NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED SEPTEMBER 30, 2017 (UNAUDITED)
Vericel Corporation, a Michigan corporation (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 and 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.
The accompanying consolidated financial statements have been prepared on a basis which assumes that the Company will continue as a going concern and contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. As of
September 30, 2017
, the Company has an accumulated deficit of
$361.2 million
and had a net loss of
$5.4 million
during the quarter ended
September 30, 2017
. The Company had cash of
$15.5 million
as of
September 30, 2017
. The Company expects that existing cash together with its
term loan and revolving line of credit agreement with Silicon Valley Bank (SVB) and MidCap Financial Services (MidCap) (the
SVB-MidCap facility), will be sufficient to support the Company's
current operations through at least twelve months following the filing of this Form 10-Q
. In connection with the SVB-MidCap facility,
the Company must remain in compliance with minimum monthly net revenue covenants (determined in accordance with U.S. GAAP), measured on a trailing twelve month basis.
SVB and MidCap also have the ability to call debt based on material adverse change clauses which are subjectively determinable and result in a
subjective acceleration clause.
If the Company's cash requirements exceed its current expectations, or if it is not in compliance with the monthly net revenue covenants or the subjective acceleration clauses are triggered under the SVB-MidCap facility, then SVB may call the debt resulting in the Company immediately needing additional funds. As of
September 30, 2017
, the Company was in compliance with the minimum revenue covenant set forth in the Second Loan Modification Agreement between the Company, SVB and MidCap. The Company may seek additional funding through debt or equity financings including the at-the-market sales agreement in place with
Cowen and Company, LLC
. However, the Company may not be able to obtain financing on acceptable terms or at all. The terms of any financing may adversely affect the holdings or the rights of the Company's shareholders. If the Company needs additional funds and is unable to obtain funding on a timely basis, the Company may need to significantly curtail its operations including its research and development programs in an effort to provide sufficient funds to continue its operations, which could adversely affect its business prospects.
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, 2017
, are not necessarily indicative of the results to be expected for the full year or for any other period. The
September 30, 2017
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, 2016
, as filed with the SEC on March 13, 2017 (Annual Report).
|
|
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. 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 does not expect a material impact to its consolidated financial statements following its initial evaluation of its revenue arrangements under the issued guidance. The Company will implement the guidance under the modified retrospective approach.
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 became effective and was implemented for the Company beginning January 1, 2017. Consistent with prior periods, the Company will continue to estimate forfeitures and therefore, the guidance did not have an impact on the Company's consolidated financial statements.
4. Revenue
Revenue Recognition and Net Product Sales
The Company sells Epicel and surgical kits directly to the customer based on contracted amounts. Revenue from sales to the customers is recognized in accordance with ASC 605,
Revenue Recognition
and SAB Topic 104,
R
eve
nue Recognition
, when (i) persuasive evidence of an arrangement exists, (ii) the goods are shipped or delivered and implanted, depending on shipping terms, (iii) title and risk of loss pass to the customer and (iv) collectability is reasonably assured. Shipping and handling costs are included as a component of revenue.
Prior to July 1, 2016, the Company sold Carticel to a distributor and followed ASC 605,
Revenue Recognition
and SAB Topic 104
Revenue Recognition
to record revenue. This distributor purchased and took title to Carticel upon shipment of the product and assumed credit and collection risk related to the end customers. 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 responsibility for shipment of the product to the surgical suite. Revenue was recorded for Carticel upon occurrence of the surgery, net of provisions for rebates and cash discounts. Such rebates and discounts were
$0.5 million
for the nine months ended September 30, 2016. There were
no
rebates or cash discounts for the three months ended September 30, 2016. These rebates and prompt payment cash discounts were established by the Company at the time of sale, based on actual experience adjusted to reflect known changes in the factors that impact such reserves. Adjustments to these reserves have historically not been significant.
On June 30, 2016, the Company reduced the scope of the agreement with its exclusive distributor by terminating their services for a significant portion of its Carticel sales. On July 1, 2016, the Company transitioned to a direct sales model for Carticel and MACI after launch whereby the Company retained credit and collection risk from the patient as the end customer. The Company utilized a new provider, Dohmen Life Science Services, LLC (DLSS), to provide patient support services but this provider did not purchase and take title to Carticel or MACI. On May 15, 2017, the Company and DLSS mutually terminated the agreement effective June 30, 2017. In addition, the Company utilized Vital Care Inc. and its franchisees as a second provider to expand the available network of contracted third-party payers for Carticel and MACI. Under this direct sales model, the patient bears the ultimate financial responsibility for the purchase of Carticel or MACI and as such the Company recognized revenue in accordance with ASC 954-605,
Health Care Entities - Revenue Recognition
. The third party payer (insurance company, government, etc.) pays all or some of the product price on the patient’s behalf.
