Item 1.
Financial Statements
VERICEL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
|
2016
|
|
2015
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash
|
|
$
|
9,835
|
|
|
$
|
14,581
|
|
Accounts receivable (net of allowance for doubtful accounts of $54 and $68, respectively)
|
|
9,031
|
|
|
10,919
|
|
Inventory
|
|
2,393
|
|
|
1,379
|
|
Other current assets
|
|
1,046
|
|
|
464
|
|
Total current assets
|
|
22,305
|
|
|
27,343
|
|
Property and equipment, net
|
|
4,351
|
|
|
4,049
|
|
Intangible assets, net
|
|
2,778
|
|
|
2,917
|
|
Total assets
|
|
$
|
29,434
|
|
|
$
|
34,309
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
5,305
|
|
|
$
|
7,588
|
|
Accrued expenses
|
|
2,892
|
|
|
3,603
|
|
Revolving credit agreement, net of deferred costs of $96
|
|
2,304
|
|
|
—
|
|
Warrant liabilities
|
|
455
|
|
|
757
|
|
Short-term deferred rent
|
|
460
|
|
|
118
|
|
Other
|
|
39
|
|
|
42
|
|
Total current liabilities
|
|
11,455
|
|
|
12,108
|
|
|
|
|
|
|
Long-term deferred rent
|
|
820
|
|
|
—
|
|
Long term debt
|
|
52
|
|
|
71
|
|
Total liabilities
|
|
12,327
|
|
|
12,179
|
|
COMMITMENTS AND CONTINGENCIES (Note 13)
|
|
|
|
|
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
Series A non-voting convertible preferred stock, no par value: shares authorized and reserved — 1; shares issued and outstanding — 1
|
|
3,150
|
|
|
3,150
|
|
Series B-2 voting convertible preferred stock, no par value: shares authorized and reserved — 39, shares issued and outstanding — 12
|
|
38,389
|
|
|
38,389
|
|
Common stock, no par value; shares authorized — 75,000; shares issued and outstanding — 22,684 and 23,789, respectively
|
|
309,437
|
|
|
307,766
|
|
Treasury stock — 1,250 shares
|
|
(3,150
|
)
|
|
(3,150
|
)
|
Accumulated deficit
|
|
(330,719
|
)
|
|
(324,025
|
)
|
Total shareholders’ equity
|
|
17,107
|
|
|
22,130
|
|
Total liabilities and shareholders’ equity
|
|
$
|
29,434
|
|
|
$
|
34,309
|
|
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
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,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
12,823
|
|
|
$
|
13,590
|
|
|
$
|
26,931
|
|
|
$
|
24,439
|
|
Total revenues
|
|
12,823
|
|
|
13,590
|
|
|
26,931
|
|
|
24,439
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales
|
|
7,300
|
|
|
6,901
|
|
|
13,860
|
|
|
12,469
|
|
Gross profit
|
|
5,523
|
|
|
6,689
|
|
|
13,071
|
|
|
11,970
|
|
Research and development
|
|
4,058
|
|
|
3,369
|
|
|
7,594
|
|
|
7,746
|
|
Selling, general and administrative
|
|
6,449
|
|
|
5,585
|
|
|
12,453
|
|
|
11,061
|
|
Total operating expenses
|
|
10,507
|
|
|
8,954
|
|
|
20,047
|
|
|
18,807
|
|
Loss from operations
|
|
(4,984
|
)
|
|
(2,265
|
)
|
|
(6,976
|
)
|
|
(6,837
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
0
|
|
|
|
|
Decrease (increase) in fair value of warrants
|
|
1,942
|
|
|
112
|
|
|
302
|
|
|
(205
|
)
|
Foreign currency translation (loss) gain
|
|
(1
|
)
|
|
(6
|
)
|
|
(11
|
)
|
|
10
|
|
Interest income
|
|
2
|
|
|
9
|
|
|
7
|
|
|
22
|
|
Interest expense
|
|
(3
|
)
|
|
(2
|
)
|
|
(6
|
)
|
|
(4
|
)
|
Other expense
|
|
—
|
|
|
—
|
|
|
(10
|
)
|
|
—
|
|
Total other income (expense)
|
|
1,940
|
|
|
113
|
|
|
282
|
|
|
(177
|
)
|
Net loss
|
|
$
|
(3,044
|
)
|
|
$
|
(2,152
|
)
|
|
$
|
(6,694
|
)
|
|
$
|
(7,014
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to common shareholders (Basic and Diluted) (see note 11)
|
|
$
|
(0.22
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.46
|
)
|
|
$
|
(0.43
|
)
|
Weighted average number of common shares outstanding (Basic and Diluted)
|
|
22,684
|
|
|
23,786
|
|
|
22,644
|
|
|
23,786
|
|
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
VERICEL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
2016
|
|
2015
|
Operating activities:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,694
|
)
|
|
$
|
(7,014
|
)
|
Adjustments to reconcile net loss to net cash used for operating activities:
|
|
|
|
|
|
|
Depreciation and amortization
|
|
923
|
|
|
672
|
|
Stock compensation expense
|
|
1,319
|
|
|
1,614
|
|
Change in fair value of warrants
|
|
(302
|
)
|
|
205
|
|
Inventory provision
|
|
86
|
|
|
—
|
|
Deferred rent expense
|
|
260
|
|
|
—
|
|
Tenant improvement reimbursement
|
|
607
|
|
|
—
|
|
Foreign currency translation loss
|
|
11
|
|
|
10
|
|
Gain on sales of fixed assets
|
|
—
|
|
|
(35
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
Inventory
|
|
(1,099
|
)
|
|
(157
|
)
|
Accounts receivable
|
|
1,888
|
|
|
(789
|
)
|
Other current assets
|
|
(385
|
)
|
|
(1,235
|
)
|
Accounts payable
|
|
(2,305
|
)
|
|
(412
|
)
|
Accrued expenses
|
|
(711
|
)
|
|
(1,458
|
)
|
Other non-current assets and liabilities, net
|
|
—
|
|
|
8
|
|
Net cash used for operating activities
|
|
(6,402
|
)
|
|
(8,591
|
)
|
Investing activities:
|
|
|
|
|
|
|
Expenditures for property, plant and equipment
|
|
(1,074
|
)
|
|
(1,555
|
)
|
Other
|
|
93
|
|
|
35
|
|
Net cash used in investing activities
|
|
(981
|
)
|
|
(1,520
|
)
|
Financing activities:
|
|
|
|
|
|
|
Net proceeds from issuance of common stock
|
|
352
|
|
|
3
|
|
Borrowings under revolving credit agreement
|
|
2,400
|
|
|
—
|
|
Deferred financing costs
|
|
(96
|
)
|
|
—
|
|
Payments on long-term debt
|
|
(19
|
)
|
|
(17
|
)
|
Net cash provided by (used in) financing activities
|
|
2,637
|
|
|
(14
|
)
|
Net decrease in cash
|
|
(4,746
|
)
|
|
(10,125
|
)
|
Cash at beginning of period
|
|
14,581
|
|
|
30,343
|
|
Cash at end of period
|
|
$
|
9,835
|
|
|
$
|
20,218
|
|
|
|
|
|
|
Supplemental cash flow information (non-cash):
|
|
|
|
|
|
|
Additions to equipment in process included in accounts payable
|
|
$
|
11
|
|
|
$
|
700
|
|
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED JUNE 30, 2016 (UNAUDITED)
Vericel Corporation, a Michigan corporation, which was formerly known as Aastrom Biosciences, Inc. (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 over
250
patent applications of Sanofi and certain of its subsidiaries for purposes of acquiring the portion of the cell therapy and regenerative medicine business (the CTRM Business), which researches, develops, manufactures, markets and sells the Carticel
®
, MACI
®
, and Epicel
®
products. The Company is a fully integrated, commercial-stage biopharmaceutical company dedicated to the identification, development and commercialization of innovative therapies that enable the body to repair and regenerate damaged tissues and organs to restore normal structure and function. Vericel has marketed products as well as developmental stage product candidates and the Company’s goal is to become the leader in cell therapy and regenerative medicine by developing, manufacturing and marketing best-in-class therapies for patients with significant unmet medical needs.
