The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
VERICEL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited, amounts in thousands)
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
Net loss | | $ | (1,069 | ) | | $ | (5,407 | ) | | $ | (13,379 | ) | | $ | (17,573 | ) |
Other comprehensive loss: | | | | | | | | |
Net change in unrealized loss on investments | | $ | (18 | ) | | — |
| | $ | (18 | ) | | $ | — |
|
Comprehensive loss | | $ | (1,087 | ) | | $ | (5,407 | ) | | $ | (13,397 | ) | | $ | (17,573 | ) |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Net income (loss) | | $ | 3,470 |
| | $ | (1,069 | ) | | $ | (19,166 | ) | | $ | (13,379 | ) |
Other comprehensive income (loss): | | | | | | | | |
Unrealized (loss) gain on investments | | (9 | ) | | (18 | ) | | 29 |
| | (18 | ) |
Comprehensive income (loss) | | $ | 3,461 |
| | $ | (1,087 | ) | | $ | (19,137 | ) | | $ | (13,397 | ) |
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
VERICEL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(Unaudited, amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Warrants Amounts | | Accumulated Other Comprehensive Income (Loss) | | Accumulated Deficit | | Total Shareholders’ Equity |
| Shares | | Amount | | | | |
BALANCE, DECEMBER 31, 2018 | 43,578 |
| | $ | 471,180 |
| | $ | 104 |
| | $ | (39 | ) | | $ | (369,014 | ) | | $ | 102,231 |
|
Net loss | | | | | | | | | (2,844 | ) | | (2,844 | ) |
Compensation expense related to stock options and restricted stock units, net of forfeitures | | | 2,628 |
| | | | | | | | 2,628 |
|
Stock option exercises | 228 |
| | 780 |
| | | | | | | | 780 |
|
Shares issued under the Employee Stock Purchase Plan | 19 |
| | 218 |
| | | | | | | | 218 |
|
Change in unrealized gain (loss) on investments | | | | | | | 42 |
| | | | 42 |
|
BALANCE, MARCH 31, 2019 | 43,825 |
| | $ | 474,806 |
| | $ | 104 |
| | $ | 3 |
| | $ | (371,858 | ) | | $ | 103,055 |
|
Net loss | | | | | | | | | (19,792 | ) | | (19,792 | ) |
Compensation expense related to stock options and restricted stock units, net of forfeitures | | | 4,183 |
| |
|
| | | |
|
| | 4,183 |
|
Stock option exercises | 227 |
| | 850 |
| | | | | | | | 850 |
|
Shares issued under the Employee Stock Purchase Plan | 14 |
| | 211 |
| | | | | | | | 211 |
|
Change in unrealized gain (loss) on investments | | | | | | | 35 |
| |
|
| | 35 |
|
BALANCE, JUNE 30, 2019 | 44,066 |
| | $ | 480,050 |
| | $ | 104 |
| | $ | 38 |
| | $ | (391,650 | ) | | $ | 88,542 |
|
Net income | | | | | | | | | 3,470 |
| | 3,470 |
|
Compensation expense related to stock options granted, net of forfeitures | | | 3,285 |
| | | | | | | | 3,285 |
|
Stock option exercises | 416 |
| | 1,427 |
| | | | | | | | 1,427 |
|
Shares issued under the Employee Stock Purchase Plan | 18 |
| | 275 |
| | | | | | | | 275 |
|
Change in unrealized gain (loss) on investments | | | | | | | (9 | ) | | | | (9 | ) |
Exercise of warrants resulting in issuance of common stock | 20 |
| | 104 |
| | (104 | ) | — |
| | — |
| | | — |
|
BALANCE, SEPTEMBER 30, 2019 | 44,520 |
| | $ | 485,141 |
| | $ | — |
| | $ | 29 |
| | $ | (388,180 | ) | | $ | 96,990 |
|
VERICEL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(Unaudited, amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Warrants Amounts | | Accumulated Other Comprehensive Income | | Accumulated Deficit | | Total Shareholders’ Equity |
| | Shares | | Amount | | | | |
BALANCE, DECEMBER 31, 2017 | | 35,861 |
| | $ | 383,020 |
| | $ | 397 |
| | $ | — |
| | $ | (360,877 | ) | | $ | 22,540 |
|
Net loss | | | | | | | | | | (7,659 | ) | | (7,659 | ) |
Compensation expense related to stock options granted, net of forfeitures | | | | 1,348 |
| | | | | | | | 1,348 |
|
Stock option exercises | | 253 |
| | 851 |
| | | | | | | | 851 |
|
Shares issued under the Employee Stock Purchase Plan | | 28 |
| | 127 |
| | | | | | | | 127 |
|
Exercise of warrants resulting in the issuance of common stock | | 360 |
| | 1,727 |
| | | | | | | | 1,727 |
|
Net change in warrant valuation of exercised warrants | | | | 2,001 |
| | | | | | | | 2,001 |
|
BALANCE, MARCH 31, 2018 | | 36,502 |
| | $ | 389,074 |
| | $ | 397 |
| | $ | — |
| | $ | (368,536 | ) | | $ | 20,935 |
|
Net loss | | | | | | | | | | (4,651 | ) | | (4,651 | ) |
Compensation expense related to stock options granted, net of forfeitures | | | | 2,465 |
| | | | | | | | 2,465 |
|
Issuance of common stock, net of issuance costs | | 5,750 |
| | 70,090 |
| | | | | | | | 70,090 |
|
Stock option exercises | | 306 |
| | 964 |
| | | | | | | | 964 |
|
Shares issued under the Employee Stock Purchase Plan | | 31 |
| | 148 |
| | | | | | | | 148 |
|
Exercise of warrants resulting in the issuance of common stock | | 95 |
| | 333 |
| | (95 | ) | | | | | | 238 |
|
Net change in warrant valuation of exercised warrants | | | | 409 |
| | | | | | | | 409 |
|
BALANCE, JUNE 30, 2018 | | 42,684 |
| | $ | 463,483 |
| | $ | 302 |
| | $ | — |
| | $ | (373,187 | ) | | $ | 90,598 |
|
Net loss | | | | | | | | | | (1,069 | ) | | (1,069 | ) |
Compensation expense related to stock options granted, net of forfeitures | | | | 1,932 |
| | | | | | | | 1,932 |
|
Stock option exercises | | 305 |
| | 952 |
| | | | | | | | 952 |
|
Shares issued under the Employee Stock Purchase Plan | | 25 |
| | 200 |
| | | | | | | | 200 |
|
Exercise of warrants resulting in the issuance of common stock | | 156 |
| | 751 |
| | | | | | | | 751 |
|
Net change in warrant valuation of exercised warrants | | | | 1,129 |
| | | | | | | | 1,129 |
|
Change in unrealized gain (loss) on investments | | | | | | | | (18 | ) | | | | (18 | ) |
BALANCE, SEPTEMBER 30, 2018 | | 43,170 |
| | $ | 468,447 |
| | $ | 302 |
| | $ | (18 | ) | | $ | (374,256 | ) | | $ | 94,475 |
|
VERICEL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, amounts in thousands)
| | | | Nine Months Ended September 30, | | Nine Months Ended September 30, |
| | 2018 | | 2017 | | 2019 | | 2018 |
Operating activities: | | |
| | |
| | |
| | |
|
Net loss | | $ | (13,379 | ) | | (17,573 | ) | | $ | (19,166 | ) | | $ | (13,379 | ) |
Adjustments to reconcile net loss to net cash used for operating activities: | | |
| | |
| | |
| | |
|
Depreciation and amortization expense | | 1,133 |
| | 1,186 |
| | 1,174 |
| | 1,133 |
|
Stock compensation expense | | 5,739 |
| | 2,053 |
| | 10,095 |
| | 5,739 |
|
Change in fair value of warrants | | 2,524 |
| | 512 |
| | — |
| | 2,524 |
|
Inventory provision | | 303 |
| | 232 |
| |
Loss on sale of fixed assets | | 23 |
| | — |
| | — |
| | 23 |
|
Foreign currency translation loss | | 49 |
| | 20 |
| | 21 |
| | 49 |
|
Amortization of premiums and discounts on marketable securities | | | (529 | ) | | — |
|
Non-cash lease cost | | | 2,011 |
| | — |
|
Change in operating assets and liabilities: | | |
| | |
| | |
| | |
|
Inventory | | (148 | ) | | (793 | ) | | (3,265 | ) | | 155 |
|
Deferred rent | | (132 | ) | | 91 |
| |
Accounts receivable | | 2,742 |
| | 1,663 |
| | 3,496 |
| | 2,742 |
|
Prepaid and other current assets | | (758 | ) | | (202 | ) | | (425 | ) | | (758 | ) |
Accounts payable | | (1,212 | ) | | (1,068 | ) | | (1,895 | ) | | (1,212 | ) |
Accrued expenses | | 19 |
| | (9 | ) | | 30 |
| | 19 |
|
Operating lease liabilities | | | (1,804 | ) | | — |
|
Other assets and liabilities, net | | 74 |
| | (129 | ) | | (76 | ) | | (58 | ) |
Net cash used for operating activities | | (3,023 | ) | | (14,017 | ) | |
Net cash used in operating activities | | | (10,333 | ) | | (3,023 | ) |
Investing activities: | | |
| | |
| | |
| | |
|
Purchases of short term investments | | (44,480 | ) | | — |
| |
Purchases of short-term investments | | | (46,303 | ) | | (44,480 | ) |
Maturities of short-term investments | | | 73,777 |
| | — |
|
Expenditures for property, plant and equipment | | (2,101 | ) | | (792 | ) | | (2,255 | ) | | (2,101 | ) |
Net cash used in investing activities | | (46,581 | ) | | (792 | ) | |
Net cash provided by (used in) investing activities | | | 25,219 |
| | (46,581 | ) |
Financing activities: | | |
| | |
| | |
| | |
|
Net proceeds from equity offering | | 70,028 |
| | — |
| | — |
| | 70,028 |
|
Net proceeds from common stock issuance due to stock option exercises | | 3,310 |
| | 7,549 |
| | 3,762 |
| | 3,310 |
|
Proceeds from exercise of warrants | | 2,716 |
| | — |
| | — |
| | 2,716 |
|
Other | | (23 | ) | | (252 | ) | | (29 | ) | | (23 | ) |
Net cash provided by financing activities | | 76,031 |
| | 7,297 |
| | 3,733 |
| | 76,031 |
|
Net increase (decrease) in cash and cash equivalents | | 26,427 |
| | (7,512 | ) | |
Net increase in cash and cash equivalents | | | 18,619 |
| | 26,427 |
|
Cash and cash equivalents at beginning of period | | 26,862 |
| | 22,978 |
| | 18,286 |
| | 26,862 |
|
Cash and cash equivalents at end of period | | $ | 53,289 |
| | $ | 15,466 |
| | $ | 36,905 |
| | $ | 53,289 |
|
| | | | | |
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED SEPTEMBER 30, 20182019 (UNAUDITED)
Vericel Corporation, a Michigan corporation (together with its consolidated subsidiaries referred to herein as the Company, Vericel, we, us or our), 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 a portfolio of patents and 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), related to the MACI®, CarticelEpicel® and EpicelCarticel® products. The Company is a fully integrated, commercial-stage biopharmaceutical company and currently markets MACI® and Epicel® in the U.S. and holds exclusive rights to commercialize NexoBrid® in all countries of North America. The Company is a leader in advanced cell therapies for the sports medicine and severe burn care markets and a developer of patient-specific expanded cell therapies for use in the treatment of patients with severe diseases and conditions. markets.