Under the direct sales model, the Company recognized product revenues from sales of Carticel and MACI upon implantation at which time the claim is billable to patient’s insurance provider on behalf of the patient and is billed by either DLSS or Vital Care. The Company assumed counterparty risk for the third party reimbursement payment from the payer and from the patient co-pay. 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 invoices and recognizes revenue.To support this direct sales model, the Company utilized DLSS to provide administrative services associated with case management and reimbursement support and to provide billing and collection services. The Company utilized Vital Care to provide similar billing and collection services for a subset of insurance payers and patients.
In April 2017, the Company was notified of a contractual dispute between Vital Care and a third-party payer and as a result, during the three months ended March 31, 2017, the Company increased its estimated revenue allowances, reducing revenue by
$2.1 million
related to 2016 sales and
$0.7 million
related to 2017 sales to reflect the lower reimbursement that would be obtained if the claims are ultimately required to be treated as out-of-network. During the three months ended June 30, 2017, the dispute was resolved and the negotiated reimbursement resulted in the Company’s ability to reduce its estimated sales allowances by
$1.4 million
which resulted in additional revenue in the second quarter related to sales which originated primarily in 2016. As a result of the continuing evaluation and assessment of these expected payments, our estimates for expected payments could change.
On May 15, 2017, the Company entered into a distribution agreement with Orsini Pharmaceutical Services, Inc. (Orsini) to appoint Orsini as a specialty pharmacy distributor of MACI to patients' physicians and other healthcare providers. The initial term of the distribution agreement will end on May 15, 2019 with the option of two additional two-year terms. The Company ships the product directly to the surgical suite. Orsini purchases and takes title to MACI upon shipment of the product at which point the Company recognizes revenue. Orsini assumes credit and collection risk related to the end customers. In 2017, there are no material chargebacks, rebates or other types of sales incentives that would impact revenue under the agreement with Orsini. The Company and Orsini amended their agreement in August 2017, and further amended the agreement in October 2017 to provide Orsini with a prompt pay discount beginning on January 1, 2018. Under the Orsini arrangement, Orsini is the customer and the Company is recognizing revenue in accordance with ASC 605 and SAB 104.
Concentration of Credit Risk
On May 15, 2017, the Company and DLSS mutually terminated their agreement effective June 30, 2017. On May 15, 2017, the Company entered into a distribution agreement with Orsini as a specialty pharmacy distributor of MACI and has engaged a third party services provider to provide the patient support program previously provided by DLSS and to manage patient cases for MACI. The Company’s receivables risk is now more concentrated, and the concentration of credit risk also shifted for the Company.
Revenue from
one
customer, the MACI distributor in the U.S., represented approximately
55%
and
25%
during the three and nine months ended
September 30, 2017
, respectively. Accounts receivable from the same customer accounted for
48%
of the outstanding accounts receivable as of
September 30, 2017
. For the
three and nine
months ended
September 30, 2016
, the Company's largest customer represented
67%
and
46%
of total revenue, respectively. The next largest customer represented approximately
10%
and
13%
of revenue for the
three and nine
ended
September 30, 2017
, respectively, and
8%
and
13%
of total revenue during the
three and nine
months ended
September 30, 2016
, respectively. No other customer accounted for more than 10% of revenue or accounts receivable in 2017 or as of December 31, 2016.
|
|
5.
|
Selected Balance Sheet Components
|
Inventory as of
September 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
(In thousands)
|
September 30, 2017
|
|
December 31, 2016
|
Raw materials
|
$
|
3,727
|
|
|
$
|
3,214
|
|
Work-in-process
|
279
|
|
|
257
|
|
Finished goods
|
43
|
|
|
17
|
|
Inventory
|
$
|
4,049
|
|
|
$
|
3,488
|
|
Property and equipment, net as of
September 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
(In thousands)
|
September 30, 2017
|
|
December 31, 2016
|
Machinery and equipment
|
$
|
3,264
|
|
|
$
|
3,150
|
|
Furniture, fixtures and office equipment
|
981
|
|
|
931
|
|
Computer equipment and software
|
3,485
|
|
|
3,147
|
|
Leasehold improvements
|
3,908
|
|
|
3,332
|
|
Construction in process
|
608
|
|
|
408
|
|
Total property and equipment, gross
|
12,246
|
|
|
10,968
|
|
Less: Accumulated depreciation
|
(8,279
|
)
|
|
(7,093
|
)
|
|
$
|
3,967
|
|
|
$
|
3,875
|
|
Depreciation expense for both the three months ended
September 30, 2017
and
September 30, 2016
was
$0.4 million
and depreciation expense for both the nine months ended
September 30, 2017
and
September 30, 2016
was
$1.2 million
.
