general and administrative | | 459 |
| | 404 |
| | 1,346 |
| | 1,251 |
| Selling, general and administrative | | 7,063 | | | 5,245 | | | 1,818 | | | 34.7 | % | |
| Total non-cash stock-based compensation expense | | $ | 755 |
| | $ | 654 |
| | $ | 2,053 |
| | $ | 1,973 |
| Total non-cash stock-based compensation expense | | $ | 9,531 | | | $ | 7,019 | | | $ | 2,512 | | | 35.8 | % | |
The changesincrease in stock-based compensation expense arefor the three months ended March 31, 2022 compared to the same period in 2021, was due primarily to fluctuations in stock prices which impact the fair value of the options grantedand restricted stock units awarded and the expense recognized in 2017 compared to 2016.the period.
Liquidity and Capital Resources
We are currently focused on utilizingSince our technology to identify, develop and commercialize innovative therapies that enable the body to repair and regenerate damaged tissues and organs to restore normal structure and function. Since the acquisition in 2014 of the CTRM Business of Sanofi, the sales of Carticel and Epicel therapies have constituted nearly all of our product sales revenues. With the approval of MACI and replacement of Carticel with MACI, we expect the sales of MACI and Epicel therapies will constitute nearly allin 2014, our primary focus has been to invest in our existing commercial business with the goal of our product sales revenues. Additionally, we are focusing significant resources to grow our commercial business.
growing revenue. We have raised significant funds in order to complete our product development programs and complete clinical trials needed to market and commercialize our products.products, including NexoBrid. To date, we have financed our operations primarily through cash received through Epicel and MACI sales, debt and public and private sales of our equity securities. We generated $3.5 million in operating cash flows during the three months ended March 31, 2022, and we may finance our operations through the sales of equity securities including the net proceeds of approximately $18.0 million we received from our December 2016 public offering and the availability of funds under the SVB-Mid-Cap Facility. While weor debt financings.
We believe that based on our current cash on hand, we are in a positioncash equivalents and investments will be sufficient to sustainsupport our current operations through at least November 2018, if actual results differ12 months from the issuance of these condensed consolidated financial statements. However, the continuing effects of the ongoing COVID-19 pandemic continue to evolve and may adversely impact our business and operations.
At March 31, 2022, we were not party to any off-balance sheet arrangements.
Cash Flows
The following table summarizes our sources and uses of cash for each of the periods presented:
| | | | | | | | | | | | | | |
| | Three months ended March 31, |
| (In thousands) | | 2022 | | 2021 |
| Net cash provided by operating activities | | $ | 3,468 | | | $ | 10,086 | |
| Net cash (used in) provided by investing activities | | (10,669) | | | 12,186 | |
| Net cash provided by financing activities | | 503 | | | 2,262 | |
| Net (decrease) increase in cash, cash equivalents, and restricted cash | | $ | (6,698) | | | $ | 24,534 | |
Net Cash Provided by Operating Activities
Our cash, cash equivalents and restricted cash totaled $61.8 million, short-term investments totaled $44.9 million and long-term investments totaled $22.8 million as of March 31, 2022. The $3.5 million of cash provided by operations during the three months ended March 31, 2022 was primarily the result of non-cash charges of $9.5 million related to stock-based compensation expense, $1.1 million of operating lease amortization and $0.9 million in depreciation and amortization expense, offset by a net loss of $7.1 million and a net decrease of $1.1 million related to movements in our working capital accounts. The overall decrease in cash from our projections, we may needworking capital accounts was primarily driven by a decrease in accounts payable and accrued expenses due to access additional capital.timing of payments, an increase in inventory due to increased production needs, offset by a decrease in accounts receivable due to a decrease in sales volume compared to the previous sequential quarter.
Our cash, cash equivalents and restricted cash totaled $58.4 million, short-term investments totaled $25.4 million and long-term investments totaled $26.0 million as of March 31, 2021. The $10.1 million of cash provided by operations during the three months ended March 31, 2021 was primarily the result of non-cash charges of $7.0 million related to stock-based compensation expense, $1.2 million of operating lease amortization, $0.8 million in depreciation and amortization expense, offset by a net loss of $3.3 million and a net increase of $4.1 million related to movements in our working capital accounts. The overall increase in cash from our working capital accounts was primarily driven by an decrease in accounts receivable due to a decrease in sales volume compared to the previous sequential quarter, a net increase of accounts payable and accrued expenses due to timing of payments and a decrease in inventory due to decreased production needs.
