Washington, D.C. 20549
FORM 10-Q
(Mark One)
FOR THE QUARTERLY PERIOD ENDED: September 30, 2019
OR
Commission file number 001-35280
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of | (I.R.S. employer | ||
incorporation or organization) | identification no.) | ||
(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 | ||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes - x No - o
Indicate by check mark whether the registrant has submitted electronically 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 | ☐ | ☒ | |
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 | ||
(Class) | Outstanding at October 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 2. | ||
Item 3. | ||
Item 4. | ||
Item 5. | ||
Item 6. | ||
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
VERICEL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, amounts in thousands)
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | $ | ||||||
Short-term investments | ||||||||
Accounts receivable (net of allowance for doubtful accounts of $643 and $514, respectively) | ||||||||
Inventory | ||||||||
Other current assets | ||||||||
Total current assets | ||||||||
Property and equipment, net | ||||||||
Right-of-use assets | ||||||||
Total assets | $ | $ | ||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | $ | ||||||
Accrued expenses | ||||||||
Current portion of operating lease liabilities | ||||||||
Other liabilities | ||||||||
Total current liabilities | ||||||||
Operating lease liabilities | ||||||||
Other long-term liabilities | ||||||||
Total liabilities | ||||||||
COMMITMENTS AND CONTINGENCIES | ||||||||
Shareholders’ equity: | ||||||||
Common stock, no par value; shares authorized — 75,000; shares issued and outstanding — 44,520 and 43,578, respectively | ||||||||
Other comprehensive gain (loss) | ( | ) | ||||||
Warrants | ||||||||
Accumulated deficit | ( | ) | ( | ) | ||||
Total shareholders’ equity | ||||||||
Total liabilities and shareholders’ equity | $ | $ | ||||||
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
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VERICEL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, amounts in thousands except per share amounts)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Product sales, net | $ | $ | $ | $ | ||||||||||||
Cost of product sales | ||||||||||||||||
Gross profit | ||||||||||||||||
Research and development | ||||||||||||||||
Selling, general and administrative | ||||||||||||||||
Total operating expenses | ||||||||||||||||
Income (loss) from operations | ( | ) | ( | ) | ( | ) | ||||||||||
Other income (expense): | ||||||||||||||||
Increase (decrease) in fair value of warrants | ( | ) | ||||||||||||||
Interest income | ||||||||||||||||
Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Other income (expense) | ( | ) | ( | ) | ||||||||||||
Total other income (expense) | ( | ) | ||||||||||||||
Net income (loss) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
Net income (loss) per share (Basic) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
Weighted average number of common shares outstanding (Basic) | ||||||||||||||||
Net income (loss) per share (Diluted) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
Weighted average number of common shares outstanding (Diluted) | ||||||||||||||||
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
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VERICEL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited, amounts in thousands)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Net income (loss) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
Other comprehensive income (loss): | ||||||||||||||||
Unrealized (loss) gain on investments | ( | ) | ( | ) | ( | ) | ||||||||||
Comprehensive income (loss) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
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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 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
Net loss | ( | ) | ( | ) | ||||||||||||||||||||
Compensation expense related to stock options and restricted stock units, net of forfeitures | ||||||||||||||||||||||||
Stock option exercises | ||||||||||||||||||||||||
Shares issued under the Employee Stock Purchase Plan | ||||||||||||||||||||||||
Change in unrealized gain (loss) on investments | ||||||||||||||||||||||||
BALANCE, MARCH 31, 2019 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
Net loss | ( | ) | ( | ) | ||||||||||||||||||||
Compensation expense related to stock options and restricted stock units, net of forfeitures | ||||||||||||||||||||||||
Stock option exercises | ||||||||||||||||||||||||
Shares issued under the Employee Stock Purchase Plan | ||||||||||||||||||||||||
Change in unrealized gain (loss) on investments | ||||||||||||||||||||||||
BALANCE, JUNE 30, 2019 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
Net income | ||||||||||||||||||||||||
Compensation expense related to stock options granted, net of forfeitures | ||||||||||||||||||||||||
Stock option exercises | ||||||||||||||||||||||||
Shares issued under the Employee Stock Purchase Plan | ||||||||||||||||||||||||
Change in unrealized gain (loss) on investments | ( | ) | ( | ) | ||||||||||||||||||||
Exercise of warrants resulting in issuance of common stock | ( | ) | — | — | — | |||||||||||||||||||
BALANCE, SEPTEMBER 30, 2019 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
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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 | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
Net loss | ( | ) | ( | ) | |||||||||||||||||||
