NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED SEPTEMBER 30, 2018 (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
®
, Carticel
®
and Epicel
®
products. The Company is a fully integrated, commercial-stage biopharmaceutical company and currently markets MACI
®
and Epicel
®
in the U.S. 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. 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, the Company 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). The Company also markets Epicel
®
(cultured epidermal autografts), a permanent skin replacement Humanitarian Use Device (HUD) for the treatment of patients with deep-dermal or full-thickness burns comprising greater than or equal to 30 percent of total body surface area (TBSA). The Company operates its business primarily in the U.S. in
one
reportable segment — the research, product development, manufacture and distribution of patient-specific, expanded cellular 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
, the Company has an accumulated deficit of
$374.3 million
and had a net loss of
$1.1 million
during the quarter ended
September 30, 2018
. The Company had cash and cash equivalents of
$53.3 million
, and short term investments of
$44.5 million
as of
September 30, 2018
. The Company expects that existing cash, cash equivalents and short 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 with 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. As 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. 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 financial statements included herein 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) 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
, as filed with the SEC on March 5, 2018 (Annual Report).
Consolidated Statement of Cash Flows
The following table presents certain supplementary cash flows information for the
nine months ended
September 30, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
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 Recognition
In May 2014, the 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. 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, the Company expects that the adoption of the new leasing standards will result in the recognition of material right-to-use assets 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 measured 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.
Measuring Credit Losses on Financial Instruments
The FASB issued updated guidance on measuring credit losses on financial instruments. The guidance removes the 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. 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 companies 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 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) following the five step model in 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
.
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) 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.
The Company recognizes product revenues from sales of MACI (and previously Carticel) implants upon delivery at which time the customer is in control of the implant and the claim is billable. Prior authorization or 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 net product revenues are based on contracted rates or estimated 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. 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 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 June 30, 2019 or upon termination of the agreement by the Company, if earlier.
On July 26, 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.
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 shows 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.
Concentration of Credit Risk
From July 2016 through June 2017, the Company utilized 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. Beginning June 16, 2018, the concentration of risk decreased because the Company retains the credit and collection risk from the end customer on implants after June 15, 2018. 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 customers of Carticel, MACI and Epicel, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Carticel
1
|
<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, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
(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, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
(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
2018
was
$0.3 million
and
$1.1 million
, respectively, and
$0.4 million
and
$1.2 million
, for the same periods in 2017.
Accrued expenses as of
September 30, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
(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
45,625
shares 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.
The fair value of the warrants described in the table above 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 based on historical volatility that matches the expected remaining life of the warrants. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield curve on the grant date for a maturity similar to the expected remaining life of the warrants. The expected life of the warrants is assumed to be equivalent to their remaining contractual term. The dividend rate is based on the historical rate, which the Company anticipates to remain at
zero
.
On December 6, 2017, the Company replaced its existing term loan 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 million
under the term loan and
$2.5 million
under 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 a
s 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, 2018
, are as follows:
|
|
|
|
|
(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 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 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, following the date of grant. The Company generally issues new shares upon the exercise of stock options.
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 July 1, 2018.
The 2017 Omnibus Incentive Plan (2017 Plan) was approved by the Company's shareholders on May 3, 2017 at the annual meeting of shareholders. The 2017 Plan 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 2017 Plan shall not be less than the fair market value of the Company’s common stock on the date of grant. The 2017 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 (Prior Plans), and
no
new awards have been granted under the Prior Plans. However, the expiration or forfeiture of options previously granted under the Prior Plans will increase the number of shares available for issuance under the 2017 Plan.
As of
September 30, 2018
, there were
2,917,614
shares available for future grant under the 2017 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
507,613
have been granted 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, employees purchased
21,937
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
, the Company granted
147,000
and
1,629,760
service-based options to purchase common stock, respectively. 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 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 Option Plan for the
three and nine
month periods ended
September 30, 2018
was
$10.90
and
$9.62
, respectively, and
$2.53
and
$1.99
, for the same periods in 2017.
Stock Compensation Expense
Non-cash stock-based compensation expense (employee stock purchase plan and service-based stock options) 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)
|
|
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
|
|
|
|
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 of 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 trade date basis. The following tables summarize the gross unrealized gains and losses of the Company’s marketable securities as of September 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
|
|
|
Gross Unrealized
|
|
|
(In thousands)
|
|
Amortized Cost
|
|
Gains
|
|
Losses
|
|
Fair Value
|
Money market funds
|
|
$
|
18,684
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
18,684
|
|
Repurchase agreements
|
|
10,002
|
|
|
—
|
|
|
—
|
|
|
10,002
|
|
Commercial paper
|
|
21,832
|
|
|
—
|
|
|
—
|
|
|
21,832
|
|
Corporate notes
|
|
13,058
|
|
|
—
|
|
|
(11
|
)
|
|
13,047
|
|
U.S. government securities
|
|
3,174
|
|
|
—
|
|
|
(1
|
)
|
|
3,173
|
|
U.S. asset-backed securities
|
|
8,430
|
|
|
—
|
|
|
(6
|
)
|
|
8,424
|
|
|
|
$
|
75,180
|
|
|
$
|
—
|
|
|
$
|
(18
|
)
|
|
$
|
75,162
|
|
Classified as:
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
|
|
|
|
|
|
$
|
30,700
|
|
Short-term investments
|
|
|
|
|
|
|
|
44,462
|
|
|
|
|
|
|
|
$
|
75,162
|
|
As of September 30, 2018, the Company invested
$10.0 million
in overnight repurchase agreement securities classified as cash equivalents on the balance sheet.
The Company's portfolio of marketable securities had an average AA- credit rating and there were no marketable securities that the Company considers to be other-than-temporarily impaired as of September 30, 2018. The Company's investment strategy is to buy short-duration marketable securities with a high credit rating. As of September 30, 2018, 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. There have been no impairments of the Company’s assets measured and carried at fair value during the nine months ended September 30, 2018.
|
|
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 level 1 and level 2 or between level 2 and level 3. 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, 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 Loss Per Common Share
|
The following reflects the net loss attributable to common shareholders and share data used in the basic and diluted earnings per share computations using the two class method:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 included in the diluted per share calculation where the effect of their inclusion would be anti-dilutive. The aggregate number of common equivalent shares (related to options, warrants and preferred stock) that have been excluded from the computations of diluted net loss per common share at
September 30, 2018
and
2017
were
5.3 million
and
5.4 million
, respectively.
13. Commitments and Contingencies
The Company leases facilities in Ann Arbor, Michigan and Cambridge, Massachusetts. 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 rent 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. As of
September 30, 2018
, the Company has recorded
$1.9 million
of leasehold improvements funded by the tenant improvement allowance
.
In addition to the property leases, the Company also leases an offsite warehouse, various vehicles and computer equipment. 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.