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.adults. At the end of the second quarter of 2017, the Company removed MACI’s predecessor, Carticel® (autologous(autologous cultured chondrocytes), an earlier generation autologous chrondocyte implant (ACI) product, from the market. Carticel is 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). The Company also markets Epicel® (cultured(cultured epidermal autografts), a permanent skin replacement Humanitarian Use Device (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). In May 2019, the Company also entered into exclusive license and supply agreements with MediWound Ltd. (MediWound) to commercialize NexoBrid® in all countries 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. NexoBrid is currently in clinical development in North America, and a U.S. Biologics License Application (BLA) currently is targeted for submission to the U.S. Food and Drug Administration (FDA) in the second quarter of 2020. 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 cellularadvanced therapies for use in the treatment of specific diseases.
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 satisfaction of liabilities and commitments in the normal course of business. As of September 30, 2018,2019, the Company has an accumulated deficit of $374.3$388.2 million and had net income of $3.5 million and a net loss of $1.1$19.2 million during the quarterthree and nine months ended September 30, 2018.2019. The Company had cash and cash equivalents of $53.3$36.9 million, and short termshort-term investments of $44.5$37.8 million as of September 30, 2018.2019. The Company expects that existing cash, cash equivalents and short termshort-term investments together with its term loan and revolving line of credit agreement with Silicon Valley Bank (SVB) and MidCap Financial Services (MidCap) (the SVB-MidCap facility), will be sufficient to support the Company's current operations through at least November 2019. In connection with12 months from the SVB-MidCap facility, the Company must remain in compliance with minimum monthly net revenue covenants (determined in accordance with U.S. GAAP), measured on a trailing twelve month basis. 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. If the Company 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. Asissuance of September 30, 2018, the Company was in compliance with the minimum revenue covenant set forth in the Third Loan Modification Agreement between the Company, SVB and MidCap.these financial statements. The Company may seek additional funding through debt or equity financings. However, the Company may not be able to obtain financing on acceptable terms or at all. The terms of any financing may adversely affect the holdings or the rights of the Company's shareholders.
The condensed consolidated balance sheet as of December 31, 2018 was derived from audited financial statements included hereinbut does not include all disclosures required by accounting principles generally accepted in the United States of America (U.S. GAAP). The accompanying condensed consolidated financial statements as of September 30, 2019 and for the three and nine months ended September 30, 2019 are unaudited and have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (SEC). The preparation of condensed consolidated financial statements in conformity with generally accepted accounting principles in the United States of America (U.S. GAAP)U.S. GAAP requires management to make estimates, judgments, and assumptions that may affect the reported amounts of assets, liabilities, equity, revenues 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 results of operations for the three and nine months ended September 30, 2018, are not necessarily indicative of the results to be expected for the full year or for any other period. The September 30, 2018 condensed consolidated balance sheet data was derived from the Company’s audited consolidated financial statements, but does not include all disclosures required by U.S. GAAP.
These condensed 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, 2017,2018, as filed with the SEC on March 5, 2018February 26, 2019 (Annual Report).
Consolidated Statement of Cash Flows
The following table presents certain supplementary cash flows information for the nine months ended September 30, 20182019 and 2017:2018:
|
| | | | | | | | |
| | Nine Months Ended September 30, |
(In thousands) | | 2019 | | 2018 |
Supplementary Cash Flows information: | | | | |
Warrants exercised for common stock | | $ | 104 |
| | $ | 3,538 |
|
Interest paid (net of interest capitalized) | | 6 |
| | 1,161 |
|
Additions to equipment in process included in accounts payable | | 46 |
| | 191 |
|
Right-of-use asset and lease liability recognized | | 2,338 |
| | — |
|
|
| | | | | | | | |
| | Nine Months Ended September 30, 2018 |
(In thousands) | | 2018 | | 2017 |
Supplementary Cash Flows information: | | | | |
Warrants exercised for common stock | | $ | 3,538 |
| | $ | — |
|
Interest paid (net of interest capitalized) | | 1,161 |
| | 691 |
|
Shares converted to common from preferred stock | | — |
| | 38,389 |
|
Additions to equipment in process included in accounts payable | | 191 |
| | 486 |
|
| |
3. | Recent Accounting Pronouncements |
Revenue RecognitionAccounting for Leases
In May 2014, theThe Financial Accounting Standards Board (FASB) issued authoritative guidance requiring entities to apply a new model for recognizing revenue from contracts with customers and the reporting of principal versus agent considerations. The guidance superseded the then-applicable revenue recognition guidance and requires 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 became effective for the Company beginning January 1, 2018. See note 4 for further discussion.
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 2019.2018. The Company has evaluated its leasing arrangements under the issued guidance and determined all leases are classified as operating leases and will be recognized as assets and future payments as liabilities on the balance sheet. Based on the Company's evaluation to date,Accounting Standard Update 2016-02 became effective for the Company expects that the adoption of the new leasing standards will result in the recognition of material right-to-use assetson January 1, 2019 and liabilities in the Company's condensed consolidated balance sheet. The adoption of the new leasing standards is not expected to have a material impact to the Company's condensed consolidated statements of income.
Accounting for Non-Employee Share Based Payment Arrangements
The FASB issued guidance to expand the scope of stock compensation guidance to include stock compensation granted to nonemployees. Previously, stock compensation granted to nonemployees was subject to vesting date, as opposed to grant date, fair value principles that required companies to re-measure fair value at each reporting period until settlement for equity classified awards. The guidance for non-employee stock compensation accounting for equity-classified awards was updated, and these awards are now subject to fixed grant date fair value principles which eliminates the variable mark-to-market accounting. The non-employee stock awards granted by the Company have a service condition but no performance condition, each of which is measuredadopted using the Black-Scholes valuation model. The guidance was adopted early and applied as of July 1, 2018 and reflected in the Company's financial statements. The impact upon adoption was not material and no cumulative adjustment was recorded.modified retrospective method. See note 7 for further discussion.
Measuring Credit Losses on Financial Instruments
The FASB issued updated guidance on measuring credit losses on financial instruments. The guidance removes the probable loss thresholds that companies apply to measure credit losses on financial instruments measured at amortized cost, such as loans, receivables, and held-to-maturity debt securities.securities and available-for-sale debt securities with unrealized losses. Prior to the updated guidance, credit losses are recognized when it is probable that the loss has been incurred. The revised guidance removes all recognition thresholds and requires companiesCompanies are required to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that
a company expected to collect over the instrument’s contractual life. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported amount. The guidance is effective for annual reporting periods beginning after December 15, 2019. The Company is currently in the process of evaluating the impact to its consolidated financial statements.
4. Revenue
Revenue Recognition and Net Product Sales
The new revenue standard became effective for the Company on January 1, 2018, and was adopted using the modified retrospective method. Based on the Company's evaluation of all of its product revenue contracts under the new revenue standard there was no cumulative adjustment recorded in the financial statements upon adoption of Accounting Standards Codification 606, Revenue Recognition, (ASC 606) on January 1, 2018. For the three and nine months ended September 30, 2018, the timing and amount of revenue recognized under ASC 606 is not materially different from that under the previous guidance.
