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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
 (Mark One)
 
     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED: June 30, 2019
 
OR
 
         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 
 Commission file number 001-35280 
VERICEL CORPORATION
(Exact name of registrant as specified in its charter)
 
Michigan
 
94-3096597
 
(State or other jurisdiction of
 
(I.R.S. employer
 
incorporation or organization)
 
identification no.)
 
64 Sidney Street
 
Cambridge
MA
02139

(Address of principal executive offices, including zip code)
 
 
(Registrant’s telephone number, including area code) (800) 556-0311

(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, no par value
 
VCEL
 
NASDAQ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yesx  No - o
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes - x No - o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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

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

COMMON STOCK, NO PAR VALUE
 
44,136,896
(Class)
 
Outstanding at July 31, 2019
 
 
 
 
 
 




VERICEL CORPORATION
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
 
PART I — FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II — OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 1B.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 
 
 
 
 
 
 
 
i





PART I - FINANCIAL INFORMATION
 
Item 1.                                                         Financial Statements
 
VERICEL CORPORATION 
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, amounts in thousands)
 
 
 
June 30,
 
December 31,
 
 
2019
 
2018
ASSETS
 
 

 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
13,962

 
$
18,286

Short-term investments
 
52,047

 
64,638

Accounts receivable (net of allowance for doubtful accounts of $748 and $514, respectively)
 
21,084

 
23,454

Inventory
 
4,788

 
3,558

Other current assets
 
2,167

 
2,847

Total current assets
 
94,048

 
112,783

Property and equipment, net
 
6,963

 
5,906

Right-of-use assets
 
24,815

 

Total assets
 
$
125,826

 
$
118,689

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
5,250

 
$
7,108

Accrued expenses
 
4,701

 
6,930

Current portion of operating lease liabilities
 
2,558

 

Other liabilities
 
34

 
754

Total current liabilities
 
12,543

 
14,792

Operating lease liabilities
 
24,607

 

Other long-term liabilities
 
134

 
1,666

Total liabilities
 
37,284

 
16,458

COMMITMENTS AND CONTINGENCIES
 


 


Shareholders’ equity:
 
 

 
 

Common stock, no par value; shares authorized — 75,000; shares issued and outstanding — 44,066 and 43,578, respectively
 
480,050

 
471,180

Other comprehensive gain (loss)
 
38

 
(39
)
Warrants
 
104

 
104

Accumulated deficit
 
(391,650
)
 
(369,014
)
Total shareholders’ equity
 
88,542

 
102,231

Total liabilities and shareholders’ equity
 
$
125,826

 
$
118,689

 
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.


3




VERICEL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, amounts in thousands except per share amounts)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Product sales, net
$
26,151

 
$
19,011

 
$
47,961

 
$
37,038

Cost of product sales
9,022

 
7,727

 
17,662

 
15,393

Gross profit
17,129

 
11,284

 
30,299

 
21,645

Research and development
21,070

 
3,739

 
24,078

 
7,468

Selling, general and administrative
16,259

 
11,791

 
29,779

 
22,745

Total operating expenses
37,329

 
15,530

 
53,857

 
30,213

Loss from operations
(20,200
)
 
(4,246
)
 
(23,558
)
 
(8,568
)
Other income (expense):
 

 
 

 
 
 
 
Increase in fair value of warrants

 
(37
)
 

 
(2,944
)
Interest income
428

 
83

 
908

 
83

Interest expense
(2
)
 
(448
)
 
(4
)
 
(880
)
Other income (expense)
(18
)
 
(3
)
 
18

 
(1
)
Total other income (expense)
408

 
(405
)
 
922

 
(3,742
)
Net loss
$
(19,792
)
 
$
(4,651
)
 
$
(22,636
)
 
$
(12,310
)
 
 
 
 
 
 
 
 
Net loss per share (Basic and Diluted)
$
(0.45
)
 
$
(0.12
)
 
$
(0.52
)
 
$
(0.33
)
Weighted average number of common shares outstanding (Basic and Diluted)
43,956

 
38,349

 
43,841

 
37,251

 
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.


4




VERICEL CORPORATION 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited, amounts in thousands)

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Net loss
 
$
(19,792
)
 
$
(4,651
)
 
$
(22,636
)
 
$
(12,310
)
Other comprehensive loss:
 
 
 
 
 
 
 
 
Unrealized gain on investments
 
35

 

 
38

 

Comprehensive loss
 
$
(19,757
)
 
$
(4,651
)
 
$
(22,598
)
 
$
(12,310
)

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.