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.
Successful future operations are subject to several technical hurdles and risk factors, including satisfactory product development, timely initiation and completion of clinical trials, regulatory approval and market acceptance of the Company’s products.
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, 2016
, are not necessarily indicative of the results to be expected for the full year or for any other period. The
June 30, 2016
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, 2015
, as filed with the SEC on March 14, 2016 (Annual Report).
The consolidated financial statements include the accounts of Vericel and its wholly-owned subsidiaries, Marrow Donation, LLC, located in San Diego, California, and Vericel Denmark ApS, in Kastrup, Demark (collectively, the Company). All inter-company transactions and accounts have been eliminated in consolidation. Aastrom Biosciences GmbH ceased operations in 2014 and Marrow Donation, LLC and Vericel Denmark ApS ceased operations in 2015.
|
|
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 will supersede the current revenue recognition guidance and require entities to evaluate their revenue recognition arrangements using a five step model to determine when a customer obtains control of a transferred good or service. The guidance is currently effective for annual reporting periods beginning after December 15, 2017 and may be adopted using a full or modified retrospective application. The Company is currently in the process of evaluating its revenue arrangements under the issued guidance and has not yet determined the impact to its consolidated financial statements.
Going Concern Assessment
The FASB has issued authoritative guidance for management on how to assess whether substantial doubt exists regarding an entity’s ability to continue as a going concern and guidance on how to prepare related footnote disclosures. The guidance will require management to evaluate whether there are conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern for one year from the date the financial statements are issued. The guidance is effective for annual reporting periods beginning after December 15, 2016. As of
June 30, 2016
, the Company does not expect the guidance to impact future disclosures.
Presentation and Subsequent Measurement of Debt Issuance Costs
The FASB issued guidance which requires entities to present debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability. For debt issuance costs related to line-of-credit arrangements, companies are able to defer and present debt issuance costs as an asset and subsequently amortize the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The guidance was effective for annual reporting periods beginning after December 15, 2015 and the Company adopted the guidance as of
June 30, 2016
.
Accounting for Leases
The FASB issued guidance to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. In accordance with the updated guidance, lessees are required to recognize the assets and liabilities arising from operating leases on the balance sheet. The guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within 2018. The Company is currently reviewing the potential impact of adopting the new guidance.
Share-based Payment Accounting
The FASB issued guidance to simplify the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new standard will be effective for us on January 1, 2017. We are currently evaluating the potential impact that this standard may have on our financial position, results of operations and statement of cash flows.
|
|
4.
|
Selected Balance Sheet Components
|
Inventory as of
June 30, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
(In thousands)
|
June 30, 2016
|
|
December 31, 2015
|
Raw materials
|
$
|
2,089
|
|
|
$
|
1,228
|
|
Work-in-process
|
276
|
|
|
131
|
|
Finished goods
|
28
|
|
|
20
|
|
Inventory
|
$
|
2,393
|
|
|
$
|
1,379
|
|
Property and equipment, net as of
June 30, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
(In thousands)
|
June 30, 2016
|
|
December 31, 2015
|
Machinery and equipment
|
$
|
3,200
|
|
|
$
|
3,280
|
|
Furniture, fixtures and office equipment
|
931
|
|
|
931
|
|
Computer equipment and software
|
2,662
|
|
|
2,662
|
|
Leasehold improvements
|
3,291
|
|
|
2,393
|
|
Construction in process
|
593
|
|
|
421
|
|
Total property and equipment, gross
|
10,677
|
|
|
9,687
|
|
Less: Accumulated depreciation
|
(6,326
|
)
|
|
(5,638
|
)
|
|
$
|
4,351
|
|
|
$
|
4,049
|
|
The leasehold improvements include $0.9 million of tenant reimbursed improvements to our cleanrooms to replace a rooftop air handler unit. The leasehold improvement is accounted for as a lease incentive under lease accounting guidance.
Depreciation expense for the
three and six
months ended
June 30, 2016
was
$0.4 million
and
$0.8 million
, respectively, compared to
$0.2 million
and
$0.5 million
, respectively, for the same periods in 2015.
Intangible assets, net as of
June 30, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
(In thousands)
|
June 30, 2016
|
|
December 31, 2015
|
Commercial rights
|
$
|
3,360
|
|
|
$
|
3,360
|
|
Less: accumulated amortization
|
$
|
(582
|
)
|
|
$
|
(443
|
)
|
|
$
|
2,778
|
|
|
$
|
2,917
|
|
The calculated value of the commercial rights intangible assets are amortized using the straight line method over an estimated useful life of
12 years
. Amortization expense for both the
three and six
months ended
June 30, 2016
and 2015 was
$0.1 million
and
$0.2 million
, respectively.
Estimated future amortization expense is as follows:
|
|
|
|
|
Calendar Years Ending December 31, (In thousands)
|
|
2016
|
$
|
141
|
|
2017
|
280
|
|
2018
|
280
|
|
2019
|
280
|
|
2020
|
280
|
|
Thereafter
|
1,517
|
|
Total
|
$
|
2,778
|
|
Accrued expenses as of
June 30, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
(In thousands)
|
June 30, 2016
|
|
December 31, 2015
|
Bonus related compensation
|
$
|
1,325
|
|
|
$
|
1,956
|
|
Employee related accruals
|
1,485
|
|
|
1,341
|
|
Accrued expenses
|
82
|
|
|
306
|
|
|
$
|
2,892
|
|
|
$
|
3,603
|
|
|
|
5.
|
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 following warrants were outstanding at
June 30, 2016
, and include provisions that could require cash settlement of the warrants or have anti-dilution price protection provisions requiring the warrants to be recorded as liabilities of the Company at the estimated fair value at the date of issuance, with changes in estimated fair value recorded as income or expense (non-cash) in the Company’s statement of operations in each subsequent period:
|
|
|
|
|
|
August 2013
Warrants
|
Exercise price
|
|
$4.80
|
Expiration date
|
|
August 16, 2018
|
Total shares issuable on exercise
|
|
724,950
|
The fair value of the August 2013 warrants is measured using the Black-Scholes valuation model. Inherent in the Black-Scholes valuation model are assumptions related to expected stock-price volatility, expected life, risk-free interest rate and dividend yield. The Company estimates the volatility of its common stock based on historical volatility that matches the expected remaining life of the warrants. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield curve on the grant date for a maturity similar to the expected remaining life of the warrants. The expected life of the warrants is assumed to be equivalent to their remaining contractual term. The dividend rate is based on the historical rate, which the Company anticipates to remain at
zero
. See further detail in note 8 of the condensed consolidated financial statements.