The Company recognizes product revenue from sales to a customer (distributor or hospital)of MACI kits, MACI implants and Epicel grafts following the five step model in Accounting Standards Codification 606 Revenue Recognition (ASC 606: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) the Company satisfies the performance obligation. Under this revenue standard, the Company recognizes revenue when its customer obtains control of the promised goods, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods. There are no contractual rights of returns, refunds or similar obligations related to MACI, kits, or Epicel as of September 30, 2018; however, in certain limited cases the Company will accept a product return if a surgery is canceled. Revenue is not recognized in these cases, and historically such amounts have been insignificant.
Currently, for MACI, MACI kits and Epicel there are no variable pricing arrangements related to warranties or rebates offered to customers. The majority of orders are due within 60 days of delivery. Shipping and handling fees are included as a component of revenue. The Company recognizes any commission fees as an expense when incurred due to the short-term nature (less than 1 year) of the time from order of a product to delivery. These fees are included in selling, general, and administrative expenses. There are no returns, refunds or similar obligations related to MACI, MACI kits, or Epicel as of September 30, 2018.606).
MACI Kits and Implants
MACI (and previously Carticel) kits are sold directly to hospitals based on contracted rates in the approved contract or sales order. The Company recognizes MACI (or Carticel) kit revenue upon delivery of the biopsy kit at which time the customer (the doctor)facility) is in control of the kit. The kit provides the doctor the ability to biopsy a sampling of cells to provide to the Company that can be used later to manufacture the implant. The ordering of the kit does not obligate the Company to manufacture an implant nor does the receipt of the cell tissue. The customer’s order of an implant is separate from the process of ordering the kit. Therefore, the sale of the kit and any subsequent sale of an implant are distinct contracts and are accounted for separately.
MACI Implants
From July 1, 2017 until June 15, 2018 the Company sold MACI primarily to distributors and directly to hospitals or patients at contracted rates. Beginning on June 16, 2018, the Company contracted with a specialty pharmacy, Orsini Pharmaceutical Services, Inc. (Orsini) to distribute its MACI product in arrangements whereby the Company retains the credit and collection risk from the end customer. Since July 26, 2018, the Company has also contracted with AllCare Plus Pharmacy, Inc. (AllCare), a specialty pharmacy, in arrangements whereby the Company retains the credit and collection risk from the end customer. The
Company pays both specialty pharmacies a fee for each patient to whom MACI is dispensed. Both Orsini and AllCare perform collection activities to receive payment from customers. The Company recognizes product revenues fromhas engaged a third-party services provider to provide the patient support program to manage patient cases and to ensure complete and correct billing information is provided to the insurers and hospitals.
In addition, the Company also sells MACI directly to DMS Pharmaceutical (DMS) for all military implants. The sales of MACI (and previously Carticel) implants upon deliverydirectly to DMS are sold at which time the customer is in control of the implant and the claim is billable. a contracted rate.
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. As noted above, the Company's netThe Company recognizes product revenues 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 based onrecorded at a contracted ratesprice, and other than customary prompt pay discounts, 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 estimated based on expected paymentsgovernment payer, subject to a patient co-pay amount. Reimbursements from the insurance provider, hospital or patient. The estimates of such payment amountsthird-party insurers and government payers vary by customerpatient and payer and are based on either contracted rates, publicly available rates, government fee schedules or past payer precedents. Net product revenues recognized consist of amounts billed net of contractual allowances for differences between amounts billed and the estimated consideration the Company expects to receive from the transaction. The Company estimates the amount of consideration it expects to receive for these transactions using the portfolio approach. These estimates include the impact of 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 records a reduction to revenue at the time of sale for its estimate of the amount of consideration that will not be collected. The allowance for uncollectible consideration was $4.2 million as of September 30, 2019 and $2.0 million at December 31, 2018.
Changes in estimates of the transaction price are recorded through revenue in the period in which such change occurs. Net product revenues from sales to distributors may include a prompt pay discount.
On July 25, 2018 and August 10, 2018, the Company entered into amendments to its distribution agreement with Orsini Pharmaceutical Services, Inc. (Orsini). The amendments modified certain payment terms for surgeries after June 15, 2018. In addition, under the revised agreement, the parties agreed to eliminate Orsini's right to serve as the Company's exclusive distributor for MACI as the Company is moving to a limited expanded network of distributors. Orsini remains the exclusive pharmacy supplying MACI for only an enumerated list of payers. The amended agreement includes a provision whereby the Company retains the credit and collection risk from the end customer on implants after June 15, 2018. Orsini performs the collection activities. The net product revenues for these cases are based on expected payments from the insurance provider, hospital or patient. The estimates of such payment amounts vary by customer and payer and are based on either contracted rates, publicly available rates or past payer precedents. Changes in estimates are recorded through revenue in the period such change occurs.
Pursuant to the revised arrangement, the Company will pay Orsini a dispensing fee on a per implant basis. In addition, in consideration of Orsini’s future administrative services related to prior period sales resulted in a $0.7 million and $0.4 million increase to revenue for the amendment, the Company has agreed to pay Orsini an incremental fee of approximately $1.3 million which will be paid as a service fee based on a fixed number of MACI cases subsequent to the date of amendment with any unpaid amount due to Orsini at Junethree and nine months ended September 30, 2019, or upon terminationrespectively and an increase to revenue of $0.1 million and a decrease to revenue of $0.3 million for the agreement by the Company, if earlier.
On July 26,three and nine months ended September 30, 2018, the Company entered into a Dispensing Agreement (Dispensing Agreement) with AllCare Plus Pharmacy, Inc. (AllCare). Pursuant to the Dispensing Agreement, the Company appoints AllCare as a non-exclusive specialty pharmacy provider of MACI. The Company will pay to AllCare a fee for each patient to whom MACI is dispensed. Under the Dispensing Agreement, the Company retains the credit and collection risk from the end customer on all implants. The net product revenues for these cases are based on contracted rates stated in the approved contract or other documentation with the insurance provider, hospital or patient.respectively.
Epicel
The Company sells Epicel directly to hospitals based on contracted rates stated in the approved contract or purchase order. Similar to MACI, there is no obligation to manufacture skin 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 product revenues from sales of Epicel upon delivery to the hospital at which time the customer is in control of the skin grafts and the claim is billable to the hospital.
Revenue by Product and Customer
The following table and description below showsreflect the products from which the Company generated its revenue:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
Revenue by product (in thousands) | | 2018 | | 2017 | | 2018 | | 2017 |
MACI and Carticel implants and kits | | | | | | | | |
Implants - based on contracted rate | | $ | 243 |
| | $ | 8,046 |
| | $ | 18,354 |
| | $ | 11,145 |
|
Implants - subject to third party reimbursement | | 15,593 |
| | 1,079 |
| | 23,156 |
| | 15,172 |
|
Biopsy kits - direct bill | | 488 |
| | 412 |
| | 1,392 |
| | 1,274 |
|
Change in estimates related to prior periods | | 125 |
| | 372 |
| | (273 | ) | | 230 |
|
Epicel | | | | | | | | |
Direct bill (hospital) | | 6,035 |
| | 4,351 |
| | 16,893 |
| | 12,753 |
|
Total revenue | | $ | 22,484 |
| | $ | 14,260 |
| | $ | 59,522 |
| | $ | 40,574 |
|
Revenue Recognition for License Grants, Milestone and Royalty Payments
The Company recognizes other revenue from contracts with customers related to license grants, milestone related payments and royalty based payments by following the five step model described above.
Upon adoption of ASC 606, the Company reassessed the accounting for its license agreement with Innovative Cellular Therapeutics CO., LTD. (ICT) discussed in note 15. The Company identified its performance obligations under the agreement, which include the license, a training obligation, and supply of certain raw materials for technology transfer. Based on its assessment of this agreement under the new revenue standard the Company determined that the license is distinct and provides ICT with the right to use the Company's technology and accordingly revenue should be recognized at the point in time at which the Company delivered the license (December 2017). This evaluation was based on 1) the rights provided to ICT under the license, including the ability to sublicense, 2) the nature of the technology (primarily rights to technology already commercially approved in the US) and 3) ICT's ability to benefit from the license on its own including using its own existing resources as a manufacturer of autologous cell therapies. The transaction price was determined to be $1.2 million. No milestones or royalties are included in the transaction price as the criteria for including these variable payments have not yet been met. The Company assessed the allocation of arrangement consideration noting no differences in allocation from that determined under ASC 605. The license was delivered in December 2017, and revenue of $1.2 million was recorded in 2017 under the then applicable revenue accounting standard ASC 605. Based upon the Company's evaluation under ASC 606 there was no change in amount or timing of revenue recognized for the agreement, and therefore no cumulative change adjustment was recorded upon adoption of the new revenue standard on January 1, 2018. The Company’s remaining performance obligations under the ICT license agreement consist of a training obligation related to technology transfer, and supply of certain raw materials for technology transfer.
The ICT license agreement provides for future milestone payments due to the Company upon the achievement of certain developmental and commercial events. The Company evaluates these milestones under the new revenue recognition standard at contract inception and at each reporting period date. Based on the Company’s evaluations to date, the Company has not included any of the future milestones in its determination of the transaction price because it is not yet probable that a significant reversal of revenue would not occur if the milestones were to be recognized. This evaluation was based on 1) the pace and eventual achievement of the milestones are largely dependent on ICT’s performance of its contractual obligations and the Company has
no prior experience to determine the likelihood of ICT performing those obligations, and 2) the transfer of the funds for each of the milestone payments by ICT to the Company, if achieved, is subject to approval by the State Administration of Foreign Exchange of the People's Republic of China. The Company does not anticipate receiving any milestone payments in 2018 or in the near-term. Furthermore, there can be no assurance that the Company will receive any such milestone or receive any such transfer of funds from ICT ever.