5



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



 
 
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




6




VERICEL CORPORATION 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, amounts in thousands)
 
 
 
Six Months Ended June 30,
 
 
2019
 
2018
Operating activities:
 
 

 
 

Net loss
 
$
(22,636
)
 
$
(12,310
)
Adjustments to reconcile net loss to net cash used for operating activities:
 
 

 
 

Depreciation and amortization expense
 
698

 
813

Stock compensation expense
 
6,810

 
3,807

Change in fair value of warrants
 

 
2,944

Loss on sale of fixed assets
 

 
23

Foreign currency translation loss
 
13

 
49

Amortization of premiums and discounts on marketable securities
 
(408
)
 

Non-cash lease cost
 
1,139

 

Change in operating assets and liabilities:
 
 

 
 

Inventory
 
(1,230
)
 
68

Accounts receivable
 
2,370

 
771

Prepaid and other current assets
 
680

 
254

Accounts payable
 
(2,238
)
 
(1,049
)
Accrued expenses
 
(2,229
)
 
(462
)
Operating lease liabilities
 
(1,007
)
 

Other assets and liabilities, net
 
(187
)
 
56

Net cash used in operating activities
 
(18,225
)
 
(5,036
)
Investing activities:
 
 

 
 

Purchases of short-term investments
 
(32,402
)
 

Maturities of short-term investments
 
45,477

 

Expenditures for property, plant and equipment
 
(1,224
)
 
(979
)
Net cash provided by (used in) investing activities
 
11,851

 
(979
)
Financing activities:
 
 

 
 

Net proceeds from equity offering
 

 
70,090

Net proceeds from common stock issuance due to stock option exercises
 
2,059

 
2,096

Proceeds from exercise of warrants
 

 
1,965

Other
 
(9
)
 
(29
)
Net cash provided by financing activities
 
2,050

 
74,122

Net increase (decrease) in cash and cash equivalents
 
(4,324
)
 
68,107

Cash and cash equivalents at beginning of period
 
18,286

 
26,862

Cash and cash equivalents at end of period
 
$
13,962

 
$
94,969

 
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.


7



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED JUNE 30, 2019 (UNAUDITED)
 
1.
Organization
 
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 related to the MACI®, Epicel® and Carticel® 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.

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. At the end of the second quarter of 2017, the Company removed Carticel (autologous cultured chondrocytes), an earlier generation autologous chrondocyte implant (ACI) product, from the market. The Company also markets 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 greater than or equal to 30 percent of total body surface area (TBSA). 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 one reportable segment — the research, product development, manufacture and distribution of advanced 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 June 30, 2019, the Company has an accumulated deficit of $391.7 million and had a net loss of $19.8 million and $22.6 million during the three and six months ended June 30, 2019.  The Company had cash and cash equivalents of $14.0 million, and short-term investments of $52.0 million as of June 30, 2019.  The Company expects that existing cash, cash equivalents and short-term investments will be sufficient to support the Company's current operations through at least 12 months from the issuance of 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.


2.
Basis of Presentation
 
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 six months ended June 30, 2019, are not necessarily indicative of the results to be expected for the full year or for any other period. The June 30, 2019 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, 2018, as filed with the SEC on February 26, 2019 (Annual Report).

8




Consolidated Statement of Cash Flows

The following table presents certain supplementary cash flows information for the six months ended June 30, 2019 and 2018:
 
 
Six Months Ended June 30,
(In thousands)
 
2019
 
2018
Supplementary Cash Flows information:
 
 
 
 
Warrants exercised for common stock
 
$

 
$
2,409

Interest paid (net of interest capitalized)
 
4

 
754

Additions to equipment in process included in accounts payable
 
365

 
459

Right-of-use asset and lease liability recognized
 
560

 



3.
Recent Accounting Pronouncements
 
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. The leasing Accounting Standard Update 2016-02, became effective for the Company on January 1, 2019, and was adopted using the 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 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 Company recognizes product revenue from sales of MACI kits, MACI implants and Epicel grafts following the five step model in Accounting Standards Codification 606 Revenue Recognition (ASC 606).
MACI Kits
MACI kits are sold directly to hospitals based on contracted rates in the approved contract or sales order. The Company recognizes MACI 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.
MACI Implants
The Company recognizes product revenues from sales of MACI 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. Depending upon the type of contract and payer for the MACI implant, the Company's net product revenues are either 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.

9



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 limit Orsini's right to serve as the Company's exclusive distributor for MACI to a specified set of payers as the Company moved to a limited expanded network of distributors. The agreement with Orsini 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 in which such change occurs.
On April 18, 2019, the Company entered into an amendment with Orsini that extended the term of the agreement until May 2022, modified the per case dispensing fee, and eliminated Orsini’s exclusivity for all payers.
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 pays 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. Depending upon the type of contract and payer for the MACI implant, 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. On May 1, 2019, the Company entered into an amendment with AllCare that extended the term of the Dispensing Agreement until May 2022 and modified the per case dispensing fee.
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.