Net Cash (Used In) Provided by Investing Activities
Net cash used in investing activities during the three months ended March 31, 2022 was the result of $12.6 million in investment purchases and $3.1 million of property and equipment purchases primarily for manufacturing upgrades and leasehold improvements, offset by $5.0 million of investment sales and maturities.
Net cash provided by investing activities during the three months ended March 31, 2021 was the result of $25.0 million of investment sales and maturities, offset by $10.4 million in investments purchases and equipment purchases of $2.3 million, primarily for manufacturing upgrades and leasehold improvements.
Net Cash Provided by Financing Activities
Net cash provided by financing activities during the three months ended March 31, 2022 was the result of net proceeds from the exercise of stock options and the employee stock purchase plan of $1.5 million partially offset by payments of employee withholding taxes related to the vesting of restricted stock units of $0.9 million.
Net cash provided by financing activities during the three months ended March 31, 2021 was primarily the result of net proceeds from the exercise of stock options of $3.8 million, partially offset by the payment of employee withholding taxes related to the vesting of restricted stock units of $1.5 million.
Sources of Capital
On October 10, 2016August 27, 2021, we entered into an at-the-market sales agreement (ATM Agreement)a Sales Agreement with Cowen and Company,SVB Leerink LLC, (Cowen) as sales agent (“SVB Leerink”), pursuant to which we may offer and sell from timeup to time,$200.0 million of shares of our common stock, no par value per share (ATM Shares), having an aggregate sale price of up to $25.0 million, through an “at the market offering” program (ATM Offering)(“ATM Shares”). The ATM Shares to be offered and sold under the Sales Agreement will be issued and sold pursuant to ouran automatically effective shelf registration statement on Form S-3S-3ASR (File No. 333-205336).333-259119) filed by us on August 27, 2021, which expires
three years from the filing date. We also filed a prospectus supplement dated October 10, 2016, withrelating to the Securities and Exchange Commission in connection with the offeroffering and sale of the ATM Shares sold under the ATM Agreement.on August 27, 2021. We are obligednot obligated to pay 3%make any sales of the gross proceedsATM Shares, and SVB Leerink is not required to Cowen as a commission. As of September 30, 2017, approximately $17.2 million of net capacity remained under the ATM Agreement.
Our cash totaled $15.5 million as of September 30, 2017. During the nine months ended September 30, 2017, the cash used for operations was $14.0 million. This use of funds was fueled largely by our operating loss of $17.6 million reduced by noncash charges including $2.1 million of stock compensation expense, $1.2 million of depreciation expense and $0.5 million due to the change in fair value of warrants.
The change in cash used for investing activities is the result of material property plant and equipment purchases of $0.8 million for manufacturing upgrades and leasehold improvements through September 30, 2017.
The change in cash provided from financing activities is the resultsell any specific number or dollar amount of the ATM activity duringShares under the nine months ended September 30, 2017 which did not occur during the nine months ended September 30, 2016. In 2016, we had net borrowings of $6.0 million under our term loan and revolving credit agreements and no additional borrowings in 2017.
On March 8, 2016, we entered into a $15.0 million debt financing with SVB which we replaced on September 9, 2016 with an expanded term loan and revolving line of credit agreement with SVB and MidCap Financial Services, or MidCap, which initially provide access to up to $20 million. The updated debt financing consists of a $4.0 million term loan which was drawn at the closing, a $4.0 million term loan which was drawn upon in November 2016, a $2.0 million term loan which is no longer available
as it was not drawn on by April 12, 2017 and up to $10.0 million of a revolving line of credit. The term loans are interest only (indexed to Wall Street Journal (WSJ) Prime plus 5.00%) until September 1, 2017 followed by 36 equal monthly payments of principal plus interest maturing September 9, 2020. Per the initial terms of the agreement, the revolving credit is limited to a borrowing base calculated using eligible accounts receivable which was further reduced in the amendment described below and maturing September 9, 2020 with an interest rate indexed to WSJ Prime plus 1.25%. We are subject to various financial and nonfinancial covenants including but not limited to a monthly minimum net revenue covenant (determined in accordance with U.S. GAAP), measured on a trailing twelve month basis. The December 31, 2017 minimum revenue covenant is set at $51.7 million. SVB and MidCap also have the ability to call debt based on material adverse change clauses which are subjectively determinable and result in a subjective acceleration clause. The Company does not believe any material adverse changes have occurred. While we believe the acceleration of the due date may be reasonably possible, it is not probable and therefore, the debt is classified in current and non-current liabilities. SVB and MidCap have a shared first priority perfected security interest in all of our assets other than intellectual property.Sales Agreement. As of September 30, 2017, there was an outstanding balance of $7.8 million under the term loan and $2.5 million under the revolving line of credit.