The assumptions used by the Company are summarized in the following tables:
|
|
|
|
|
|
|
|
|
|
August 2013 Warrants
|
|
June 30, 2016
|
|
December 31, 2015
|
Closing stock price
|
|
$
|
2.25
|
|
|
$
|
2.58
|
|
Expected dividend rate
|
|
—
|
%
|
|
—
|
%
|
Expected stock price volatility
|
|
85.9
|
%
|
|
91.4
|
%
|
Risk-free interest rate
|
|
0.6
|
%
|
|
1.3
|
%
|
Expected life (years)
|
|
2.13
|
|
|
2.63
|
|
On March 8, 2016, the Company entered into a
$15.0 million
debt financing with Silicon Valley Bank (SVB). The debt financing consists of a
$3.0 million
term loan available immediately upon the closing,
$2.0 million
term loan available upon the FDA's approval of the MACI BLA and up to
$10.0 million
revolving line of credit. The term loans are interest only (indexed to Wall Street Journal (WSJ) Prime plus
0.75%
) until March 1, 2017 followed by
36
equal monthly payments of principal plus interest maturing February 1, 2020. The revolving credit is limited to a borrowing base calculated using eligible accounts receivable and maturing March 8, 2018 with an interest rate indexed to WSJ Prime plus
0.25%
or
0.75%
, depending on certain balance sheet ratios. Monthly, the Company must remain in compliance with an adjusted quick ratio greater than or equal to
1.10
to
1.0
. The adjusted quick ratio is the ratio of (a) unrestricted cash and cash equivalents and net billed accounts receivable to (b) current liabilities minus the current portion of deferred revenue and warrant liabilities. SVB has a first priority perfected security interest in all assets of the Company other than intellectual property. As of
June 30, 2016
, there was an outstanding balance of
$2.4 million
under the revolving line of credit recorded in current liabilities. The remaining capacity under the revolving line of credit as of
June 30, 2016
was
$7.2 million
and we were, and continue to be, in compliance with our financial and non-financial debt covenants.
|
|
7.
|
Stock-based Compensation
|
Stock Option and Equity Incentive Plans
The Company can issue nonqualified and incentive stock options as well as other equity awards pursuant to its Second Amended and Restated 2009 Omnibus Incentive Plan, (Option Plan). Such awards pursuant to the Option Plan may be granted by the Company’s Board of Directors to certain of the Company’s employees, directors and consultants.
During the
three and six
months ended
June 30, 2016
, the Company granted
236,750
and
1,072,230
service-based options to purchase common stock, respectively. The options were granted with exercise prices equal to the fair market value of the Company’s stock at the grant date, and other than those granted to non-employee directors, vest over
four years
, under a graded-vesting methodology, following the date of grant, and expire after
ten years
. The Company issues new shares upon the exercise of stock options. The weighted average grant-date fair value of service-based options granted under the Option Plan during the
three and six
month periods ended
June 30, 2016
was
$2.06
and
$2.16
, respectively for 2016 and
$2.43
and
$2.22
, respectively for the same periods in 2015.
The net compensation expense recorded for the service-based stock options related to employees and directors was
$0.7 million
and
$1.2 million
for the
three and six
months ended
June 30, 2016
, respectively, and
$0.7 million
and
$1.6 million
for the
three and six
months ended June 30,
2015
, respectively. The compensation cost includes forfeiture adjustments.
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
|
|
2016
|
|
2015
|
Expected dividend rate
|
|
—
|
%
|
|
—
|
%
|
Expected stock price volatility
|
|
78.7 – 92.2%
|
|
|
78.8 – 88.1%
|
|
Risk-free interest rate
|
|
1.2 – 1.8%
|
|
|
1.5 – 2.0%
|
|
Expected life (years)
|
|
5.5 – 6.3
|
|
|
5.5 – 6.3
|
|
The following table summarizes the activity for service-based stock options for the indicated periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service-Based Stock Options
|
|
Options
|
|
Weighted
Average
Exercise Price
|
|
Weighted Average
Remaining
Contractual Term
(Years)
|
|
Aggregate
Intrinsic Value
|
Outstanding at December 31, 2015
|
|
2,523,400
|
|
|
$
|
6.36
|
|
|
8.7
|
|
$
|
5,000
|
|
Granted
|
|
1,072,230
|
|
|
$
|
3.03
|
|
|
|
|
|
|
Exercised
|
|
39,231
|
|
|
$
|
3.06
|
|
|
|
|
$
|
76,827
|
|
Expired
|
|
72,375
|
|
|
$
|
37.79
|
|
|
|
|
|
|
Forfeited
|
|
113,686
|
|
|
$
|
3.81
|
|
|
|
|
|
|
Outstanding at June 30, 2016
|
|
3,370,338
|
|
|
$
|
4.75
|
|
|
7.8
|
|
$
|
150,224
|
|
Exercisable at June 30, 2016
|
|
900,364
|
|
|
$
|
8.93
|
|
|
8.6
|
|
$
|
8,439
|
|
As of
June 30, 2016
there was approximately
$3.5 million
of total unrecognized compensation cost related to non-vested service-based stock options granted under the Option Plan. That cost is expected to be recognized over a weighted-average period of
3.1
years.
The total fair value of options vested during the
three and six
months ended
June 30, 2016
and
2015
was
$0.6 million
and
$1.0 million
, respectively, and
$0.6 million
and
$0.9 million
, respectively.
Employee Stock Purchase Plan
Employees are able to purchase stock under the Vericel Corporation Employee Stock Purchase Plan (ESPP), which was implemented effective October 1, 2015. Participation in this plan is available to substantially all employees. Compensation expense is recorded based on the fair market value of the purchase options at the grant date, which corresponds to the first day of each purchase period and is amortized over the purchase period. On July 1, 2016, employees purchased
60,992
shares resulting in proceeds from the sale of common stock of
$0.1 million
under the ESPP. The total share-based compensation expense for the ESPP for the both the
three and six
months ended
June 30, 2016
was approximately
$0.1 million
for each period.
|
|
8.
|
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).
|
The following table summarizes the valuation of the Company’s investments and financial instruments that are measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
|
|
|
|
Fair value measurement category
|
|
|
|
Fair value measurement category
|
(In thousands)
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liabilities
|
|
$
|
455
|
|
|
$
|
—
|
|
|
$
|
455
|
|
|
$
|
—
|
|
|
$
|
757
|
|
|
$
|
—
|
|
|
$
|
757
|
|
|
$
|
—
|
|
The following table summarizes the change in the estimated fair value of the Company’s warrant liabilities:
|
|
|
|
|
Warrant Liabilities (In thousands)
|
|
Balance at December 31, 2015
|
$
|
757
|
|
Decrease in fair value
|
(302
|
)
|
Balance at June 30, 2016
|
$
|
455
|
|
On January 21, 2014, the Company entered into a purchase agreement (Purchase Agreement), together with a registration rights agreement, for the sale of up to
$15.0 million
of shares of its common stock to Lincoln Park, subject to certain limitations, from time to time over a
30 months
period, which began on April 3, 2014 and ends on October 3, 2016.
The Company may direct Lincoln Park, at its sole discretion, to purchase up to
50,000
shares of common stock in regular purchases, increasing to amounts of up to
100,000
shares depending upon the closing sale price of the common stock. In addition, the Company may direct Lincoln Park to purchase additional amounts as accelerated purchases if on the date of a regular purchase the closing sale price of the common stock equals or exceeds
$3.00
per share. The purchase price of shares of common stock related to the future funding will be based on the prevailing market prices of such shares at the time of sales (or over a period of up to
10
business days leading up to such time), but in no event will shares be sold to Lincoln Park on a day the common stock closing price is less than the floor price of
$2.50
, subject to adjustment. The Company controls the timing and amount of any sales of common stock to Lincoln Park. The Company’s sales of shares of common stock to Lincoln Park under the Purchase Agreement are limited to no more than the number of shares that would result in the beneficial ownership by Lincoln Park and its affiliates, at any single point in time, of more than
9.99%
of the then outstanding shares of the common stock. The remaining capacity under this agreement is
$11.3 million
as of
June 30, 2016
. No shares were issued in 2015 or 2016.