The ICT license agreement contains future sales-based royalties to the Company in the low-to-mid double digits. These royalties meet the exception for sales-based or usage-based royalties because they predominantly relate to the license and will be recognized when and if the subsequent sales occur. However, there can be no assurance that the Company will receive any such royalties or receive any such transfer of funds from ICT ever. |
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
Net revenue by product (in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
MACI implants and kits | | | | | | | | |
Implants based on contracted rates sold to or through a specialty pharmacy (a) | | $ | 11,779 |
| | $ | 11,102 |
| | $ | 34,555 |
| | $ | 26,257 |
|
Implants subject to third-party reimbursement sold through a specialty pharmacy (b) | | 4,030 |
| | 1,612 |
| | 10,584 |
| | 5,468 |
|
Implants sold direct based on contracted rates (c) | | 3,039 |
| | 2,632 |
| | 9,715 |
| | 8,715 |
|
Implants sold direct subject to third-party reimbursement (d) | | 573 |
| | 490 |
| | 1,176 |
| | 1,070 |
|
Biopsy kits - direct bill | | 533 |
| | 488 |
| | 1,632 |
| | 1,392 |
|
Change in estimates related to prior periods | | 656 |
| | 125 |
| | 353 |
| | (273 | ) |
Epicel | | | | | | | | |
Direct bill (hospital) | | 9,889 |
| | 6,035 |
| | 20,445 |
| | 16,893 |
|
Total revenue | | $ | 30,499 |
| | $ | 22,484 |
| | $ | 78,460 |
| | $ | 59,522 |
|
| | | | | | | | |
(a) Represents implants sold through Orsini or AllCare in which such specialty pharmacy has entered into 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 contract. Also represents sales directly to DMS based on a contracted rate. Prior to June 15, 2018, the sales to Orsini represented here were based on a fixed transfer price under the distribution model. |
| | | | | | | | |
(b) Represents implants sold through Orsini or AllCare in which 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. |
| | | | | | | | |
(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. |
| | | | | | | | |
(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. |
Concentration of Credit Risk
From July 2016 through
Prior to June 2017,16, 2018 the Company utilizedcompany sold MACI primarily to its distributor Orsini at a direct sales model and contracted with Dohmen Life Science Services, LLC (DLSS) to provide administrative services associated with case management and reimbursement support and to provide billing and collection services for MACI. The Company also utilized Vital Care, Inc. (Vital Care) to provide similar billing and collection services for a subset of insurance payers and patients. In the second quarter of 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 Pharmaceutical Services, Inc. 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 and credit risk became more concentrated from June 30, 2017 through June 15, 2018 due to the shift from DLSS to Orsini.fixed transfer price. Beginning June 16, 2018, the concentration of risk decreased because the Company retainsstarted retaining the credit and collection risk from the end customer on implants after June 15, 2018.resulting in a decrease in risk concentration. The Company sells Epicel directly to hospitals and not through a distributor. The Company's receivables are less concentrated than those for MACI.
The Company's total revenue and accounts receivable balances were comprised of the following concentrations from its largest customerscustomer of Carticel, MACI and Epicel based on customers whose revenue or accounts receivable concentration is greater than 10% in any of the periods disclosed below and are as follows:
|
| | | | | | | | | | | | | | | | | |
| Revenue Concentration |
| Accounts Receivable Concentration |
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| September 30, |
| December 31, |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
MACI | — | % | | — | % | | — | % | | 24 | % | | — | % |
| 2 | % |
Epicel | 10 | % | | 5 | % | | 9 | % | | 9 | % | | 6 | % |
| 4 | % |
|
| | | | | | | | | | | | | | | |
| Revenue Concentration |
| Accounts Receivable Concentration |
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| September 30, |
| December 31, |
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| 2018 |
| 2017 |
MACI and Carticel1 | <10% |
| 55 | % |
| 24 | % |
| 25 | % |
| <10% |
| 46 | % |
Epicel | <10% |
| 10 | % |
| <10% |
|
| 13 | % |
| <10% |
| <10% |
|
1 Carticel was removed from the market at the end of the second quarter of 2017.
| |
5. | Selected Balance Sheet Components |
Inventory as of September 30, 20182019 and December 31, 2017:2018:
|
| | | | | | | |
(In thousands) | September 30, 2019 | | December 31, 2018 |
Raw materials | $ | 5,730 |
| | $ | 2,872 |
|
Work-in-process | 976 |
| | 638 |
|
Finished goods | 117 |
| | 48 |
|
Inventory | $ | 6,823 |
| | $ | 3,558 |
|
|
| | | | | | | |
(In thousands) | September 30, 2018 | | December 31, 2017 |
Raw materials | $ | 3,130 |
| | $ | 3,532 |
|
Work-in-process | 456 |
| | 226 |
|
Finished goods | 52 |
| | 35 |
|
Inventory | $ | 3,638 |
| | $ | 3,793 |
|
Property and equipment, net as of September 30, 20182019 and December 31, 2017:2018:
|
| | | | | | | |
(In thousands) | September 30, 2019 | | December 31, 2018 |
Machinery and equipment | $ | 2,577 |
| | $ | 1,536 |
|
Furniture, fixtures and office equipment | 775 |
| | 775 |
|
Computer equipment and software | 6,007 |
| | 3,712 |
|
Leasehold improvements | 4,631 |
| | 4,587 |
|
Construction in process | 1,716 |
| | 2,801 |
|
Financing right-of-use lease | 157 |
| | — |
|
Total property and equipment, gross | 15,863 |
| | 13,411 |
|
Less: Accumulated depreciation | (8,673 | ) | | (7,505 | ) |
| $ | 7,190 |
| | $ | 5,906 |
|
|
| | | | | | | |
(In thousands) | September 30, 2018 | | December 31, 2017 |
Machinery and equipment | $ | 1,424 |
| | $ | 1,249 |
|
Furniture, fixtures and office equipment | 757 |
| | 872 |
|
Computer equipment and software | 3,695 |
| | 3,536 |
|
Leasehold improvements | 4,459 |
| | 4,213 |
|
Construction in process | 2,084 |
| | 822 |
|
Total property and equipment, gross | 12,419 |
| | 10,692 |
|
Less: Accumulated depreciation | (7,212 | ) | | (6,621 | ) |
| $ | 5,207 |
| | $ | 4,071 |
|
Depreciation expense for the three and nine months ended September 30, 20182019 was $0.4 million and $1.2 million and $0.3 million and $1.1 million respectively, and $0.4 million and $1.2 million, for the same periodsperiod in 2017.2018.
Accrued expenses as of September 30, 20182019 and December 31, 2017:2018:
|
| | | | | | | |
(In thousands) | September 30, 2019 | | December 31, 2018 |
Bonus related compensation | $ | 3,426 |
| | $ | 5,161 |
|
Employee related accruals | 2,546 |
| | 1,559 |
|
Other accrued expenses | 988 |
| | 210 |
|
| $ | 6,960 |
| | $ | 6,930 |
|
|
| | | | | | | |
(In thousands) | September 30, 2018 | | December 31, 2017 |
Bonus related compensation | $ | 2,180 |
| | $ | 2,693 |
|
Employee related accruals | 2,955 |
| | 2,389 |
|
Other accrued expenses | 457 |
| | 491 |
|
| $ | 5,592 |
| | $ | 5,573 |
|
| |
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 and December 2017 the Company issued warrants in connection with the amended debt agreement discussed in note 7 (collectively the Debt Warrants). The warrants issued in August 2013 (August 2013 Warrants) expired in August 2018, and included anti-dilution price protection provisions that required cash settlement of the warrants and accordingly required the warrants to be recorded as liabilities of the Company at the estimated fair value at the balance sheet date, 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 following table describes the outstanding warrants as of September 30, 2018:
|
| | | | |
| | September 2016 Warrants | | December 2017 Warrants |
Exercise price | | $2.25 | | $4.27 |
Expiration date | | September 9, 2022 | | December 6, 2023 |
Total shares issuable on exercise | | 58,537 | | 53,902 |
During the nine months ended September 30, 2018, the Company issued 565,895 and 45,625shares of common stock upon the exercise of August 2013 and September 2016 Warrants with an exercise price of $4.80 and $2.25 per share, respectively for proceeds of $2.7 million. As of September 30, 2018, the unexercised August 2013 warrants expired and no August 2013 warrants are outstanding.
offerings. The fair value of the warrants described in the table aboveas of December 31, 2018 were initially 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 basedstock-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 remainremaining at zero. 0.
During the nine months ended September 30, 2019, the Company issued 19,808 shares of common stock upon the exercise of warrants with an exercise price of $4.27 per share. There are no outstanding warrants as of September 30, 2019.
The Company leases facilities in Ann Arbor, Michigan and Cambridge, Massachusetts. The Cambridge facility includes clean rooms, laboratories for MACI and Epicel manufacturing and office space. The Company also leases offsite warehouse space, vehicles and computer equipment.