10



Revenue by Product and Customer
The following table and description below reflect the products from which the Company generated its revenue:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Revenue by product (in thousands)
 
2019
 
2018
 
2019
 
2018
MACI implants and kits
 
 
 
 
 
 
 
 
Implants based on contracted rate sold through a specialty pharmacy (a)
 
$
12,989

 
$
7,363

 
$
22,776

 
$
15,155

Implants subject to third-party reimbursement sold through a specialty pharmacy (b)
 
3,459

 
2,639

 
6,202

 
3,647

Implants sold direct based on contracted rates (c)
 
3,450

 
3,409

 
6,676

 
6,083

Implants sold direct subject to third-party reimbursement (d)
 
281

 
297

 
603

 
580

Biopsy kits - direct bill
 
557

 
468

 
1,099

 
904

Change in estimates related to prior periods
 
87

 
(51
)
 
50

 
(189
)
Epicel
 
 
 
 
 
 
 
 
     Direct bill (hospital)
 
5,328

 
4,886

 
10,555

 
10,858

Total revenue
 
$
26,151

 
$
19,011

 
$
47,961

 
$
37,038

 
 
 
 
 
 
 
 
 
(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 known at the time of sale supported by the pharmacy's direct contract.
 
 
 
 
 
 
 
 
 
(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

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 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 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 total revenue and accounts receivable balances were comprised of the following concentrations from its largest customers of MACI and Epicel, as follows:

Revenue Concentration

Accounts Receivable Concentration

Three Months Ended June 30,

Six Months Ended June 30,

June 30,

December 31,

2019

2018

2019

2018

2019

2018
MACI
7
%
 
39
%
 
7
%
 
41
%
 
7
%

8
%
Epicel
6
%
 
9
%
 
8
%
 
12
%
 
3
%

4
%



11




5.
Selected Balance Sheet Components
 
Inventory as of June 30, 2019 and December 31, 2018:
(In thousands)
June 30, 2019
 
December 31, 2018
Raw materials
$
4,127

 
$
2,872

Work-in-process
596

 
638

Finished goods
65

 
48

Inventory
$
4,788

 
$
3,558


 
Property and equipment, net as of June 30, 2019 and December 31, 2018
(In thousands) 
June 30, 2019
 
December 31, 2018
Machinery and equipment
$
2,456

 
$
1,536

Furniture, fixtures and office equipment
775

 
775

Computer equipment and software
5,906

 
3,712

Leasehold improvements
4,631

 
4,587

Construction in process
1,230

 
2,801

Financing right-of-use lease
166

 

Total property and equipment, gross
15,164

 
13,411

Less: Accumulated depreciation
(8,201
)
 
(7,505
)
 
$
6,963

 
$
5,906


 
Depreciation expense for the three and six months ended June 30, 2019 was $0.4 million and $0.7 million and $0.4 million and $0.8 million for the same period in 2018.

Accrued expenses as of June 30, 2019 and December 31, 2018:
(In thousands)
June 30, 2019
 
December 31, 2018
Bonus related compensation
$
1,528

 
$
5,161

Employee related accruals
2,695

 
1,559

Other accrued expenses
478

 
210

 
$
4,701

 
$
6,930



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 December 2017 the Company issued warrants in connection with a previous loan agreement. The following table describes the outstanding warrants classified in equity as of June 30, 2019:
 
 
December 2017 Warrants
Exercise price
 
$4.27
Expiration date
 
December 6, 2023
Total shares issuable on exercise
 
26,951


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 remaining at zero.  
 
 
 
 
 


12



7.
Leases

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 six months ended June 30, 2019, lease expense of less than $0.1 million was recorded related to short-term leases for both the three and six months ended June 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 both the three and six months ended June 30, 2019 and for the same periods ending June 30, 2018 (as reported under the prior leasing guidance), the Company recognized $1.3 million and $2.6 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 June 30, 2019 are as follows:
(In thousands)
 
Classification
 
June 30, 2019
Assets
 
 
 
 
Operating
 
Right-of-use assets
 
$
24,815

Finance
 
Property and equipment, net
 
166

 
 
 
 
$
24,981

Liabilities
 
 
 
 
Current
 
 
 
 
Operating
 
Current portion of operating lease liabilities
 
2,558

Finance
 
Other liabilities
 
34

 
 
 
 
$
2,592

Non-current
 
 
 
 
Operating
 
Operating lease liabilities
 
24,607

Finance
 
Other long-term liabilities
 
134

 
 
 
 
$
24,741


Cash paid for amounts included in the measurement of the Company's operating lease liabilities was $2.5 million for the six months ended June 30, 2019.