On December 30, 2016,March 31, 2022, we entered into an amendmenthave sold no shares pursuant to the SVB-MidCap facility to amend certain financial covenants and to modify the final payment of the term loan advance. We further amended the SVB-MidCap facility on May 9, 2017 to update the monthly netSales Agreement.
If revenue requirement covenants, measured ondeclines for a trailing twelve month basis. The amendment decreased the 12 month trailing minimum revenue covenant as of June 30, 2017 and revised the December 31, 2017 minimum revenue covenant to $51.7 million. As of September 30, 2017, we were in compliance with the minimum revenue covenant. The amount of eligible account receivables used to calculate the availability under the revolving line of credit is no longer reduced by the $3.0 million per the terms of an amendment, as our revenue met minimum revenue targets for two (2) consecutive quarters. As of September 30, 2017, there was $3.3 millionremaining capacity under the revolving line of credit. The distribution agreement with Orsini discussed in note 4 and the concentration of credit limitations in the calculation of eligible account receivables could further reduce our ability to borrow under the revolving line of credit.
While we believe that, based on our current cash on hand, we are in a position to sustain operations through at least November 2018, if actual results differ from our projections or we pursue other strategic opportunities,sustained period, we may need to access additional capital. In addition, if our revenues do not meet the existing threshold set forth in the debt covenants, and we are unable to renegotiate those thresholds, SVB could call the debt immediately. Such events could result in the need for additional funds. However,capital; however, we may not be able to obtain financing on acceptable terms or at all. Market volatility could also adversely impact our ability to access financing when needed. The terms of any financing may adversely affect the holdings or the rights of our shareholders. If we need additional funds and we are unable to obtain funding on a timely basis, we may need to significantly curtail our operations including our research and development programs in an effort to provide sufficient funds to continue our operations, which could adversely affect our business prospects. Actual cash requirements may differ from projections and will depend on many factors, including continued scientific progress in ourany future impacts of the COVID-19 pandemic, the level of future research and development, programs, the scope and results of ongoing and potential clinical trials, the time and costs involved in obtaining regulatory approvals, the costs involved in filing, prosecuting and enforcing patents, the need for additional manufacturing capacity, competing technological and market developments, costs of possible acquisition or development of complementary business activities, and the cost of product launch andto market acceptance of those products and commercialization of newly approvedour products.
Contractual Obligations and Commitments Off-Balance Sheet Arrangements
The disclosure of our contractual obligations and commitments is set forth in the heading “Management’s Discussion and Analysis of Financial Conditions and Results of Operations - Contractual Obligations” in our Annual Report on Form 10-K for the year ended December 31, 2021. There have been no material changes, outside of the ordinary course of business, to our contractual obligations and commitments since December 31, 2021, except as discussed in Note 5, “Leases” in the accompanying condensed consolidated financial statements.
At September 30, 2017, we were not party to any off-balance sheet arrangements.
Critical Accounting Policies
OurThe discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, arewhich have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP).U.S. GAAP. The preparation of these condensed consolidated financial statements requires the application of appropriate technical accounting rules and guidance, as well as the use of estimates. The application of these policies necessarily involves judgments regarding future events. Theseus to make estimates and judgments inthat affect our reported assets, liabilities, revenues, expenses, and of themselves, couldrelated disclosures. Actual results may differ materially impact the condensed consolidated financial statementsfrom these estimates under different assumptions and disclosures based on varying assumptions. The accounting policies discussed in our Form 10-K for the fiscal year ended December 31, 2016 are considered by management to be the most important to an understanding of the consolidated financial statements because of their significance to the portrayal of our financial condition and results of operations. conditions.