The Company adopted the new leasing standards using the modified retrospective transition approach, as of January 1, 2019, with no restatement of prior periods. As a result of adoption, no cumulative adjustment to retained earnings occurred. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward prior conclusions related to whether any expired or existing contracts are or contain leases, the lease classification for any expired or existing leases and initial direct costs for existing leases. Certain of the Company’s lease agreements include lease payments that are adjusted periodically for an index or rate. The leases are initially measured using the projected payments adjusted for the index or rate in effect at the commencement date. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. Upon adoption all operating lease commitments with a lease term greater than 12 months that were previously assessed under previous lease guidance, were recognized as right to use assets and liabilities, on a discounted basis on the balance sheet. Leases with an initial term of 12 months or less are not recorded on the balance sheet and for the nine months ended September 30, 2019, lease expense of less than $0.1 million was recorded related to short-term leases for both the three and nine months ended September 30, 2019.
Adoption of ASU 2016-02 resulted in the recording of additional right-of-use assets and lease liabilities of approximately $25.6 million and $27.8 million, respectively, as of January 1, 2019. There was an immaterial impact on the Company's consolidated net earnings and cash flows upon adoption. The contribution toward the cost of tenant improvements is recorded as a reduction of the operating lease assets and reclassed from deferred rent to lease operating assets. For the three and nine months ended September 30, 2019, the Company recognized $1.4 million and $4.0 million of operating lease expense and less than $0.1 million of financing lease expense, respectively. For the three and nine months ending September 30, 2018 (as reported under the prior leasing guidance) the Company recognized $1.3 million and $3.9 million of operating lease expense and less than $0.1 million of financing lease expense, respectively. The Company's leases contain non-lease components and activities that do not transfer a good or service to the Company. The Company elected not to combine lease and non-lease components and therefore non-lease costs were not included in the net lease assets or lease liabilities.
Total leased assets and liabilities as reassessed under the updated guidance and classified on the balance sheet, as of September 30, 2019 are as follows:
|
| | | | | | |
(In thousands) | | Classification | | September 30, 2019 |
Assets | | | | |
Operating | | Right-of-use assets | | $ | 25,619 |
|
Finance | | Property and equipment, net | | 157 |
|
| | | | $ | 25,776 |
|
Liabilities | | | | |
Current | | | | |
Operating | | Current portion of operating lease liabilities | | $ | 2,836 |
|
Finance | | Other liabilities | | 35 |
|
| | | | $ | 2,871 |
|
Non-current | | | | |
Operating | | Operating lease liabilities | | $ | 25,311 |
|
Finance | | Other long-term liabilities | | 114 |
|
| | | | $ | 25,425 |
|
Cash paid for amounts included in the measurement of the Company's operating lease liabilities was $3.6 million for the nine months ended September 30, 2019.
Maturity of lease liabilities as of September 30, 2019 are as follows:
|
| | | | | | | | | | | | | |
(In thousands) | | Operating Leases | | Finance Leases | | Total |
2019 |
| | $ | 1,324 |
| | $ | — |
| | $ | 1,324 |
|
2020 |
| | 5,336 |
| | 41 |
| | 5,377 |
|
2021 |
| | 5,255 |
| | 41 |
| | 5,296 |
|
2022 |
| | 5,309 |
| | 41 |
| | 5,350 |
|
2023 |
| | 5,292 |
| | 41 |
| | 5,333 |
|
2024 |
| | 5,302 |
| | — |
| | 5,302 |
|
Thereafter |
| | 11,269 |
| | — |
| | 11,269 |
|
Total lease payments |
| | 39,087 |
| | 164 |
| | 39,251 |
|
Less: Interest |
| | (10,940 | ) | | (15 | ) | | (10,955 | ) |
Present value of lease liabilities |
| | $ | 28,147 |
| | $ | 149 |
| | $ | 28,296 |
|
An explicit rate is not provided for some of the Company's leases, therefore the Company uses a mix of incremental borrowing rate based on the information available at commencement date, as well as implicit and explicit rates in determining the present value of lease payments.
The Company has options to renew lease terms for facilities and other assets. The exercise of lease renewal options is generally at the Company's sole discretion. The Company evaluates renewal and termination options at the lease commencement date to determine if it is reasonably certain to exercise the option on the basis of economic factors. For certain leases, the Company's exercise of the renewal option was determined to be probable and the renewal period was accordingly included in the lease term and related calculations. Lease terms and discount rates as of September 30, 2019 are as follows:
|
| | | | |
| | September 30, 2019 |
Weighted average remaining lease term (years) | | |
Operating leases | | 7.07 |
|
7.Finance leases | Debt | 3.75 |
|
Weighted average discount rate | | |
Operating leases | | 9.46 | % |
Finance leases | | 5.00 | % |
On December 6, 2017, the Company replaced its existing term loan
Future minimum payments related to operating and revolving line of credit agreement with the SVB-MidCap facility which provides access to up to $25.0 million. The updated debt financing consists of a $15.0 million term loan which was drawn at the closing and up to $10.0 million of a revolving line of credit. The term loan is interest only (indexed to Wall Street Journal (WSJ) Prime plus 4.25%) until December 1, 2018 followed by 36 equal monthly payments of principal plus interest maturing December 6, 2021. Under the terms of the agreement, the revolving line of credit is limited to a borrowing base
calculated using eligible accounts receivable and maturing December 6, 2021 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 a monthly minimum net revenue covenant (determined in accordance with GAAP), measured on a trailing twelve month basis. SVB 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. 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, 2018, there was an outstanding balance of $15.0 millioncapital leases, as reflected under the term loan and $2.5 million underprior guidance, for the revolving line of credit (net of total deferred costs of $0.2 million). The weighted average interest rate on the outstanding term and revolving credit loans as of September 30, 2018 was 9.07% in addition to a final payment of 3.6% of the term loan due upon maturity. The available capacity under the revolving line of credit as of September 30, 2018 was $7.5 million. The Company was, and continues to be, in compliance with its financial and non-financial debt covenants.
Annual principal payments on debt at September 30,fiscal year ended December 31, 2018, are as follows:
follows with no changes from prior disclosure:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Total | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | More than 5 years |
Operating leases | | $ | 15,386 |
| | $ | 4,879 |
| | $ | 4,719 |
| | $ | 4,754 |
| | $ | 966 |
| | $ | 68 |
| | $ | — |
|
Capital leases | | 205 |
| | 41 |
| | 41 |
| | 41 |
| | 41 |
| | 41 |
| | — |
|
Total | | $ | 15,591 |
| | $ | 4,920 |
| | $ | 4,760 |
| | $ | 4,795 |
| | $ | 1,007 |
| | $ | 109 |
| | $ | — |
|
|
| | | |
(In thousands) | |
Years Ending December 31, | Amount |
|
2018 | $ | 417 |
|
2019 | 5,000 |
|
2020 | 5,000 |
|
2021 | 7,083 |
|
2022 | — |
|
Thereafter | — |
|
| $ | 17,500 |
|
| |
8. | Stock-based Compensation |
Stock Option, Restricted Stock Units and Equity Incentive Plans
The Company has historically had various stock incentive plans and agreements that provide for the issuance of nonqualified and incentive stock options as well as other equity awards. Such awards may be granted by the Company’s Board of Directors to certain of the Company’s employees, directors and consultants.
Options and restricted stock units granted to employees and non-employees under these plans expire no later than ten years from the date of grant and generally become exercisable over a four year period, under a graded-vesting methodology for stock options and annually on the anniversary grant date for restricted stock units, following the date of grant. The Company generally issues new shares upon the exercise of stock options.
options or vesting of restricted stock units. For certain non-employee consultants, stock option awards continue to vest post-termination. The guidance for non-employee stock compensation accounting for equity-classified awards was updated, and these awards are now subject to fixed grant date fair value principles which eliminates the variable mark-to-market accounting. The options were valued as of the adoption date of July 1, 2018.
The 20172019 Omnibus Incentive Plan (2017(2019 Plan) was approved by the Company's shareholders on May 3, 2017 at the annual meeting of shareholders. The 2017 Plan1, 2019 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 20172019 Plan shall not be less than the fair market value of the Company’s common stock on the date of grant. The 20172019 Plan replaced the 1992 Stock Option Plan, the 2001 Stock Option Plan, the Amended and Restated 2004 Equity Incentive Plan, and the 2009 Second Amended and Restated Omnibus Incentive Plan and the 2017 Omnibus Incentive Plan (Prior Plans), and no0 new awards have been granted under the Prior Plans.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 20172019 Plan.
As of September 30, 2018,2019, there were 2,917,6143,605,081 shares available for future grant under the 20172019 Plan.
Employee Stock Purchase Plan
Employees are able to purchase stock under the Vericel Corporation Employee Stock Purchase Plan (ESPP). The ESPP allows for the issuance of an aggregate of 1,000,000 shares of common stock of which 507,613576,723 have been grantedissued since the inception of the plan in 2015. Participation in this plan is available to substantially all employees. The ESPP is a compensatory plan accounted for under the expense recognition provisions of the share-based payment accounting standards. 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 1, 2018,2019, employees purchased 21,93717,746 shares resulting in proceeds from the sale of common stock of $0.2 million under the ESPP.