Maturity of lease liabilities as of June 30, 2019 are as follows:

13



(In thousands)
 
Operating Leases
 
Finance Leases
 
Total
2019

 
$
2,504

 
$
21

 
$
2,525

2020

 
4,944

 
41

 
4,985

2021

 
4,864

 
41

 
4,905

2022

 
4,929

 
41

 
4,970

2023

 
4,901

 
41

 
4,942

2024

 
4,968

 

 
4,968

Thereafter

 
11,269

 

 
11,269

Total lease payments

 
38,379

 
185

 
38,564

Less: Interest

 
(11,214
)
 
(17
)
 
(11,231
)
Present value of lease liabilities

 
$
27,165

 
$
168

 
$
27,333



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 June 30, 2019 are as follows:
 
 
June 30, 2019
Weighted average remaining lease term (years)
 
 
Operating leases
 
7.26

Finance leases
 
4.01

Weighted average discount rate
 
 
Operating leases
 
9.53
%
Finance leases
 
5.00
%


Future minimum payments related to operating and capital leases, as reflected under the prior guidance, for the fiscal year ended December 31, 2018, are as 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

 
$



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 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 2019 Omnibus Incentive Plan (2019 Plan) was approved on May 1, 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

14



granted under the 2019 Plan shall not be less than the fair market value of the Company’s common stock on the date of grant.  The 2019 Plan replaced the 1992 Stock Option Plan, the 2001 Stock Option Plan, the Amended and Restated 2004 Equity Incentive Plan, the 2009 Second Amended and Restated Omnibus Incentive Plan and the 2017 Omnibus Incentive Plan (Prior Plans), and no new awards have been granted under the Prior Plans after approval.  However, the expiration or forfeiture of options previously granted under the Prior Plans will increase the number of shares available for issuance under the 2019 Plan.

As of June 30, 2019, there were 3,517,347 shares available for future grant under the 2019 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 558,977 have been issued 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 July 1, 2019, employees purchased 18,729 shares resulting in proceeds from the sale of common stock of $0.3 million under the ESPP.

 Service-Based Stock Options

During the three and six months ended June 30, 2019, the Company granted 152,500 and 1,638,510 service-based options to purchase common 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 2017 and 2019 Plans for the three and six month periods ended June 30, 2019 was $11.94 and $12.74, respectively and $9.26 and $6.85, respectively, for the same periods in 2018.

Restricted Stock Units

During the three and six months ended June 30, 2019, the Company granted 10,500 and 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 three and six month periods ended June 30, 2019 was $16.62 and $17.71. The total grant-date fair value of restricted stock units granted in the six months ended June 30, 2019 was $3.3 million. No restricted stock units were granted in 2018.

15




Stock Compensation Expense

Non-cash stock-based compensation expense (employee stock purchase plan, service-based stock 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 June 30,
 
Six Months Ended June 30,
(In thousands)
 
2019
 
2018
 
2019
 
2018
Cost of goods sold
 
$
716

 
$
394

 
$
976

 
$
536

Research and development
 
886

 
442

 
1,410

 
917

Selling, general and administrative
 
2,581

 
1,629

 
4,424

 
2,354

Total non-cash stock-based compensation expense
 
$
4,183

 
$
2,465

 
$
6,810

 
$
3,807



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.
 
 
 
Six Months Ended June 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
 
1.9-2.7%

 
2.4-2.9%

Expected life (years)
 
5.3-6.3

 
5.2-6.3

 
 
 
 
 
 
 
 
 
 

9.
Cash Equivalents and Investments

Marketable debt securities are classified as available-for-sale and carried at fair value in the accompanying consolidated balance sheets on a settlement date basis. The following tables summarize the gross unrealized gains and losses of the Company’s marketable securities as of June 30, 2019 and December 31, 2018:
 
 
June 30, 2019
 
 
 
 
Gross Unrealized
 
 
(In thousands)
 
Amortized Cost
 
Gains
 
Losses
 
Fair Value
Money market funds
 
$
4,831

 
$

 
$

 
$
4,831

Commercial paper
 
17,149

 

 

 
17,149

Corporate notes
 
17,225

 
20

 

 
17,245

U.S. government securities
 
6,955

 
11

 

 
6,966

U.S. asset-backed securities
 
10,680

 
7

 

 
10,687

 
 
$
56,840

 
$
38

 
$

 
$
56,878

Classified as:
 
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
 
$
4,831

Short-term investments
 
 
 
 
 
 
 
52,047

 
 
 
 
 
 
$
56,878


16



 
 
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