There have been no material changes to thatour critical accounting policies and estimates in the three months ended March 31, 2022. For further information, disclosedrefer to our summary of significant accounting policies and estimates in our Annual Report duringon Form 10-K filed for the nine monthsyear ended September 30, 2017.December 31, 2021.
Cautionary Note Regarding Forward-Looking Statements
This report, including the documents that we incorporateincorporated by reference herein, contains forward-lookingcertain statements that describe our management’s beliefs concerning future business conditions, plans and prospects, growth opportunities and the outlook for our business based upon information currently available. Such statements are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the (“Exchange
Act) Act”). AnyWherever possible, we have identified these forward-looking statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These statements are often, but are not always, made through the use ofby words or phrases such as “will,” “may,” “anticipates,” “believes,” “intends,” “estimates,” “expects,” “plans,” “projects,” “trends,” “opportunity,” “comfortable,” “current,” “intention,” “position,” “assume,” “potential,” “outlook,” “remain,” “continue,” “maintain,” “sustain,” “seek,” “target,” “achieve,” “continuing,” “ongoing,” “expects,” “management believes,” “we believe,” “we intend” and similar words or phrases, or future or conditional verbs such as “will,” “would,” “should,” “could,” “may,” or similar expressions. Accordingly, theseThese forward-looking statements involve estimates,are based upon assumptions our management believes are reasonable. Such forward-looking statements are subject to risks and uncertainties which could cause our actual results, performance and achievements to differ materially from those expressed in, them. The factors describedor implied by, these statements, including, among others, the risks and uncertainties listed in our Annual Report among others, could have a material adverse effect upon our business, results of operations and financial conditions.under “Part I, Item 1A Risk Factors.”
Because the factors referredour forward-looking statements are based on estimates and assumptions that are subject to in the preceding paragraph could causesignificant business, economic and competitive uncertainties, many of which are beyond our control or are subject to change, actual results could be materially different and any or outcomes to differ materially from those expressed in anyall of our forward-looking statements we make, you should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaksmay turn out to be wrong. Forward-looking statements speak only as of the date on which it is made and can be affected by assumptions we undertake no obligation to update any forward-looking statementmight make or statements to reflect eventsby known or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.unknown risks and uncertainties. Many factors mentioned in our discussion in our Annual Report will be important in determining future results. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition,Consequently, we cannot assess the impactassure you that our expectations or forecasts expressed in such forward-looking statements will be achieved. Except as required
by law, we undertake no obligation to publicly update any of our businessforward-looking or the extent to which any factor,other statements, whether as a result of new information, future events, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.otherwise. These forward-looking statements include statements regarding:
•manufacturing and facility capabilities;
•potential strategic collaborations with others;
•future capital needs and financing sources;
•adequacy of existing capital to support operations for a specified time;
•reimbursement for our products;
•the timing of a response to the FDA’s complete response letter regarding the NexoBrid BLA;
•the timing of the FDA’s review of any resubmission of the NexoBrid BLA;
•expectations regarding approval by the FDA of the NexoBrid BLA;
•product development and marketing plans;
•regulatory filing plans;
•features and successes of our cellular therapies;
•manufacturing and facility capabilities;
•clinical trial plans, including publication thereof;
•the effects of the ongoing COVID-19 pandemic on our business, including economic slowdowns or recessions, impact to our operations or to the healthcare industry generally, which could reduce demand for our products;
•anticipation of future losses;
•replacement of manufacturing sources;
•commercialization plans; or
•revenue expectations and operating results.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of September 30, 2017, we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates or credit conditions on our securities portfolio. For additional information regarding ourquantitative and qualitative disclosures about market risk, refer tosee Part II, Item 7A. Quantitative“Quantitative and Qualitative Disclosures About Market Risk, in” of our Annual Report on Form 10-K for the year ended December 31, 2016.2021. Our exposures to market risk have not changed materially since December 31, 2021.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Management of the Company, with the participation of its Chief Executive Officer and Chief Financial Officer (its Certifying Officers), evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on the evaluation as of March 31, 2022, the Company’s Certifying Officers concluded that the Company’s disclosure controls and procedures were effective.
