NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED SEPTEMBER 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 nine
months ended
September 30, 2016
, are not necessarily indicative of the results to be expected for the full year or for any other period. The
September 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.
Net Product Sales
On June 30, 2016, the Company terminated the agreement with its exclusive distributor for substantially all of its Carticel sales by reducing the scope of our agreement with this distributor. Prior to June 30, 2016, the distributor purchased and took title to Carticel upon shipment of the product and assumed credit and collection risk. The distributor worked with the payers on behalf of patients and surgeons to ensure medical coverage and to obtain reimbursement for Carticel implantation procedures. The Company retained all responsibility for shipment of the product to the surgical suite. Effective July 1, 2016, the Company transitioned to a direct sales model whereby the Company retains credit and collection risk from the end customer. The Company's new provider, Dohmen Life Science Services, LLC (DLSS) provides a similar patient support services as the previous distributor but does not purchase and take title to Carticel.
The Company recognizes product revenues from sales of Carticel upon delivery to patients as long as (i) there is persuasive evidence that an arrangement exists between ourselves and the customer, (ii) collectability is reasonably assured and (iii) the price
is fixed or determinable. Prior authorization or confirmation of coverage level by the patient’s private insurance plan, hospital or government payer is a prerequisite to the shipment of product to a patient. The Company's net product revenues are calculated by estimating expected payments for insurance, hospital or patient payments at the time it recognizes the gross revenue. The estimates are updated on a recurring basis as new information becomes available.
|
|
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. The Company is currently reviewing the potential impact of adopting the new guidance.
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 March 31, 2016 and for future periods.
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.
Statement of Cash Flows Presentation
The FASB issued guidance to address diversity in practice with respect to how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The updated guidance addresses eight specific cash flow issues with the objective of reducing the existing diversity that occurs in practice. The guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within 2017. The Company is currently reviewing the potential impact of adopting the new guidance.
|
|
4.
|
Selected Balance Sheet Components
|
Inventory as of
September 30, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
(In thousands)
|
September 30, 2016
|
|
December 31, 2015
|
Raw materials
|
$
|
3,214
|
|
|
$
|
1,228
|
|
Work-in-process
|
373
|
|
|
131
|
|
Finished goods
|
20
|
|
|
20
|
|
Inventory
|
$
|
3,607
|
|
|
$
|
1,379
|
|
Property and equipment, net as of
September 30, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
(In thousands)
|
September 30, 2016
|
|
December 31, 2015
|
Machinery and equipment
|
$
|
3,207
|
|
|
$
|
3,280
|
|
Furniture, fixtures and office equipment
|
931
|
|
|
931
|
|
Computer equipment and software
|
2,674
|
|
|
2,662
|
|
Leasehold improvements
|
3,319
|
|
|
2,393
|
|
Construction in process
|
810
|
|
|
421
|
|
Total property and equipment, gross
|
10,941
|
|
|
9,687
|
|
Less: Accumulated depreciation
|
(6,726
|
)
|
|
(5,638
|
)
|
|
$
|
4,215
|
|
|
$
|
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 nine
months ended
September 30, 2016
was
$0.4 million
and
$1.2 million
, respectively, compared to
$0.4 million
and
$1.0 million
, respectively, for the same periods in 2015.
Intangible assets, net as of
September 30, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
(In thousands)
|
September 30, 2016
|
|
December 31, 2015
|
Commercial rights
|
$
|
3,360
|
|
|
$
|
3,360
|
|
Less: accumulated amortization
|
$
|
(652
|
)
|
|
$
|
(443
|
)
|
|
$
|
2,708
|
|
|
$
|
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 nine
months ended
September 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
|
$
|
70
|
|
2017
|
280
|
|
2018
|
280
|
|
2019
|
280
|
|
2020
|
280
|
|
Thereafter
|
1,518
|
|
Total
|
$
|
2,708
|
|
Accrued expenses as of
September 30, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
(In thousands)
|
September 30, 2016
|
|
December 31, 2015
|
Bonus related compensation
|
$
|
1,615
|
|
|
$
|
1,956
|
|
Employee related accruals
|
1,759
|
|
|
1,341
|
|
Accrued expenses
|
24
|
|
|
306
|
|
|
$
|
3,398
|
|
|
$
|
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 and in September 2016 the Company issued warrants in connection with the updated debt agreement (September 2016 Warrants) discussed in note 6. The warrants issued in August 2013 (August 2013 Warrants) include anti-dilution price protection provisions that could require cash settlement of the warrants and accordingly 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. The September 2016 Warrants meet the requirements for equity classification. The following table describes the outstanding warrants:
|
|
|
|
|
|
|
|
August 2013
Warrants
|
|
September 2016 Warrants
|
Exercise price
|
|
$4.80
|
|
$2.48
|
Expiration date
|
|
August 16, 2018
|
|
September 9, 2022
|
Total shares issuable on exercise
|
|
724,950
|
|
117,074
|
On September 9, 2016, the Company issued
117,074
warrants to
two
holders in conjunction with the loan agreement described in note 6. The initial valuation of the September 2016 Warrants was recorded as debt issuance costs and is being amortized over the remaining life of the loan agreement to interest expense. The September 2016 Warrants are treated as equity instruments recorded at fair value with no subsequent remeasurement. Pursuant to the warrants, the holders may exercise their warrants for an aggregate of
117,074
shares of the Company’s common stock.