Service-Based Stock Options
During the three and nine months ended September 30, 2018,2019, the Company granted 147,000111,600 and 1,629,7601,750,110 service-based options to purchase common stock, respectively.stock. The options have an exercise price equal to the fair market value per share of common stock on the grant date, generally vest over four years (other than non-employee director options which vest over one year), and have a term of 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 Option2017 Omnibus Incentive Plan and 2019 Plan for the three and nine month periods ended September 30, 20182019 was $13.28 and $12.77, respectively and $10.90 and $9.62, respectively, and $2.53 and $1.99, for the same periods in 2017.2018.
Restricted Stock Units
During the nine months ended September 30, 2019, the Company granted 186,922 service-based restricted stock units. The restricted stock units vest annually over four years in equal installments commencing on the first anniversary of the grant date (other than non-employee director options which vest over one year from the grant date). The Company issues new shares upon the vesting of restricted stock units. Restricted stock awards are recorded at fair value at the date of grant, which is based on the closing share price on the grant date. Compensation expense is recorded for restricted stock units that are expected to vest based on their fair value at grant date and is amortized over the expected vesting period. The weighted average grant-date fair value of restricted stock units awarded for the nine months ended September 30, 2019 was $17.71. The total grant-date fair value of restricted stock units granted in the nine months ended September 30, 2019 was $3.3 million. NaN restricted stock units were granted in 2018.
Stock Compensation Expense
Non-cash stock-based compensation expense (employee stock purchase plan, and service-based stock options)options and restricted stock units) 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) | | 2019 | | 2018 | | 2019 | | 2018 |
Cost of goods sold | | $ | 543 |
| | $ | 284 |
| | $ | 1,519 |
| | $ | 820 |
|
Research and development | | 583 |
| | 365 |
| | 1,993 |
| | 1,282 |
|
Selling, general and administrative | | 2,159 |
| | 1,283 |
| | 6,583 |
| | 3,637 |
|
Total non-cash stock-based compensation expense | | $ | 3,285 |
| | $ | 1,932 |
| | $ | 10,095 |
| | $ | 5,739 |
|
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In thousands) | | 2018 | | 2017 | | 2018 | | 2017 |
Cost of goods sold | | $ | 284 |
| | $ | 119 |
| | $ | 820 |
| | $ | 316 |
|
Research and development | | 365 |
| | 177 |
| | 1,282 |
| | 391 |
|
Selling, general and administrative | | 1,283 |
| | 459 |
| | 3,637 |
| | 1,346 |
|
Total non-cash stock-based compensation expense | | $ | 1,932 |
| | $ | 755 |
| | $ | 5,739 |
| | $ | 2,053 |
|
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 | | 2018 | | 2017 |
Expected dividend rate | | — | % | | — | % |
Expected stock price volatility | | 82.3 – 88.3% |
| | 80.1 – 88.2% |
|
Risk-free interest rate | | 2.4 – 2.9% |
| | 1.8 – 2.3% |
|
Expected life (years) | | 5.3 – 6.3 |
| | 5.5 – 6.3 |
|
|
| | | | | | |
| | Nine Months Ended September 30, |
Service-Based Stock Options | | 2019 | | 2018 |
Expected dividend rate | | — | % | | — | % |
Expected stock price volatility | | 79.5-85.5% |
| | 82.3-88.3% |
|
Risk-free interest rate | | 1.4-2.7% |
| | 2.4-2.9% |
|
Expected life (years) | | 5.3-6.3 |
| | 5.3-6.3 |
|
| |
9. | Cash Equivalents and Investments |
Cash Equivalents
Cash equivalents consist of short-term, highly liquid investments with original maturities of three months or less from the date of purchase and consist primarily of demand deposits, money market funds, overnight repurchase agreements and short duration agency bonds and commercial paper.
Investments
Short-term investments consist ofMarketable debt securities classified as available-for-sale and have maturities greater than 90 days, but less than one year as of the balance sheet date. All investments are carried at fair value based upon quoted market prices. Unrealized gains and losses on available-for-sale securities are excluded from earnings and are reported as a component of accumulated other
comprehensive loss. The cost of available-for-sale securities sold is based on the specific-identification method. Realized gains and losses are included in earnings, and are derived for specific-identification method for determining the costs of investments sold. If a decline in the fair value is considered other-than-temporary, based on available evidence, the unrealized loss is reclassified from accumulated other comprehensive income (loss) to the statements of operations. Realized gains and losses are determined on the specific identification method and are included in investment and other income, net.
During the quarter ended September 30, 2018, the Company purchased marketable debt securities, which are classified as available-for-sale and carried at fair value in the accompanying consolidated balance sheets on a tradesettlement date basis. The following tables summarize the gross unrealized gains and losses of the Company’s marketable securities as of September 30, 2019 and December 31, 2018:
| | | | September 30, 2018 | | September 30, 2019 |
| | | | Gross Unrealized | | | | | | Gross Unrealized | | |
(In thousands) | | Amortized Cost | | Gains | | Losses | | Fair Value | | Amortized Cost | | Gains | | Losses | | Fair Value |
Money market funds | | $ | 18,684 |
| | $ | — |
| | $ | — |
| | $ | 18,684 |
| | $ | 19,431 |
| | $ | — |
| | $ | — |
| | $ | 19,431 |
|
Repurchase agreements | | 10,002 |
| | — |
| | — |
| | 10,002 |
| |
Commercial paper | | 21,832 |
| | — |
| | — |
| | 21,832 |
| | 13,018 |
| | — |
| | — |
| | 13,018 |
|
Corporate notes | | 13,058 |
| | — |
| | (11 | ) | | 13,047 |
| | 13,549 |
| | 19 |
| | — |
| | 13,568 |
|
U.S. government securities | | 3,174 |
| | — |
| | (1 | ) | | 3,173 |
| | 6,986 |
| | 6 |
| | — |
| | 6,992 |
|
U.S. asset-backed securities | | 8,430 |
| | — |
| | (6 | ) | | 8,424 |
| | 4,178 |
| | 4 |
| | — |
| | 4,182 |
|
| | $ | 75,180 |
| | $ | — |
| | $ | (18 | ) | | $ | 75,162 |
| | $ | 57,162 |
| | $ | 29 |
| | $ | — |
| | $ | 57,191 |
|
Classified as: | | | | | | | | | | | | | | | | |
Cash equivalents | | | | | | | | $ | 30,700 |
| | | | | | | | $ | 19,431 |
|
Short-term investments | | | | | | | | 44,462 |
| | | | | | | | 37,760 |
|
| | | | | | | $ | 75,162 |
| | | | | | | $ | 57,191 |
|
As of September 30, |
| | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | | | Gross Unrealized | | |
(In thousands) | | Amortized Cost | | Gains | | Losses | | Fair Value |
Money market funds | | $ | 5,838 |
| | $ | — |
| | $ | — |
| | $ | 5,838 |
|
Repurchase agreements | | 5,000 |
| | — |
| | — |
| | 5,000 |
|
Commercial paper | | 30,710 |
| | — |
| | — |
| | 30,710 |
|
Corporate notes | | 13,168 |
| | — |
| | (24 | ) | | 13,144 |
|
U.S. government securities | | 10,167 |
| | — |
| | (1 | ) | | 10,166 |
|
U.S. asset-backed securities | | 10,632 |
| | — |
| | (14 | ) | | 10,618 |
|
| | $ | 75,515 |
| | $ | — |
| | $ | (39 | ) | | $ | 75,476 |
|
Classified as: | | | | | | | | |
Cash equivalents | | | | | | | | $ | 10,838 |
|
Short-term investments | | | | | | | | 64,638 |
|
| | | | | | $ | 75,476 |
|
At December 31, 2018, the Company invested $10.0$5.0 million in overnight repurchase agreement securities classified as cash equivalents on the balance sheet. As of September 30, 2019, no amounts were invested in overnight repurchase agreements.
The Company's portfolio of marketable securities had an average AA- credit rating and thereThere were no marketable securities that the Company considers to be other-than-temporarily impaired as of September 30, 2018.2019. The Company's investment strategy is to buy short-duration marketable securities with a high credit rating. As of September 30, 2018,2019, all marketable securities held by the Company had remaining contractual maturities of one year or less.
If any adjustment to fair value reflects a decline in the value of the investment, the Company considers all available evidence to evaluate the extent to which the decline is “other than temporary,” including the Company's intention to sell and, if so, mark the investment to market through a charge to our consolidated statements of comprehensive loss.operations. There have been no impairments of the Company’s assets measured and carried at fair value during the nine months ended September 30, 2018.2019.
| |
10. | 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).