Compensation expense related to stock options granted, net of forfeitures | |||||||||||||||||||||||
Stock option exercises | |||||||||||||||||||||||
Shares issued under the Employee Stock Purchase Plan | |||||||||||||||||||||||
Exercise of warrants resulting in the issuance of common stock | |||||||||||||||||||||||
Net change in warrant valuation of exercised warrants | |||||||||||||||||||||||
BALANCE, MARCH 31, 2018 | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
Net loss | ( | ) | ( | ) | |||||||||||||||||||
Compensation expense related to stock options granted, net of forfeitures | |||||||||||||||||||||||
Issuance of common stock, net of issuance costs | |||||||||||||||||||||||
Stock option exercises | |||||||||||||||||||||||
Shares issued under the Employee Stock Purchase Plan | |||||||||||||||||||||||
Exercise of warrants resulting in the issuance of common stock | ( | ) | |||||||||||||||||||||
Net change in warrant valuation of exercised warrants | |||||||||||||||||||||||
BALANCE, JUNE 30, 2018 | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
Net loss | ( | ) | ( | ) | |||||||||||||||||||
Compensation expense related to stock options granted, net of forfeitures | |||||||||||||||||||||||
Stock option exercises | |||||||||||||||||||||||
Shares issued under the Employee Stock Purchase Plan | |||||||||||||||||||||||
Exercise of warrants resulting in the issuance of common stock | |||||||||||||||||||||||
Net change in warrant valuation of exercised warrants | |||||||||||||||||||||||
Change in unrealized gain (loss) on investments | ( | ) | ( | ) | |||||||||||||||||||
BALANCE, SEPTEMBER 30, 2018 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
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VERICEL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, amounts in thousands)
Nine Months Ended September 30, | ||||||||
2019 | 2018 | |||||||
Operating activities: | ||||||||
Net loss | $ | ( | ) | $ | ( | ) | ||
Adjustments to reconcile net loss to net cash used for operating activities: | ||||||||
Depreciation and amortization expense | ||||||||
Stock compensation expense | ||||||||
Change in fair value of warrants | ||||||||
Loss on sale of fixed assets | ||||||||
Foreign currency translation loss | ||||||||
Amortization of premiums and discounts on marketable securities | ( | ) | ||||||
Non-cash lease cost | ||||||||
Change in operating assets and liabilities: | ||||||||
Inventory | ( | ) | ||||||
Accounts receivable | ||||||||
Prepaid and other current assets | ( | ) | ( | ) | ||||
Accounts payable | ( | ) | ( | ) | ||||
Accrued expenses | ||||||||
Operating lease liabilities | ( | ) | ||||||
Other assets and liabilities, net | ( | ) | ( | ) | ||||
Net cash used in operating activities | ( | ) | ( | ) | ||||
Investing activities: | ||||||||
Purchases of short-term investments | ( | ) | ( | ) | ||||
Maturities of short-term investments | ||||||||
Expenditures for property, plant and equipment | ( | ) | ( | ) | ||||
Net cash provided by (used in) investing activities | ( | ) | ||||||
Financing activities: | ||||||||
Net proceeds from equity offering | ||||||||
Net proceeds from common stock issuance due to stock option exercises | ||||||||
Proceeds from exercise of warrants | ||||||||
Other | ( | ) | ( | ) | ||||
Net cash provided by financing activities | ||||||||
Net increase in cash and cash equivalents | ||||||||
Cash and cash equivalents at beginning of period | ||||||||
Cash and cash equivalents at end of period | $ | $ | ||||||
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED SEPTEMBER 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). 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 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 September 30, 2019, the Company has an accumulated deficit of $388.2 million and had net income of $3.5 million and a net loss of $19.2 million during the three and nine months ended September 30, 2019. The Company had cash and cash equivalents of $36.9 million, and short-term investments of $37.8 million as of September 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 balance sheet as of December 31, 2018 was derived from audited financial statements but 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 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.
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).
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Consolidated Statement of Cash Flows
The following table presents certain supplementary cash flows information for the nine months ended September 30, 2019 and 2018:
Nine Months Ended September 30, | ||||||||
(In thousands) | 2019 | 2018 | ||||||
Supplementary Cash Flows information: | ||||||||
Warrants exercised for common stock | $ | $ | ||||||
Interest paid (net of interest capitalized) | ||||||||
Additions to equipment in process included in accounts payable | ||||||||
Right-of-use asset and lease liability recognized | ||||||||
3. | Recent Accounting Pronouncements |
Accounting for Leases
The Financial Accounting Standards Board (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 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 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. Companies 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 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 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
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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 has 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 directly to DMS are sold at a contracted rate.