At
June 30, 2016
, there was approximately
$7.8 million
of net capacity remaining on the At-the-Market Sales Agreement with MLV & Co. LLC (formerly McNicoll, Lewis & Vlak and now owned by FBR & Co.) which allowed us to sell shares of our common stock from time to time under a registration statement on Form S-3 filed in June 2011, pursuant to which we registered
$100 million
of our securities for public sale. The Form S-3 registration statement filed in June 2011 expired in July 2014. If we choose to access the remaining capacity, we will file an updated Form S-3 registration statement.
Treasury Stock
On December 23, 2015 Stonepine Capital, LLC (Stonepine) exchanged
1,250,000
shares of the Company's common stock held by Stonepine for
1,250
shares of Series A Convertible Preferred Stock. The common stock transferred from Stonepine to the Company during the share exchange is reserved as treasury shares. The value transferred to Series A Convertible Preferred Stock of
$3.2 million
is equal to the fair market value of the common stock as of December 23, 2015. See further discussion in note 10 of the condensed consolidated financial statements.
Series B Convertible Preferred Stock
On March 9, 2012, the Company completed the sale of
12,308
shares of Series B-1 Non-Voting Convertible Preferred Stock (Series B-1 preferred stock) at an offering price of
$3,250
per share. In addition to the Series B-1 preferred stock, which was issued at the closing, the Company also authorized Series B-2 Voting Convertible Preferred Stock (Series B-2 preferred stock). The Series B-1 preferred stock and Series B-2 preferred stock collectively are referred to as the Series B preferred stock. The Series B preferred stock is convertible, at the option of the holder thereof at any time after the
5 years
anniversary of the closing of the offering, (the Conversion date) into shares of common stock, at a conversion ratio of one share of preferred stock for fifty shares of common stock. At any time after the Conversion date, the Company may elect to convert any or all outstanding shares of Series B preferred stock into shares of common stock, subject to certain limitations. Stock dividends on the Series B preferred stock will be cumulative and compound daily, at a rate of
11.5%
per annum, payable upon conversion, liquidation, redemption or other similar events, and payable in cash or Series B-1 preferred stock until the Conversion date. As of
June 30, 2016
, there are approximately
395,011
shares of accumulated but undeclared Series B-1 Stock dividends. Unless prohibited by Michigan law governing distributions to shareholders, the Series B-1 preferred stock shall be redeemable at the option of holder of the Series B-1 preferred stock commencing at any time after the Conversion date, liquidation, winding up, dissolution or other similar events, subject to certain terms and limitations.
The Series B preferred stock does not, in its entirety, require liability classification and was evaluated for embedded features to determine if those features require bifurcation and separate classification as derivative liabilities. The Series B preferred stock host contract was evaluated for equity or mezzanine classification based upon the nature of the redemption and conversion features. Generally, any feature that could require cash redemption for matters not within the Company’s control, irrespective of probability of the event occurring, requires classification outside of shareholders’ equity. The Series B preferred stock was initially recorded as mezzanine in the Condensed Consolidated Balance Sheets and was accreted to its redemption value through charges to accumulated deficit using the effective interest method.
In 2013, the Company amended the Series B preferred stock agreement to remove the cash redemption provision, modify the liquidation preferences for the Series B-2 preferred stock and to increase the redemption price for the Series B-1 preferred stock. The redemption price, prior to the
five years
anniversary, is now equal to
$7,430
multiplied by the number of Series B-1 preferred shares redeemed minus the Company’s closing stock price multiplied by the number of common shares into which the outstanding Series B-2 preferred stock are convertible. The redemption price, after the
five years
anniversary, is the amount equal to the greater of the Series B offering price plus accrued dividends or the conversion value in common stock. As a result of the amendment to the agreement, the total amount of
$38.4 million
Series B preferred stock was reclassified from mezzanine into shareholders’ equity.
Series A Convertible Preferred Stock
On December 18, 2015, the Company entered into a Securities Exchange Agreement (Exchange Agreement) with Stonepine pursuant to which Stonepine exchanged an aggregate of
1,250,000
shares of its common stock for
1,250
shares of the Company’s Series A Convertible Preferred Stock (the Exchange). The Exchange closed on December 23, 2015. In connection with the Exchange, the Company designated
1,250
shares of its authorized and unissued preferred stock as Series A Convertible Preferred Stock. Each share of Series A Convertible Preferred Stock is convertible into
1,000
shares of its common stock at any time at the holder’s option. The holder, however, will be prohibited from converting Series A Convertible Preferred Stock into shares of common stock if, as a result of such conversion, the holder, together with its affiliates, would own more than
9.99%
of the shares of the Company's common stock then issued and outstanding or, upon such holder’s written election,
14.99%
of the shares of the Company's common stock then issued and outstanding. In the event of our liquidation, dissolution, or winding up, holders of Series A Convertible Preferred Stock will receive a payment equal to any declared but unpaid dividends before any proceeds are distributed to the holders of common stock, after any proceeds are distributed to the holder of our Series B-1 Non-Voting Convertible Preferred Stock and Series B-2 Voting Convertible Preferred Stock (together, the Series B Convertible Preferred Stock) and pari passu with any distributions to the holders of the Company's common stock. Shares of Series A Convertible Preferred Stock have no voting rights, except as required by law and except where the consent of holders of a majority of the outstanding Series A Convertible Preferred Stock would be required to amend the terms of the Series A Convertible Preferred Stock. Shares of Series A Convertible Preferred Stock are entitled to receive dividends at the same time as the shares of Common Stock.
|
|
11.
|
Net Loss Per Common Share
|
Basic earnings (loss) per share is calculated using the two-class method, which is an earnings allocation formula that determines earnings (loss) per share for the holders of the Company’s common shares and holders of the Series B preferred stock. The Series B preferred stock shares contain participation rights in undistributed earnings, but do not share in the losses of the Company. The dividends on the Series B preferred stock are treated as a reduction of earnings attributable to common shareholders.
The following reflects the net loss attributable to common shareholders and share data used in the basic and diluted earnings per share computations using the two class method:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
(Amounts In thousands except per share amounts)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,044
|
)
|
|
$
|
(2,152
|
)
|
|
$
|
(6,694
|
)
|
|
$
|
(7,014
|
)
|
Dividends accumulated on convertible preferred stock
|
|
(1,856
|
)
|
|
(1,654
|
)
|
|
(3,660
|
)
|
|
(3,244
|
)
|
Net loss attributable to common shareholders
|
|
$
|
(4,900
|
)
|
|
$
|
(3,806
|
)
|
|
$
|
(10,354
|
)
|
|
$
|
(10,258
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic and diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
22,684
|
|
|
23,786
|
|
|
22,644
|
|
|
23,786
|
|
Net loss per share attributable to common shareholders (basic and diluted)
|
|
$
|
(0.22
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.46
|
)
|
|
$
|
(0.43
|
)
|
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
June 30, 2016
and
2015
were
6.4 million
and
4.3 million
, respectively.
12. Concentration of Credit Risk
Revenue from
one
customer, a distributor in the U.S., represented approximately
69%
and
63%
of total revenue during the three months ended
June 30, 2016
and 2015, respectively, and
65%
and
63%
of total revenue during the
six
months ended
June 30, 2016
and 2015, respectively. Accounts receivable from the same customer accounted for
78%
and
76%
of the outstanding accounts receivable as of
June 30, 2016
and December 31, 2015, respectively. The next largest customer represented approximately
13%
and
15%
of revenue for the three month period ended
June 30, 2016
and 2015, respectively, and
15%
and
16%
of total revenue during the
six
months ended
June 30, 2016
and 2015, respectively. No other customer accounted for more than 10% of revenue or accounts receivable in 2016 or 2015 reported in either period.