There was no movement between levelLevel 1 and levelLevel 2 or between levelLevel 2 and level 3.Level 3 from December 31, 2018 to September 30, 2019. 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, corporate notes, government securities and asset-backed securities 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. The following table summarizes the valuation of the Company’s financial instruments that are measured at fair value on a recurring basis:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2019 | | December 31, 2018 |
| | | | 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 | | $ | 19,431 |
| | $ | 19,431 |
| | $ | — |
| | $ | — |
| | $ | 5,838 |
| | $ | 5,838 |
| | $ | — |
| | $ | — |
|
Repurchase agreements | | — |
| | — |
| | — |
| | — |
| | 5,000 |
| | — |
| | 5,000 |
| | — |
|
Commercial paper | | 13,018 |
| | — |
| | 13,018 |
| | — |
| | 30,710 |
| | — |
| | 30,710 |
| | — |
|
Corporate notes | | 13,568 |
| | — |
| | 13,568 |
| | — |
| | 13,144 |
| | — |
| | 13,144 |
| | — |
|
U.S. government securities | | 6,992 |
| | — |
| | 6,992 |
| | — |
| | 10,166 |
| | — |
| | 10,166 |
| | — |
|
U.S. asset-backed securities | | 4,182 |
| | — |
| | 4,182 |
| | — |
| | 10,618 |
| | — |
| | 10,618 |
| | — |
|
| | $ | 57,191 |
| | $ | 19,431 |
| | $ | 37,760 |
| | $ | — |
| | $ | 75,476 |
| | $ | 5,838 |
| | $ | 69,638 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2018 | | December 31, 2017 |
| | | | 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 | | $ | 18,684 |
| | $ | 18,684 |
| | $ | — |
| | $ | — |
| | $ | — |
| | — |
| | — |
| | — |
|
Repurchase agreements | | 10,002 |
| | — |
| | 10,002 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Commercial paper | | 21,832 |
| | — |
| | 21,832 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Corporate notes | | 13,047 |
| | — |
| | 13,047 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
U.S. government securities | | 3,173 |
| | — |
| | 3,173 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
U.S. asset-backed securities | | 8,424 |
| | — |
| | 8,424 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| | $ | 75,162 |
| | $ | 18,684 |
| | $ | 56,478 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Liabilities: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Warrant liabilities | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,014 |
| | $ | — |
| | $ | 1,014 |
| | $ | — |
|
The following table summarizes the change in the estimated fair value of the Company’s outstanding warrant liabilities as of September 30, 2018:
|
| | | |
Warrant Liabilities (In thousands) | |
Balance at December 31, 2017 | $ | 1,014 |
|
Increase in fair value (net of expired warrants) | 2,524 |
|
Warrant exercise | (3,538 | ) |
Balance at September 30, 2018 | $ | — |
|
The increase in fair value of warrants is due to the increase in stock price that has a direct impact on the Black-Scholes valuation model discussed in note 6.
Revolving and Term Loan Credit Agreements
At each of September 30, 2018 and December 31, 2017, the Company had a total of $17.3 million net debt outstanding under our revolving and term loan credit agreements, which 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.
At-the-Market Sales Agreement
On October 10, 2016, the Company entered into an at-the-market sales agreement with Cowen (ATM Agreement), pursuant to which the Company could sell shares of its common stock through Cowen, as sales agent, in registered transactions from the Company's shelf registration statement filed in June 2015, for aggregate proceeds of up to $25.0 million. Shares of common stock sold under the ATM were sold at market prices. The Company was required to pay up to 3% of the gross proceeds to Cowen as a commission. A total of 2,340,879 shares of common stock were sold under the ATM Agreement of which 1,983,023 were sold in 2017 for proceeds of $7.2 million (net of $0.3 million in commission and issuance costs). There were no shares sold under the ATM Agreement during the nine months ended September 30, 2018. Effective May 29, 2018, the Company terminated the ATM Agreement and no further sales pursuant to the ATM Agreement will be made following such date of termination.
Public Equity Offering
In June 2018, the Company sold 5,750,000 shares of its common stock in an underwritten public offering at a price per share of $13.00 per share. The Company received proceeds of $70.1 million, net of $4.7 million of underwriters’ discount and issuance costs consisting primarily of legal and accounting fees. The Company recorded these proceeds as a common stock issuance.
| |
12. | Net LossEarnings (Loss) Per Common Share |
Basic earnings per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by adding the dilutive potential common shares to the weighted average number of common shares that were outstanding during the period. For purposes of the diluted earnings per share calculation, outstanding stock options and restricted stock units are considered common stock equivalents, using the treasury stock method.
The following reflects the net lossincome (loss) attributable to common shareholders and share data used in the basic and diluted earnings per share computations using the twotreasury class method:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(Amounts in thousands except per share amounts) | | 2019 | | 2018 | | 2019 | | 2018 |
Numerator: | | |
| | |
| | |
| | |
|
Net income (loss) | | $ | 3,470 |
| | $ | (1,069 | ) | | $ | (19,166 | ) | | $ | (13,379 | ) |
Denominator: | | |
| | |
| | | | |
|
Weighted-average common shares outstanding (basic) | | 44,251 |
| | 42,925 |
| | 43,979 |
| | 39,163 |
|
Weighted-average shares outstanding (diluted) | | 46,667 |
| | 42,925 |
| | 43,979 |
| | 39,163 |
|
Net income (loss) per share attributable to common shareholders (basic) | | $ | 0.08 |
| | $ | (0.02 | ) | | $ | (0.44 | ) | | $ | (0.34 | ) |
| | | | | | | | |
Net income (loss) per share attributable to common shareholders (diluted) | | $ | 0.07 |
| | $ | (0.02 | ) | | $ | (0.44 | ) | | $ | (0.34 | ) |
| | | | | | | | |
Anti-dilutive shares excluded from the calculation of diluted earnings per share(a): | | | | | | | | |
Stock options | | 1,619 | | 5,196 | | 5,116 | | 5,196 |
Restricted stock unit awards | | — |
| | — |
| | 159 | | — |
|
Warrants | | — |
| | 112 | | — |
| | 112 |
| | | | | | | | |
(a) Common equivalent shares are not included in the diluted per share calculation where the effect of their inclusion would be anti-dilutive. |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(Amounts in thousands except per share amounts) | | 2018 | | 2017 | | 2018 | | 2017 |
Numerator: | | |
| | |
| | |
| | |
|
Net loss | | $ | (1,069 | ) | | $ | (5,407 | ) | | $ | (13,379 | ) | | $ | (17,573 | ) |
Denominator for basic and diluted EPS: | | |
| | |
| | | | |
|
Weighted-average common shares outstanding | | 42,925 |
| | 33,667 |
| | 39,163 |
| | 32,783 |
|
Net loss per share attributable to common shareholders (basic and diluted) | | $ | (0.02 | ) | | $ | (0.16 | ) | | $ | (0.34 | ) | | $ | (0.54 | ) |
Common equivalent shares are not included12. NexoBrid License and Supply Agreements
On May 6, 2019, the Company entered into exclusive license and supply agreements with MediWound Ltd. (MediWound) to commercialize NexoBrid® and any improvements to Nexobrid in all countries of 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.
NexoBrid is currently in clinical development in North America, and pursuant to the terms of the license agreement, MediWound will continue to conduct all clinical activities described in the diluted per share calculation wheredevelopment plan to support the effectBLA filing with the United States Food and Drug Administration under the supervision of their inclusiona Central Steering Committee comprised of members of each party.
In May 2019, the Company paid MediWound $17.5 million in consideration of the license. The $17.5 million upfront payment was recorded to research and development expense in the nine months ended September 30, 2019 as the license is for registration-stage product rights and is considered in process research and development. The Company is also obligated to pay MediWound $7.5 million upon U.S. regulatory approval of the BLA for NexoBrid and up to $125 million contingent upon meeting certain sales milestones. The first sales milestone of $7.5 million would be anti-dilutive.triggered when annual net sales of NexoBrid or improvements to it in North America exceed $75 million. The aggregate numberCompany also will pay MediWound tiered royalties on net sales ranging from high single-digit to low double-digit percentages, subject to customary reductions. The U.S. Biomedical Advanced Research and Development Authority (BARDA) has committed to procure NexoBrid, and the Company will pay a percentage of common equivalent shares (relatedgross profits to options, warrantsMediWound on initial committed amounts and preferred stock) that have been excluded froma royalty on any additional BARDA purchases of NexoBrid beyond the computationsinitial committed amount. 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 diluted net loss per common share at September 30, 2018 and 2017 were 5.3 million and 5.4 million, respectively.the term of the supply agreement. After the exclusivity period or upon supply failure, the Company will be permitted to establish an alternate source of supply.
13. Commitments and Contingencies
The Company leases facilities in Ann Arbor, Michigan and Cambridge, Massachusetts. The Cambridge facility includes clean rooms, laboratories for MACI and Epicel manufacturing and office space. The Company also pays for use of an offsite warehouse space and leases various vehicles and computer equipment.
In March 2016, the Company amended its current lease in Cambridge to, among other provisions, extend the term 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 rentpart of the operating lease assets under the new leasing guidance
described below, on the Company's condensed consolidated balance sheet and is amortized to the Company's condensed consolidated statement of operations as reductions to rent expense over the lease term.sheet. As of September 30, 2018,2019, the Company has recorded $1.9$2.0 million of leasehold improvements funded by the tenant improvement allowance.
In additionThe Company adopted the updated leasing guidance as described in note 7, as of January 1, 2019. Upon adoption all operating lease commitments with a lease term greater than 12 months that were previously assessed under previous lease guidance, were recognized as right to use assets and liabilities, on a discounted basis on the property leases,balance sheet. Leases with an initial term of 12 months or less are not recorded on the Company also leases an offsite warehouse, various vehiclesbalance sheet and computer equipment. lease expense is recorded on a straight-line basis over the lease term.
The Company's purchase commitments consist of minimum purchase amounts of materials used in the Company's cell manufacturing process to manufacture its marketed cell therapy products. The Company’s agreement with Orsini includes certain minimum administrative fees included in purchase commitments below.