Prior authorization and confirmation of coverage level by the patient’s private insurance plan, hospital or government payer is a prerequisite to the shipment of product to a patient. The Company 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 recorded at a contracted price, 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 government payer, subject to a patient co-pay amount. Reimbursements from third-party insurers and government payers vary by patient and payer and are based on either contracted rates, publicly available rates, 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. Changes in estimates related to prior period sales resulted in a $0.7 million and $0.4 million increase to revenue for the three and nine months ended September 30, 2019, respectively and an increase to revenue of $0.1 million and a decrease to revenue of $0.3 million for the three and nine months ended September 30, 2018, 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.
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Revenue by Product and Customer
The following table and description below reflect the products from which the Company generated its revenue:
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) | $ | $ | $ | $ | ||||||||||||
Implants subject to third-party reimbursement sold through a specialty pharmacy (b) | ||||||||||||||||
Implants sold direct based on contracted rates (c) | ||||||||||||||||
Implants sold direct subject to third-party reimbursement (d) | ||||||||||||||||
Biopsy kits - direct bill | ||||||||||||||||
Change in estimates related to prior periods | ( | ) | ||||||||||||||
Epicel | ||||||||||||||||
Direct bill (hospital) | ||||||||||||||||
Total revenue | $ | $ | $ | $ | ||||||||||||
(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. | ||||||||||||||||
Prior to June 16, 2018 the company sold MACI primarily to its distributor Orsini at a fixed transfer price. Beginning June 16, 2018, the Company started retaining the credit and collection risk from the end customer on implants resulting in a decrease in risk concentration. 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 customer of 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 | % | % | % | % | % | % | |||||||||||
Epicel | % | % | % | % | % | % | |||||||||||
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5. | Selected Balance Sheet Components |
Inventory as of September 30, 2019 and December 31, 2018:
(In thousands) | September 30, 2019 | December 31, 2018 | |||||
Raw materials | $ | $ | |||||
Work-in-process | |||||||
Finished goods | |||||||
Inventory | $ | $ | |||||
Property and equipment, net as of September 30, 2019 and December 31, 2018:
(In thousands) | September 30, 2019 | December 31, 2018 | |||||
Machinery and equipment | $ | $ | |||||
Furniture, fixtures and office equipment | |||||||
Computer equipment and software | |||||||
Leasehold improvements | |||||||
Construction in process | |||||||
Financing right-of-use lease | |||||||
Total property and equipment, gross | |||||||
Less: Accumulated depreciation | ( | ) | ( | ) | |||
$ | $ | ||||||
Depreciation expense for the three and nine months ended September 30, 2019 was $0.4 million and $1.2 million and $0.3 million and $1.1 million for the same period in 2018.
Accrued expenses as of September 30, 2019 and December 31, 2018:
(In thousands) | September 30, 2019 | December 31, 2018 | |||||
Bonus related compensation | $ | $ | |||||
Employee related accruals | |||||||
Other accrued expenses | |||||||
$ | $ | ||||||
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. The fair value of the warrants as 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-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 .
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.
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.
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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 | $ | ||||
Finance | Property and equipment, net | |||||
$ | ||||||
Liabilities | ||||||
Current | ||||||
Operating | Current portion of operating lease liabilities | $ | ||||
Finance | Other liabilities | |||||
$ | ||||||
Non-current | ||||||
Operating | Operating lease liabilities | $ | ||||
Finance | Other long-term liabilities | |||||
$ | ||||||
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:
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(In thousands) | Operating Leases | Finance Leases | Total | ||||||||||
2019 | $ | $ | $ | ||||||||||
2020 | |||||||||||||
2021 | |||||||||||||
2022 | |||||||||||||
2023 | |||||||||||||
2024 | |||||||||||||
Thereafter | |||||||||||||
Total lease payments | |||||||||||||
Less: Interest | ( | ) | ( | ) | ( | ) | |||||||
Present value of lease liabilities | $ | $ | $ | ||||||||||
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 | |||
Finance leases | |||
Weighted average discount rate | |||
Operating leases | % | ||
Finance leases | % | ||
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 | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
Capital leases | ||||||||||||||||||||||||||||
Total | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
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
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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 September 30, 2019, there were 3,605,081 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 576,723 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 October 1, 2019, employees purchased 17,746 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, 2019, the Company granted 111,600 and 1,750,110 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 Omnibus Incentive Plan and 2019 Plan for the three and nine month periods ended September 30, 2019 was $13.28 and $12.77 , respectively and $10.90 and $9.62 , respectively, for the same periods in 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. No restricted stock units were granted in 2018.
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 September 30, | Nine Months Ended September 30, | |||||||||||||||
(In thousands) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Cost of goods sold | $ | $ | $ | |||||||||||||