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 terms until February 2022. Under the amendment, the landlord will contribute approximately
$2.0 million
toward the cost of tenant improvements. The
contribution toward the cost of tenant improvements is recorded as deferred rent on our consolidated balance sheet and is amortized to our consolidated statement of operations as reductions to rent expense over the lease term. As of June 30, 2016, we have recorded a tenant improvement of
$0.9 million
.
In addition to the property leases, the Company also leases an offsite warehouse, various vehicles and computer equipment.
As of
June 30, 2016
, future minimum payments related to leases and other contractual obligations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Total
|
|
2016
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
More than 5 Years
|
Operating leases
|
|
$
|
25,538
|
|
|
$
|
2,123
|
|
|
$
|
4,897
|
|
|
$
|
4,590
|
|
|
$
|
4,267
|
|
|
$
|
4,386
|
|
|
$
|
5,275
|
|
Purchase commitments
|
|
450
|
|
|
450
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Capital leases
|
|
97
|
|
|
22
|
|
|
43
|
|
|
32
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
26,085
|
|
|
$
|
2,595
|
|
|
$
|
4,940
|
|
|
$
|
4,622
|
|
|
$
|
4,267
|
|
|
$
|
4,386
|
|
|
$
|
5,275
|
|
Rent expense for the
three and six
months ended
June 30, 2016
was
$1.2 million
and
$2.4 million
, respectively, and
$1.3 million
and
$2.5 million
, respectively, for the
three and six
months ended
June 30, 2015
.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Vericel Corporation is a leader in developing patient-specific expanded cellular therapies for use in the treatment of patients with severe diseases and conditions. We market two autologous cell therapy products in the United States: Carticel
®
(autologous cultured chondrocytes), an autologous chondrocyte implant for the treatment of cartilage defects in the knee, and Epicel
®
(cultured epidermal autografts), a permanent skin replacement 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. We are also developing MACI
®
, a third-generation autologous chondrocyte implant for the treatment of cartilage defects in the knee, and ixmyelocel-T, a patient-specific multicellular therapy for the treatment of advanced heart failure due to ischemic dilated cardiomyopathy.
Manufacturing
We have a cell-manufacturing facility in Cambridge, Massachusetts which is used for U.S. manufacturing and distribution of Carticel, Epicel manufacturing and also manufacturing of MACI for the SUMMIT study conducted for approval in Europe. We also operate a centralized cell manufacturing facility in Ann Arbor, Michigan. The Ann Arbor facility supports the current open label extension portion of the ixCELL-DCM clinical trial being conducted in the United States and Canada and we believe we have sufficient capacity, with minor modifications, to supply our early commercialization requirements.
Product Portfolio
We market two autologous cell therapy products in the United States: Carticel® (autologous cultured chondrocytes), an autologous chondrocyte implant for the treatment of cartilage defects in the knee, and Epicel® (cultured epidermal autografts), a permanent skin replacement 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). We are also developing MACI
®
, a third-generation autologous chondrocyte implant for the treatment of cartilage defects in the knee and for which a BLA is under review by the FDA. Our product candidate portfolio also includes ixmyelocel-T, a patient-specific multicellular therapy currently in development for the treatment of advanced heart failure due to ischemic dilated cardiomyopathy (DCM). We completed enrolling and treating patients in our Phase 2b ixCELL-DCM study in February 2015 and on March 10, 2016 announced the trial had met its primary endpoint of reduction in clinical cardiac events and that incidence of adverse events, including serious adverse events, in patients treated with ixmyelocel-T was comparable to patients in the placebo group.
Carticel
Carticel, a first-generation autologous chondrocyte implant product for the treatment and repair of cartilage defects in the knee, is the first and currently the only FDA-approved autologous cartilage repair product. Carticel is indicated for the repair of symptomatic cartilage defects of the femoral condyle (medial, lateral or trochlea) caused by acute or repetitive trauma, in patients who have had an inadequate response to a prior arthroscopic or other surgical repair procedure such as debridement, microfracture, drilling/abrasion arthroplasty, or osteochondral allograft/autograft. Carticel received a Biologics License Application (BLA) approval in 1997 and is currently marketed in the U.S. It is generally used on patients with larger lesions (greater than 3 cm
2
).
In the U.S., we focus sales of Carticel on the sports-injury-targeted orthopedic physician target audience, which is very concentrated, with 60% of the current Carticel business originating from 25% of this audience, or approximately 110 physicians. We currently have approximately a 20-person field force calling on this sports-injury targeted orthopedic physician audience. For the
three and six
months ended
June 30, 2016
, net revenues were
$9.0 million
and
$17.8 million
, respectively, for Carticel.
Epicel
Epicel (cultured epidermal autografts) is a permanent skin replacement for full thickness burns greater than or equal to 30% of TBSA. Epicel is regulated by the Center for Biologics Evaluation and Research under medical device authorities, and is the only FDA-approved autologous epidermal product available for large total surface area burns. Epicel was designated as a HUD in 1998 and an HDE application for the product was submitted in 1999. HUDs are devices that are intended for diseases or conditions that affect fewer than 4,000 individuals annually in the United States. Under an HDE approval, a HUD cannot be sold for an amount that exceeds the cost of research and development, fabrication and distribution unless certain conditions are met. Currently, fewer than 100 patients are treated with Epicel in the U.S. each year. For the
three and six
months ended
June 30, 2016
, net revenues were
$3.8 million
and
$9.1 million
, respectively, for Epicel.
A HUD is eligible to be sold for profit after receiving HDE approval if the device meets certain eligibility criteria, including where the device is intended for the treatment of a disease or condition that occurs in pediatric patients and such device is labeled for use in pediatric patients. If the FDA determines that a HUD meets the eligibility criteria, the HUD is permitted to be sold for profit as long as the number of devices distributed in any calendar year does not exceed the annual distribution number (ADN). The ADN is defined as the number of devices reasonably needed to treat a population of 4,000 individuals per year in the United States.
On February 18, 2016, the FDA approved the Company’s HDE supplement to revise the labeled indications of use to specifically include pediatric patients and to add pediatric labeling. The revised product label also now specifies that the probable benefit of Epicel, mainly related to survival, was demonstrated in two Epicel clinical experience databases and a physician-sponsored study comparing outcomes in patients with massive burns treated with Epicel relative to standard care. Due to the change in the label to include use in pediatric patients, Epicel is no longer subject to the HDE profit restrictions. In conjunction with meeting the pediatric eligibility criteria, the FDA has determined the ADN number for Epicel is 360,400.
We currently have a 5-person field force calling upon dedicated burn centers.
MACI
MACI is a third-generation autologous chondrocyte implant product for the treatment of focal chondral cartilage defects in the knee. MACI received marketing authorization in Europe in July 2013 by meeting the requirements of the Advanced Therapy and Medicinal Product (ATMP) guidelines. MACI had been commercially available in the European Union (EU) since 1998. As part of the June 2014 restructuring we temporarily suspended sales of MACI in August 2014, primarily due to low utilization and an unfavorable pricing environment. We believe that MACI has significant revenue potential in the U.S., if approved and reimbursed. On March 4, 2016, the FDA accepted our BLA seeking approval to market MACI as an autologous cellular treatment for symptomatic cartilage defects of the knee. The FDA provided a Prescription Drug User Fee Act goal date of January 3, 2017. In
addition, the FDA has communicated that it is not currently planning to hold an advisory committee meeting to discuss the application.