As of September 30, 2018, future minimum payments related to leases and other contractual obligations are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Total | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | More than 5 years |
Operating leases | | $ | 16,915 |
| | $ | 1,273 |
| | $ | 4,908 |
| | $ | 4,902 |
| | $ | 4,811 |
| | $ | 957 |
| | $ | 64 |
|
Debt and interest related payments | | 20,860 |
| | 814 |
| | 6,290 |
| | 5,817 |
| | 7,939 |
| | — |
| | — |
|
Purchase commitments | | 3,206 |
| | 526 |
| | 711 |
| | 681 |
| | 644 |
| | 644 |
| | — |
|
Total | | $ | 40,981 |
| | $ | 2,613 |
| | $ | 11,909 |
| | $ | 11,400 |
| | $ | 13,394 |
| | $ | 1,601 |
| | $ | 64 |
|
Rent expense for the three and nine months ended September 30, 2018 was $1.3 million and $4.1 million, respectively, and $1.5 million and $4.1 million for the same periods in 2017.
14. License Agreement
On May 10, 2017, the Company announced that it has entered into a License Agreement (License Agreement) with Innovative Cellular Therapeutics CO., LTD. (ICT), a leading cell therapy company and developer of CAR-T cell therapy for cancer treatment, for the development and distribution of the Company's product portfolio in Greater China, South Korea, Singapore, and other countries in Asia. ICT acquired an exclusive license to certain patent rights, know-how and intellectual property relating to Carticel, MACI, ixmyelocel-T, and Epicel. The remaining variable consideration, which is related to the development and commercialization milestones and royalty based payments, is monitored for completion and related revenue recognition as discussed in note 4.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Vericel Corporation is a leader in advanced cell therapies for the sports medicine and severe burn care markets, and a developer of patient-specific expanded cell therapies for use in the treatment of patients with severe diseases and conditions. We currently market two FDA approved autologous cell therapy products in the United States. 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 of 2017, we removed MACI’s predecessor, Carticel® (autologous cultured chondrocytes), from the market. Carticel is 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).adults. We also market Epicel® (cultured epidermal autografts), a permanent skin replacement Humanitarian Use Device (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).
Manufacturing
We have a cell-manufacturing facility in Cambridge, Massachusetts which is used for U.S. manufacturing and distribution of MACI and Epicel. Throughout 2016 and early 2017, we also operated a centralized cell manufacturing facility in Ann Arbor, Michigan.
Product Portfolio
Our approved and marketed products include two approvedFDA-approved autologous cell therapy products:therapies: MACI, a third generationthird-generation autologous implant for the repair of symptomatic, full-thickness cartilage defects of the knee in adult patients and Epicel, a permanent skin replacement for adult and pediatric patients with deep dermal or full thickness burns in adults and pediatrics with greater than or equal to 30% of TBSA, both of whichTBSA. Both products are currently marketed in the U.S. We also own Carticel a first-generation product for autologous chondrocyte implantation, or ACI, which is no longer marketed in the U.S. In addition, we have entered into exclusive license and supply agreements with MediWound to commercialize NexoBrid in all countries of North America. NexoBrid is currently in clinical development in North America. Until 2017, our active product candidate portfolio included ixmyelocel-T, a patient-specific multicellular therapy for the treatment of advanced heart failure due to dilated cardiomyopathy, or DCM. We have no current plans to continue the development of ixmyelocel-T unless funded by a partner.ixmyelocel-T.
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 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 generationthird-generation product for autologous implantchondrocyte implantation (ACI), a class of methods for the repair of symptomatic, single or multiple full-thickness cartilage defects of the knee with or without bone involvement in adults. TheMACI replaced Carticel, an earlier generation ACI product for the treatment and repair of cartilage defects in the knee and was the first shipment and implantation of MACI occurred on January 31, 2017, and we stopped manufacturing and marketing Carticel at the end of the second quarter in 2017.FDA-approved cartilage repair product.
In the U.S., the physician target audience which repairs cartilage defects is very concentrated and is comprised of a group of physiciansorthopedic surgeons who self-identify as and/or have thea formal specialty ofas sports medicine physicians. We believe this target audience is approximately 3,000 physicians. WeIn addition to these physicians there is a population of approximately 8,000 general orthopedic surgeons who treat cartilage injuries, although typically at a much lower average volume relative to the sports medicine segment. As we look to more effectively engage this customer base, we expanded our field force from 2840 to 4048 representatives in 2018.the second quarter of 2019 to target the majority of the approximately 3,000 sports medicine physicians. In 2020 we plan on a further expansion to 76 representatives to enable the field force to also call on 2,000 of the general orthopedic surgeons.Most private payers have a medical policy that allowscovers treatment with MACI. All ofMACI with the top 30 largest commercial payers for Carticel havehaving a formal medical policy for MACI or ACI in general. For thoseEven for private payers which have not yet approved a medical policy for MACI, for medically appropriate cases, we can often obtain approval on a case by case basis. For the three and nine months ended September 30, 2018,2019, net revenues for MACI were $20.6 million and $58.0 million, respectively and $16.4 million and $42.6 million, respectively.for the same periods in 2018.
Epicel
Epicel is a permanent skin replacement for deep dermal or full thickness burns greater than or equal to 30% of TBSA.total body surface area (TBSA). Epicel is regulated by the Center for Biologics Evaluation and Research, or CBER of the FederalU.S. Food and Drug Administration, or 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 HUDHumanitarian Use Device (HUD) in 1998 and a Humanitarian Device Exception (HDE) application for the product was submitted in 1999. HUDs are devices that are intended for diseases or conditions that affect fewer than 8,000 individuals annually in the 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. For the three and nine months ended September 30, 2018, net revenues for Epicel were $6.0 million and $16.9 million, respectively.
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 as long as the number of devices distributed in any calendar year does not exceed the Annual Distribution Number (ADN). The ADN is defined as the number of devices reasonably needed to treat a population of 8,000 individuals per year in the U.S.
On February 18, 2016, the FDA approved our HDE supplement to revise the labeled indications of use to specifically include pediatric patients and to add pediatric labeling. 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 to 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 is 360,400 which is approximately 5045 times larger than the volume of grafts sold in 2017.2018. We currently have a 5-person9-person field force. For the three and nine months ended September 30, 2019, net revenues for Epicel were $9.9 million and $20.4 million, respectively, and $6.0 million and $16.9 million for the same periods in 2018.
NexoBrid
Our preapproval stage portfolio includes NexoBrid, a topically-administered biological product that enzymatically removes nonviable burn tissue, or eschar, in patients with deep partial and full-thickness thermal burns. NexoBrid is currently in clinical development in North America, and a BLA currently is targeted for submission to the FDA in the second quarter of 2020. Pursuant to the terms of our license agreement with MediWound, MediWound will continue to conduct all clinical activities described in the development plan to support the filing of a BLA with the United States Food and Drug Administration under the supervision of a Central Steering Committee comprised of members of each party.
Ixmyelocel-T
Our preapproval stage portfolio also includes ixmyelocel-T, a unique patient-specific multicellular therapy derived from an adult patient’s own bone marrow which utilizes our proprietary, highly automated and scalable manufacturing system. The patient-specificThis multicellular therapy was developed for the treatment of advanced heart failure due to DCM.
Ixmyelocel-T has been granted a U.S. Orphan Drug designation 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 for 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 occurred 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.
On September 29, 2017, the FDA indicated we would be required to conduct at least one additional Phase 3 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, at this time we have no current plans to initiate or fund a Phase 3 trial on our own unless funded by a partner.own.
Results of Operations
Net LossIncome (Loss)
Our net earnings and loss for the three and nine months ended September 30, 20182019 totaled $3.5 million and $19.2 million, respectively and a loss of $1.1 million and $13.4 million, respectively and $5.4 million and $17.6 million for the same periods in 2017.2018.
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In thousands) | | 2018 | | 2017 | | 2018 | | 2017 | | 2019 | | 2018 | | 2019 | | 2018 |
Total revenues | | $ | 22,484 |
| | $ | 14,260 |
| | $ | 59,522 |
| | $ | 40,574 |
| | $ | 30,499 |
| | $ | 22,484 |
| | $ | 78,460 |
| | $ | 59,522 |
|
Cost of product sales | | 8,138 |
| | 7,186 |
| | 23,531 |
| | 21,965 |
| | 9,324 |
| | 8,138 |
| | 26,986 |
| | 23,531 |
|
Gross profit | | 14,346 |
| | 7,074 |
| | 35,991 |
| | 18,609 |
| | 21,175 |
| | 14,346 |
| | 51,474 |
| | 35,991 |
|
Total operating expenses | | 15,682 |
| | 11,105 |
| | 45,895 |
| | 34,784 |
| | 18,078 |
| | 15,682 |
| | 71,935 |
| | 45,895 |
|
Loss from operations | | (1,336 | ) | | (4,031 | ) | | (9,904 | ) | | (16,175 | ) | |
Income (loss) from operations | | | 3,097 |
| | (1,336 | ) | | (20,461 | ) | | (9,904 | ) |
Other income (expense) | | 267 |
| | (1,376 | ) | | (3,475 | ) | | (1,398 | ) | | 373 |
| | 267 |
| | 1,295 |
| | (3,475 | ) |
Net loss | | $ | (1,069 | ) | | $ | (5,407 | ) | | $ | (13,379 | ) | | $ | (17,573 | ) | |
Net income (loss) | | | $ | 3,470 |
| | $ | (1,069 | ) | | $ | (19,166 | ) | | $ | (13,379 | ) |