The Company has established disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities and Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the SEC’sCommission’s rules and forms, and that such information is accumulated and communicated to management of the Company, with the participation of its Chief Executive Officer and Chief Financial Officer (its “Certifying Officers”),Certifying Officers, as appropriate, to allow timely decisions regarding required disclosure.
Management of the Company, with the participation of its Certifying Officers, evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in Rules l3a-15(e) and l5d-15(e) under the Exchange Act. Based on the evaluation as of September 30, 2017, our Certifying Officers concluded that the Company’s disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There have beenDuring the three months ended March 31, 2022, there were no material changes made in our internal control over financial reporting during(as such term is defined in Rules 13a-15(f) and 15d-15(f) of the quarter ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.Exchange Act).
PART II —- OTHER INFORMATION
Item 1. Legal Proceedings
FromWe are currently not party to any material legal proceedings, although from time to time we receive threats or may be subject to litigation matters incidental tobecome involved in disputes in connection with the operation of our business. However, we are not currently a party to any material pending legal proceedings.
Item 1A. Risk Factors
There have been no material changes from the risk factors previously disclosed in the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 and the risk factors found in Part I, Item 1A, "Risk Factors," of the Company's Annual Report on Form 10-K for the year ended December 31, 2016.2021. The risks described in the Annual Report on Form 10-K and Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 are not the only risks the Company faces. Additional risks and uncertainties not currently known or currently deemed to be immaterial also may materially and adversely affect the Company’s business, financial condition, results of operations or cash flows.
Item 1B. Unresolved Staff Comments
On August 11, 2017, we received a comment letter from the staff of the SEC with respect to our Form 10-K for the fiscal year ended December 31, 2016. We responded to the SEC's comments on September 11, 2017, and received one follow-up comment from the SEC on October 4, 2017, regarding the applicable accounting policies used for revenue recognition and product sales. On October 18, 2017, we submitted our response to the SEC regarding this comment. As of November 7, 2017 we are still waiting for a response from the SEC to clear the unresolved comment.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Company did not repurchase anyNot applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
The Exhibits listed in the Exhibit Index immediately following the Signature, are filed as a part of this Quarterly Report on Form 10-Q.
EXHIBIT INDEX
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| | | | | | | | | | |
| Exhibit No. | | Description | |
| | | |
10.13.1 | |
| |
| | | |
10.23.2 | | | |
| | | |
| 3.3 | |
| |
| | | |
10.33.4 | |
| |
| | | |
10.4**3.5 | | | |
| | | |
10.5**10.1*† | | | |
| | | |
10.6**10.2* | |
| |
| | | |
10.7**10.3* | |
| |
| | | |
10.8†**10.4* | |
| |
| | | |
31.1** | | | |
| | | |
31.2** | | | |
| | | |
32.1** | | |
| | |
32.2** | | | |
| | | |
101.INS** | | | |
| | | |
101.SCH** | | | |
| | | |
101.CAL** | | | |
| | | |
101.LAB** | | | |
| | | |
101.PRE** | | | |
| | | |
101 DEF**101.DEF* | | | |
| | | |
| 104 | | | |
# Management contract or compensatory plan or arrangement covering executive officers or directors of Vericel.
* Filed herewith.
† Certain of the exhibits and schedules to this Exhibit have been omitted in accordance with Regulation S-K Item 601(a)(5). The Registrant agrees to furnish a copy of all omitted exhibits and schedules to the SEC upon its request.
† Confidential treatment has been requested as to certain portions thereto, which portions are omitted and will be filed separately with the Securities and Exchange Commission.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: November 7, 2017May 4, 2022
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| VERICEL CORPORATION |
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| /s/ DOMINICK C. COLANGELO |
| Dominick C. Colangelo |
| President and Chief Executive Officer |
| (Principal Executive Officer) |
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| /s/ GERARD MICHELJOSEPH A. MARA |
| Gerard MichelJoseph A. Mara |
| Chief Financial Officer and Vice President, Corporate Development |
| (Principal Financial Officer) |