The fair value of the warrants described in the table above 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
|
|
September 30, 2016
|
|
December 31, 2015
|
Closing stock price
|
|
$
|
2.80
|
|
|
$
|
2.58
|
|
Expected dividend rate
|
|
—
|
%
|
|
—
|
%
|
Expected stock price volatility
|
|
90.0
|
%
|
|
91.4
|
%
|
Risk-free interest rate
|
|
0.8
|
%
|
|
1.3
|
%
|
Expected life (years)
|
|
1.88
|
|
|
2.63
|
|
|
|
|
|
|
|
September 2016 Warrants
|
|
September 9, 2016
|
Closing stock price
|
|
$
|
2.20
|
|
Expected dividend rate
|
|
—
|
%
|
Expected stock price volatility
|
|
89.8
|
%
|
Risk-free interest rate
|
|
1.4
|
%
|
Expected life (years)
|
|
6.00
|
|
On March 8, 2016, the Company entered into a
$15.0 million
debt financing with Silicon Valley Bank (SVB) which on September 9, 2016, was replaced by an expanded term loan and revolving line of credit agreement with SVB and MidCap Financial Services, or MidCap, which together provide access to up to
$20 million
. The updated debt financing consists of a
$4.0 million
term loan which was drawn at the closing, a
$4.0 million
term loan which must be drawn by March 31, 2017, a
$2.0 million
term loan available upon the FDA's approval of the MACI BLA and up to
$10.0 million
of a revolving line of credit. The term loans are interest only (indexed to Wall Street Journal (WSJ) Prime plus
5.00%
) until September 1, 2017 followed by
36
equal monthly payments of principal plus interest maturing September 9, 2020. The revolving credit is limited to a borrowing base calculated using eligible accounts receivable and maturing September 9, 2020 with an interest rate indexed to WSJ Prime plus
1.25%
. Monthly, the Company must remain in compliance with a minimum net revenue covenant (determined in accordance with GAAP), measured on a trailing twelve month basis. SVB and MidCap have a shared first priority perfected security interest in all assets of the Company other than intellectual property. As of
September 30, 2016
, there was an outstanding balance of
$4.0 million
under the term loan and
$2.0 million
under the revolving line of credit, both recorded in current liabilities. The remaining capacity under the revolving line of credit as of
September 30, 2016
was
$4.3 million
and we were, and continue to be, in compliance with our financial and non-financial debt covenants. In addition, warrants were issued in conjunction with the debt agreement as discussed in note 5.
In determining whether the debt replacement is to be accounted for as a debt extinguishment or a debt modification, the Company considered whether creditors remained the same or changed and whether the changes in debt terms are substantial. After performing the assessment in accordance with accounting guidance for the modification of debt arrangements, this transaction was determined to be accounted for as a debt modification. As a result, the unamortized deferred financing costs now include
$0.1 million
from the original issue costs and lender fees and
$0.3 million
, in new issue costs, lender fees and warrant issuance costs which will be deferred over the life of the new debt arrangement.
|
|
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 nine
months ended
September 30, 2016
, the Company granted
13,800
and
1,086,030
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 nine
month periods ended
September 30, 2016
was
$1.77
and
$2.15
, respectively for 2016 and
$2.26
and
$2.23
, respectively for the same periods in 2015.
The net compensation expense recorded for the service-based stock options related to employees and directors was
$0.6 million
and
$1.8 million
for the
three and nine
months ended
September 30, 2016
, respectively, and
$0.6 million
and
$2.2 million
for the
three and nine
months ended
September 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.
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
Service-Based Stock Options
|
|
2016
|
|
2015
|
Expected dividend rate
|
|
—
|
%
|
|
—
|
%
|
Expected stock price volatility
|
|
78.7 – 92.2%
|
|
|
77.6 – 88.1%
|
|
Risk-free interest rate
|
|
1.1 – 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
|
|
1,086,030
|
|
|
$
|
3.02
|
|
|
|
|
|
|
Exercised
|
|
39,231
|
|
|
$
|
3.06
|
|
|
|
|
$
|
76,827
|
|
Expired
|
|
79,963
|
|
|
$
|
34.98
|
|
|
|
|
|
|
Forfeited
|
|
126,631
|
|
|
$
|
3.80
|
|
|
|
|
|
|
Outstanding at September 30, 2016
|
|
3,363,605
|
|
|
$
|
4.73
|
|
|
8.4
|
|
$
|
471,219
|
|
Exercisable at September 30, 2016
|
|
1,129,664
|
|
|
$
|
7.83
|
|
|
7.8
|
|
$
|
49,148
|
|
As of
September 30, 2016
there was approximately
$2.9 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
2.9
years.
The total fair value of options vested during the
three and nine
months ended
September 30, 2016
and
2015
was
$0.6 million
and
$1.6 million
, respectively, and
$0.4 million
and
$1.3 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 October 3, 2016, employees purchased
62,000
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
three and nine
months ended
September 30, 2016
was less than
$0.1 million
and
$0.2 million
, respectively.