Ixmyelocel-T
Our preapproval stage portfolio includes ixmyelocel-T, a unique patient-specific multicellular therapy derived from an adult patient’s own bone marrow which utilizes our proprietary, highly automated and scalable manufacturing system. Our proprietary cell manufacturing process significantly expands the mesenchymal stromal cells (MSCs) and M2-like anti-inflammatory macrophages in the patient’s bone marrow mononuclear cells while retaining many of the hematopoietic cells. These cell types are known to regulate the immune response and play a key role in tissue repair and regeneration by resolving pathologic inflammation, promoting angiogenesis, and remodeling ischemic tissue. The novelty and advantage of using ixmyelocel-T is the expansion of a unique combination of cell populations, including MSCs and M2-like macrophages, which secrete a distinct combination of angiogenic and regenerative factors, and possess the ability to remain anti-inflammatory in the face of inflammatory challenge.
Our lead clinical development program for ixmyelocel-T is focused on severe, chronic ischemic cardiovascular diseases. We have completed the double-blind portion of the Phase 2b ixCELL-DCM study, which is a randomized, double-blind, placebo-controlled clinical trial for patients with advanced heart failure due to ischemic DCM. Ixmyelocel-T has been granted a U.S. Orphan Drug designation by the FDA for the treatment of DCM. We also have conducted clinical studies for the treatment of critical limb ischemia and the treatment of craniofacial defects.
The Phase 2b ixCELL-DCM clinical study treated 114 patients at 28 sites in the U.S. and Canada. We completed enrolling and treating patients in February, 2015. Patients were followed for 12 months for the primary efficacy endpoint of major adverse cardiovascular events, defined as all-cause deaths, all-cause hospitalizations, and unplanned outpatient or emergency department visits for IV treatment of acute worsening heart failure. Secondary endpoints include clinical, functional, structural, symptomatic, quality of life, and biomarker measures at 3, 6 and 9 months. On March 10, 2016, we announced the trial had met its primary endpoint of reduction in clinical cardiac events, and that the full data results from the ixCELL-DCM trial were presented at the Late-Breaking Clinical Trial Sessions of the American College of Cardiology 65
th
Annual Scientific Session & Expo on April 4, 2016. On April 4, 2016, we announced that incidence of adverse events, including serious adverse events, in patients treated with ixmyelocel-T was comparable to or lower than patients in the placebo group. With respect to the secondary endpoints of the trial, the components of the primary endpoint were also analyzed using the Win ratio in a hierarchical manner to incorporate both the incidence and timing of the endpoint components. The Win ratio result of 1.56 showed that more often ixmyelocel-T was the "winner" in that the time to death, left ventricular assist device placement, heart transplantation or time to cardiovascular hospitalization was shorter for placebo-treated patients, but this difference did not reach statistical significance. The time to first event was longer in the ixmyelocel-T group compared to placebo, but was not statistically significant. There were no significant structural changes in left ventricle cavity size or left ventricular ejection fraction as measured by echocardiogram in either the ixmyelocel-T or placebo groups. Both treatment groups had an improvement in the New York Heart Association class and six-minute walk test, with no statistical difference between the groups after 12 months using the last observation carried forward. Because the trial met the primary endpoint, patients who had been assigned to the placebo group or randomized to ixmyelocel-T in the double blind portion of the trial but did not receive ixmyelocel-T will be offered the option to receive treatment.
Future development plans for ixmyelocel-T are dependent upon input from our regulatory interactions and the availability of financing. We are focused on determining the most appropriate manner to fund future development of ixmyelocel-T, balancing risk to the overall business, dilution to current shareholders, and retaining a significant portion of the upside potential of the program for the company and our shareholders.
Results of Operations
Net Loss
Our net loss for the
three and six
months ended
June 30, 2016
totaled
$3.0 million
or
$0.22
per share and
$6.7 million
or
$0.46
per share, respectively. Our net loss for the
three and six
months ended
June 30, 2015
totaled
$2.2 million
or
$0.16
per share and
$7.0 million
and
$0.43
per share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(In thousands)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Total revenues
|
|
$
|
12,823
|
|
|
$
|
13,590
|
|
|
$
|
26,931
|
|
|
$
|
24,439
|
|
Cost of product sales
|
|
7,300
|
|
|
6,901
|
|
|
13,860
|
|
|
12,469
|
|
Gross profit
|
|
5,523
|
|
|
6,689
|
|
|
13,071
|
|
|
11,970
|
|
Total operating expenses
|
|
10,507
|
|
|
8,954
|
|
|
20,047
|
|
|
18,807
|
|
Loss from operations
|
|
(4,984
|
)
|
|
(2,265
|
)
|
|
(6,976
|
)
|
|
(6,837
|
)
|
Other expense
|
|
1,940
|
|
|
113
|
|
|
282
|
|
|
(177
|
)
|
Net loss
|
|
$
|
(3,044
|
)
|
|
$
|
(2,152
|
)
|
|
$
|
(6,694
|
)
|
|
$
|
(7,014
|
)
|
Net Revenues
Net revenues decreased for the three months ended
June 30, 2016
compared to the same period the previous year primarily due to the downtime for the Carticel and Epicel cleanrooms to replace a rooftop air handler unit which resulted in a two-week, or approximately 16%, reduction in product shipment dates for both products during the second quarter. The decrease is offset by an increases in the price we charge for Carticel in 2016 which became effective in the three months ended March 31, 2016.
Net revenues increased for the
six
months ended
June 30, 2016
compared to the same period the previous year due primarily to an increase in Epicel sales and an increase in the price we charge for Carticel offset by the closure of Marrow Donation, LLC in 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
Revenue by product (in thousands)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Carticel
|
|
$
|
8,987
|
|
|
$
|
9,063
|
|
|
$
|
17,798
|
|
|
$
|
16,181
|
|
Epicel
|
|
3,836
|
|
|
4,274
|
|
|
9,133
|
|
|
7,913
|
|
Bone Marrow
|
|
—
|
|
|
253
|
|
|
—
|
|
|
345
|
|
|
|
$
|
12,823
|
|
|
$
|
13,590
|
|
|
$
|
26,931
|
|
|
$
|
24,439
|
|
Seasonality.
Carticel revenue is subject to seasonal fluctuations with stronger sales occurring in the fourth quarter and second quarter due to a number of factors including insurance copay limits and the time of year patients prefer to start rehabilitation. Over the last five years ended December 31, 2015, the percentage of annual sales by quarter has ranged as follows: first quarter, 20% to 24%; second quarter, 24% to 26%; third quarter, 21% to 23%; and fourth quarter, 29% to 33%. During 2015, the percentage of annual sales by quarter was as follows: 20% in the first quarter; 26% in the second quarter; 22% in the third quarter; and 32% in the fourth quarter. Epicel revenue is also subject to seasonal fluctuations mostly associated with the use of heating elements during the colder months, with stronger sales occurring in the winter months of the first and fourth quarters, and weaker sales occurring in the hot summer months of the third quarter. However, in any single year, this trend can be absent due to the extreme variability inherent with Epicel’s low patient volume of fewer than 100 patients per year. Over the last five years ended December 31, 2015, the percentage of annual sales by quarter has ranged as follows: first quarter, 27%; second quarter, 25%; third quarter, 20%; and fourth quarter, 28%. The variability between the same quarters in consecutive years has been as high as 10% of the annual volume. While the number of patients treated per year remains low, we expect these large swings in revenue in some quarters to continue. These seasonal trends have caused and will likely continue to cause, fluctuations in our quarterly results, including fluctuations in sequential revenue growth rates.
Gross Profit and Gross Profit Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(In thousands)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Gross profit
|
|
$
|
5,523
|
|
|
$
|
6,689
|
|
|
$
|
13,071
|
|
|
$
|
11,970
|
|
Gross profit %
|
|
43
|
%
|
|
49
|
%
|
|
49
|
%
|
|
49
|
%
|
Gross profit ratio decreased for the
three months ended June 30, 2016
compared to the same period in 2015 due to the downtime for the Carticel and Epicel cleanrooms to replace a rooftop air handler unit which resulted in a two-week, or approximately 16%, reduction in product shipment dates for both products during the second quarter. The gross profit ratio has remained consistent for the
six
months ended
June 30, 2016
and 2015.
Research and Development Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(In thousands)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Research and development costs
|
|
4,058
|
|
|
3,369
|
|
|
7,594
|
|
|
7,746
|
|
Research and development expenses for the
three months ended June 30, 2016
were
$4.1 million
versus
$3.4 million
for the same period a year ago. Trial expenses for the ixCELL-DCM clinical trial were higher in the
three months ended June 30, 2016
due to consulting services related to completing the blinded portion of the trial, analyzing the data and preparing to treat patients who had been originally assigned to the placebo group in the double blind portion of the trial and will now be offered the option to receive ixmyelocel-T in the open label extension portion of the trial. In addition, MACI research and development consulting fees for the
three months ended June 30, 2016
have increased compared to the same period a year ago.
Research and development expenses for the
six
months ended
June 30, 2016
were
$7.6 million
versus
$7.7 million
for the same period a year ago. Expenses related to the ixCELL-DCM clinical trial were lower due to decrease in consulting services offset by an increase in expenses associated with MACI, Carticel and Epicel research and development expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(In thousands)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Dilated Cardiomyopathy
|
|
$
|
2,038
|
|
|
$
|
1,866
|
|
|
$
|
3,857
|
|
|
$
|
5,298
|
|
MACI
|
|
728
|
|
|
417
|
|
|
1,280
|
|
|
607
|
|
Carticel
|
|
719
|
|
|
522
|
|
|
1,366
|
|
|
1,000
|
|
Epicel
|
|
573
|
|
|
564
|
|
|
1,091
|
|
|
841
|
|
Total research and development expenses
|
|
$
|
4,058
|
|
|
$
|
3,369
|
|
|
$
|
7,594
|
|
|
$
|
7,746
|
|
Selling, General and Administrative Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(In thousands)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Selling, general and administrative costs
|
|
$
|
6,449
|
|
|
$
|
5,585
|
|
|
$
|
12,453
|
|
|
$
|
11,061
|
|
Selling, general and administrative expenses for the
three months ended June 30, 2016
were
$6.4 million
compared to
$5.6 million
for the same period a year ago. Selling, general and administrative expenses for the
six months ended June 30, 2016
were
$12.5 million
compared to
$11.1 million
for the same period a year ago. The increase in selling, general and administrative expenses in 2016 is due primarily to an increase in start-up costs with our new reimbursement and patient support services for Carticel, professional services related to preparing for the potential launch of MACI, legal fees, shared facility fees and an increase in personnel costs.
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(In thousands)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Increase in fair value of warrants
|
|
$
|
1,942
|
|
|
$
|
112
|
|
|
$
|
302
|
|
|
$
|
(205
|
)
|
Foreign currency translation (loss) gain
|
|
(1
|
)
|
|
(6
|
)
|
|
(11
|
)
|
|
10
|
|
Other income
|
|
—
|
|
|
—
|
|
|
(10
|
)
|
|
—
|
|
Net interest income
|
|
(1
|
)
|
|
7
|
|
|
1
|
|
|
18
|
|
Total other income (expense)
|
|
$
|
1,940
|
|
|
$
|
113
|
|
|
$
|
282
|
|
|
$
|
(177
|
)
|
The change in other income and expense for the
three and six
months ended
June 30, 2016
compared to
2015
is due primarily to the change in warrant value as a result of the fluctuations in our stock price and the reduction in the time to maturity and the expiration of the January Class A warrants and December 2010 warrants in 2015. Fluctuations in the fair value of the warrants
in future periods could result in significant non-cash adjustments to the condensed consolidated financial statements; however, any income or expense recorded will not impact our cash, operating expenses or cash flow.
Stock Compensation
Non-cash stock-based compensation expense included in cost of goods sold, research and development expenses and selling, general and administrative expenses is summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(In thousands)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Cost of goods sold
|
|
$
|
131
|
|
|
$
|
67
|
|
|
$
|
214
|
|
|
$
|
187
|
|
Research and development
|
|
179
|
|
|
145
|
|
|
$
|
258
|
|
|
$
|
357
|
|
Selling, general and administrative
|
|
521
|
|
|
480
|
|
|
847
|
|
|
1,070
|
|
Total non-cash stock-based compensation expense
|
|
$
|
831
|
|
|
$
|
692
|
|
|
$
|
1,319
|
|
|
$
|
1,614
|
|
The increase in stock-based compensation expense is due primarily to an increase in the fair value of the options granted in 2016 compared to 2015 in addition to the expense recognized as a result of the Vericel Corporation Employee Stock Purchase Plan which was implemented effective October 1, 2015.
Adjusted Net Loss and Adjusted Net Loss Per Share
The reconciliation of reported numerator and denominator in net loss per share (GAAP) to adjusted net loss per share (non-GAAP measure) for the
three and six
months ended
June 30, 2016
and
2015
is below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(Amounts In thousands except per share amounts)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Numerator:
|
|
|
|
|
|
|
|
|
Numerator of basic and diluted EPS
|
|
$
|
(4,900
|
)
|
|
$
|
(3,806
|
)
|
|
$
|
(10,354
|
)
|
|
$
|
(10,258
|
)
|
Add: (Decrease) increase in fair value of warrants
|
|
(1,942
|
)
|
|
(112
|
)
|
|
(302
|
)
|
|
205
|
|
Add: Dividends accumulated on convertible preferred stock
|
|
1,856
|
|
|
1,654
|
|
|
3,660
|
|
|
3,244
|
|
Adjusted net loss - Non-GAAP
|
|
$
|
(4,986
|
)
|
|
$
|
(2,264
|
)
|
|
$
|
(6,996
|
)
|
|
$
|
(6,809
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Denominator for basic and diluted EPS:
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
22,684
|
|
|
23,786
|
|
|
22,644
|
|
|
23,786
|
|
Add: Treasury stock
|
|
1,250
|
|
|
—
|
|
|
1,250
|
|
|
—
|
|
Adjusted denominator for basic and diluted EPS - Non-GAAP
|
|
23,934
|
|
|
23,786
|
|
|
23,894
|
|
|
23,786
|
|
Adjusted net loss per share (basic and diluted) - Non-GAAP
|
|
$
|
(0.21
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.29
|
)
|
|
$
|
(0.29
|
)
|
We believe that the presentation of Adjusted Net Loss and Adjusted Net Loss Per Share, non-GAAP financial measures, provide investors with additional information about our financial results. Adjusted Net Loss and Adjusted Net Loss Per Share are important supplemental measures used by our board of directors and management to evaluate our operating performance from period to period on a consistent basis and as measures for planning and forecasting overall expectations and for evaluating actual results against such expectations.
The Adjusted Net Loss excludes the non-cash change in the fair value of warrants and the non-cash accumulated dividend on the Series B convertible preferred stock. The Adjusted Net Loss Per Share includes common shares reserved as treasury shares received in exchange for the Series A non-voting convertible preferred stock.