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 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
|
|
$
|
658
|
|
|
$
|
—
|
|
|
$
|
658
|
|
|
$
|
—
|
|
|
$
|
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
|
(99
|
)
|
Balance at September 30, 2016
|
$
|
658
|
|
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 Capital Fund, LLC (Lincoln Park), subject to certain limitations, from time to time over a
30 months
period, which began on April 3, 2014 and ends on November 1, 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
$11.2 million
as of
September 30, 2016
.
No
shares were issued in 2015. In October 2016,
50,000
shares were purchased by Lincoln Park for
$0.1 million
.
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
In 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
September 30, 2016
, there are approximately
424,723
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.
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 is classified in 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.
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11.
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Net Loss Per Common Share
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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:
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Three months ended September 30,
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Nine months ended September 30,
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(Amounts in thousands except per share amounts)
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2016
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2015
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2016
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2015
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Numerator:
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Net loss
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$
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(6,675
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)
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$
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(4,416
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)
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$
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(13,369
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)
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$
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(11,430
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)
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Dividends accumulated on convertible preferred stock
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(1,931
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)
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(1,654
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)
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(5,591
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)
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(4,965
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)
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Net loss attributable to common shareholders
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$
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(8,606
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)
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$
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(6,070
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)
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$
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(18,960
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)
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$
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(16,395
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)
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Denominator:
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Denominator for basic and diluted EPS:
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Weighted-average common shares outstanding
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22,744
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23,788
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22,678
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23,786
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Net loss per share attributable to common shareholders (basic and diluted)
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$
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(0.38
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)
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$
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(0.26
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)
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$
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(0.84
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)
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$
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(0.69
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)
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Common equivalent shares are not included in the diluted per share calculation where the effect of their inclusion would be anti-dilutive. The aggregate number of common equivalent shares (related to options, warrants and preferred stock) that have been excluded from the computations of diluted net loss per common share at
September 30, 2016
and
2015
were
6.5 million
and
4.2 million
, respectively.
12. Concentration of Credit Risk
On June 30, 2016, the Company terminated its agreement with the distributor for a significant portion of its Carticel sales. Prior to June 30, 2016, the Company sold Carticel to a distributor, which subsequently resold Carticel to patients and healthcare providers. The Company has transitioned to a new provider, Dohmen Life Science Services, LLC (DLSS) who provides a patient support services program but does not act as a distributor. The Company's receivables risk is now spread among various hospitals, individual patients, and third-party payers and therefore, the concentration of credit risk shifted for the Company.
Revenue from
one
customer, the distributor in the U.S., represented approximately
67%
of total revenue during the three months ended
September 30,
2015, and
46%
and
66%
of total revenue during the
nine
months ended
September 30, 2016
and 2015, respectively. Accounts receivable from the same customer accounted for
76%
of the outstanding accounts receivable as of December 31, 2015. The next largest customer represented
13%
and
14%
of total revenue during the
nine
months ended
September 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 the Company's consolidated balance sheet and is amortized to our consolidated statement of operations as reductions to rent expense over the lease term. As of September 30, 2016, the Company has recorded a tenant improvement of
$0.9 million
.
In addition to the property leases, the Company also leases an offsite warehouse, various vehicles and computer equipment. The Company's purchase commitments consists of minimum purchase amounts of material in manufacturing in addition to fees payable under the DLSS contract which provides a patient support services program for Carticel and MACI.
As of
September 30, 2016
, future minimum payments related to leases and other contractual obligations are as follows:
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(In thousands)
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Total
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2016
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2017
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2018
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2019
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2020
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More than 5 Years
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Operating leases
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$
|
24,658
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|
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$
|
1,043
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|
|
$
|
4,933
|
|
|
$
|
4,646
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|
|
$
|
4,316
|
|
|
$
|
4,413
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|
|
$
|
5,307
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|
Purchase commitments
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|
4,610
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|
|
440
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|
|
1,668
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|
1,668
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|
834
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—
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—
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Capital leases
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86
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|
11
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|
|
43
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|
32
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—
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—
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—
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Total
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$
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29,354
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$
|
1,494
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|
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$
|
6,644
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|
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$
|
6,346
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|
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$
|
5,150
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|
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$
|
4,413
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$
|
5,307
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Rent expense for the
three and nine
months ended
September 30, 2016
was
$1.2 million
and
$3.6 million
, respectively, and
$1.3 million
and
$3.8 million
, respectively, for the
three and nine
months ended
September 30, 2015
.
14. Subsequent Events
On October 10, 2016, the Company entered into an At-the-Market Sales Agreement (ATM) with Cowen and Company, LLC (Cowen), pursuant to which the Company may sell shares of its common stock through Cowen, as sales agent, in registered transactions from its shelf registration statement filed in June 2015, for aggregate proceeds of up to
$25.0 million
. Shares of common stock sold under the ATM are to be sold at market prices. The Company will pay up to
3%
of the gross proceeds to Cowen as a commission. No shares of common stock have been sold to date under the ATM.