Adjusted Net Loss and Adjusted Net Loss Per Share are not in accordance with, or an alternative to, measures prepared in accordance with U.S. GAAP. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. As non-GAAP measures, Adjusted Net Loss and Adjusted Net Loss Per Share have limitations in that they do not reflect all of the amounts associated with our results of operations as determined in accordance with U.S. GAAP. Non-GAAP financial measures that we use may differ from measures that other companies may use. These non-GAAP financial measures that we disclose are not meant to be considered superior to or a substitute for results of operations prepared in accordance with GAAP, and should be viewed in conjunction with, GAAP financial measures.
Liquidity and Capital Resources
We are currently focused on utilizing our technology to identify, develop and commercialize innovative therapies that enable the body to repair and regenerate damaged tissues and organs to restore normal structure and function. Until such time as we satisfy, if at all, applicable regulatory approval requirements for ixmyelocel-T and MACI, we expect the sales of Carticel and Epicel therapies to constitute nearly all of our product sales revenues. Additionally, we are focusing significant resources to grow our commercial business.
We have raised significant funds in order to complete our product development programs, and complete clinical trials needed to market and commercialize our products. To date, we have financed our operations primarily through public and private sales of our equity securities. While we believe that, based on our current cash on hand and availability under our term loan and revolving line of credit, we are well positioned to sustain operations twelve months beyond
June 30, 2016
; if actual results differ from our projections, we may need to access additional capital. We expect that we will require substantial additional capital resources to complete the development of ixmyelocel-T for the treatment of advanced heart failure due to ischemic DCM and for other strategic opportunities. Actual cash requirements may differ from projections and will depend on many factors, including continued scientific progress in our research and development programs, the scope and results of clinical trials, the time and costs involved in obtaining regulatory approvals, the costs involved in filing, prosecuting and enforcing patents, competing technological and market developments, costs of possible acquisition or development of complementary business activities, and the cost of product launch and commercialization of newly approved products. If MACI receives the required FDA approvals, we may need to raise additional capital in anticipation of the introduction of MACI in the U.S. market.
We have access to certain amounts of financing through an agreement with Lincoln Park Capital Fund, LLC (Lincoln Park). We may direct Lincoln Park to purchase up to $15.0 million worth of shares of our common stock over a 30-month period generally in amounts up to 50,000 shares of our common stock on certain business days under a Purchase Agreement. However, there are certain factors, such as volume of trading in our common stock and our stock price, which limit the amount that can be raised in a short period of time. The extent to which we rely on the Lincoln Park Equity Line as a source of funding will depend on a number of factors, including the prevailing market price of our common stock and the extent to which we are able to secure working capital from other sources. The remaining capacity under this agreement is
$11.3 million
as of
June 30, 2016
.
At
June 30, 2016
, there was approximately
$7.8 million
of net capacity remaining on the At-the-Market Sales Agreement with MLV & Co. LLC (formerly McNicoll, Lewis & Vlak and now owned by FBR & Co.), which allowed us to sell our common stock from time to time under a registration statement on Form S-3 filed in June 2011, pursuant to which we registered $100 million of our securities for public sale. The Form S-3 registration statement filed in June 2011 expired in July 2014. If we choose to access the remaining capacity, we will file an updated Form S-3 registration statement.
On March 8, 2016, we entered into a
$15.0 million
debt financing with SVB. The debt financing consists of a
$3.0 million
term loan available immediately upon the closing,
$2.0 million
term loan available upon the FDA's approval of the MACI BLA and up to
$10.0 million
revolving line of credit. The term loans are interest only (indexed to WSJ Prime plus
0.75%
) until March 1, 2017 followed by 36 equal monthly payments of principal plus interest maturing February 1, 2020. The revolving credit is limited to a borrowing base calculated using eligible accounts receivable and maturing March 8, 2018 with an interest rate indexed to WSJ Prime plus
0.25%
or
0.75%
, depending on certain balance sheet ratios. Monthly, the Company must remain in compliance with an adjusted quick ratio greater than or equal to
1.10
to
1.0
. The adjusted quick ratio is the ratio of (a) unrestricted cash and cash equivalents and net billed accounts receivable to (b) current liabilities minus the current portion of deferred revenue and warrant liabilities. SVB has a first priority perfected security interest in all assets of the Company other than intellectual property. As of
June 30, 2016
, there was an outstanding balance of
$2.4 million
under the revolving line of credit. The remaining capacity under the revolving line of credit as of
June 30, 2016
was
$7.2 million
and we were, and continue to be, in compliance with our financial and non-financial debt covenants.
Our cash totaled
$9.8 million
at
June 30, 2016
. During the
six months ended June 30, 2016
, the cash used for operations was
$6.4 million
. This use of funds was fueled largely by our operating loss adjusted by stock compensation expense of
$1.3 million
, depreciation and amortization expense of
$0.9 million
and cash receipts of $0.6 million for tenant improvement reimbursements.
The decrease in cash used for investing activities was primarily due to a reduction in capital additions through
June 30, 2016
compared to the same period in 2015. In 2015, the capital additions included an upgrade to our financial management/ERP software.
The change in cash provided from financing activities is primarily due to the cash proceeds of
$2.4 million
from borrowings under the debt financing with SVB in addition to the issuance of common stock of
$0.4 million
as a result of the exercise of stock
options and employee participation in the Vericel Corporation Employee Stock Purchase Plan which was implemented effective October 1, 2015.
Off-Balance Sheet Arrangements
At
June 30, 2016
, we were not party to any off-balance sheet arrangements.
Critical Accounting Policies
Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of these condensed consolidated financial statements requires the application of appropriate technical accounting rules and guidance, as well as the use of estimates. The application of these policies necessarily involves judgments regarding future events. These estimates and judgments, in and of themselves, could materially impact the condensed consolidated financial statements and disclosures based on varying assumptions. The accounting policies discussed in our Form 10-K for the fiscal year ended
December 31, 2015
are considered by management to be the most important to an understanding of the consolidated financial statements because of their significance to the portrayal of our financial condition and results of operations. There have been no material changes to that information disclosed in our Annual Report during the
six months ended June 30, 2016
.
Forward-Looking Statements
This report, including the documents that we incorporate by reference, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). Any statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These statements are often, but are not always, made through the use of words or phrases such as “anticipates,” “estimates,” “plans,” “projects,” “trends,” “opportunity,” “comfortable,” “current,” “intention,” “position,” “assume,” “potential,” “outlook,” “remain,” “continue,” “maintain,” “sustain,” “seek,” “achieve,” “continuing,” “ongoing,” “expects,” “management believes,” “we believe,” “we intend” and similar words or phrases, or future or conditional verbs such as “will,” “would,” “should,” “could,” “may,” or similar expressions. Accordingly, these statements involve estimates, assumptions and uncertainties which could cause actual results to differ materially from those expressed in them. The factors described in our Annual Report, among others, could have a material adverse effect upon our business, results of operations and financial conditions.
Because the factors referred to in the preceding paragraph could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements we make, you should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. These forward-looking statements include statements regarding:
•
potential strategic collaborations with others;
•
future capital needs and financing sources;
•
adequacy of existing capital to support operations for a specified time;
•
product development and marketing plans;
•
regulatory filing plans;
•
features and successes of our cellular therapies;
•
manufacturing and facility capabilities;
•
clinical trial plans, including publication thereof;
•
anticipation of future losses;
•
replacement of manufacturing sources;
•
commercialization plans; or
•
revenue expectations and operating results.