Accrued expenses as of
September 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
(In thousands)
|
September 30, 2017
|
|
December 31, 2016
|
Bonus related compensation
|
$
|
1,608
|
|
|
$
|
2,433
|
|
Employee related accruals
|
2,021
|
|
|
1,668
|
|
Clinical trial related accruals
|
379
|
|
|
422
|
|
Other
|
506
|
|
|
—
|
|
|
$
|
4,514
|
|
|
$
|
4,523
|
|
|
|
6.
|
Stock Purchase Warrants
|
The Company has historically issued warrants to purchase shares of the Company’s common stock in connection with certain of its common stock offerings and in September 2016 the Company issued warrants in connection with the updated debt agreement (September 2016 Warrants) discussed in note 7. 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 require 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 7. 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 9 of the condensed consolidated financial statements.
The assumptions used by the Company are summarized in the following tables:
|
|
|
|
|
|
|
|
|
|
August 2013 Warrants
|
|
September 30, 2017
|
|
December 31, 2016
|
Closing stock price
|
|
$
|
6.00
|
|
|
$
|
3.00
|
|
Expected dividend rate
|
|
—
|
%
|
|
—
|
%
|
Expected stock price volatility
|
|
50.6
|
%
|
|
97.9
|
%
|
Risk-free interest rate
|
|
1.3
|
%
|
|
1.0
|
%
|
Expected life (years)
|
|
0.88
|
|
|
1.62
|
|
|
|
|
|
|
|
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 SVB which on September 9, 2016, was replaced by an expanded term loan and revolving line of credit agreement with SVB and MidCap, which together initially provided 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 was drawn upon in November 2016, a
$2.0 million
term loan which is no longer available as it was not drawn upon by April 12, 2017 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 line of 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%
.
The Company is subject to various financial and nonfinancial covenants including but not limited to monthly minimum net revenue covenants
(determined in accordance with U.S. GAAP), measured on a trailing twelve month basis
. SVB and MidCap have the ability to call debt based on material adverse change clauses which are subjectively determinable and result in a
subjective acceleration clause. The Company has not been informed of any material adverse changes that have occurred. 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, 2017
, there was an outstanding balance of
$7.8 million
under the term loan and
$2.5 million
under the revolving line of credit (net of total deferred costs of
$0.3 million
). The weighted average interest rate on the outstanding term and revolving credit loans as of
September 30, 2017
was
7.8%
.
On December 30, 2016, the Company entered into an amendment to the SVB-MidCap facility to amend certain financial covenants and to modify the final payment of the term loan advance. The Company further amended the SVB-MidCap facility on May 9, 2017 to update the monthly net revenue requirement covenants,
measured on a trailing twelve month basis
. The amendment
decreased the monthly 12 month trailing minimum revenue covenant
and revised the
December 31, 2017 minimum revenue covenant to
$51.7 million
.
As of
September 30, 2017
, the Company was in compliance with the minimum revenue covenant. As of
September 30, 2017
, there was
$3.3 million
remaining capacity under the revolving line of credit.
|
|
8.
|
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, 2017
, the Company granted
127,200
and
1,677,760
, respectively, service-based options to purchase common stock. 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, 2017
was
$2.53
and
$1.99
, respectively and,
$1.77
and
$2.15
, respectively for the same periods in
2016
.
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 September 30,
|
|
Nine Months Ended September 30,
|
(In thousands)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Cost of goods sold
|
|
$
|
119
|
|
|
$
|
117
|
|
|
$
|
316
|
|
|
$
|
330
|
|
Research and development
|
|
177
|
|
|
133
|
|
|
$
|
391
|
|
|
$
|
392
|
|
Selling, general and administrative
|
|
459
|
|
|
404
|
|
|
1,346
|
|
|
1,251
|
|
Total non-cash stock-based compensation expense
|
|
$
|
755
|
|
|
$
|
654
|
|
|
$
|
2,053
|
|
|
$
|
1,973
|
|
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
|
|
2017
|
|
2016
|
Expected dividend rate
|
|
—
|
%
|
|
—
|
%
|
Expected stock price volatility
|
|
80.1 – 88.2%
|
|
|
78.7 – 92.2%
|
|
Risk-free interest rate
|
|
1.8 – 2.3%
|
|
|
1.1 – 1.8%
|
|
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, 2016
|
|
3,355,692
|
|
|
$
|
4.66
|
|
|
8.2
|
|
$
|
610
|
|
Granted
|
|
1,677,760
|
|
|
$
|
2.82
|
|
|
|
|
|
|
Exercised
|
|
(165,678
|
)
|
|
$
|
3.12
|
|
|
|
|
$
|
362
|
|
Expired
|
|
(100,131
|
)
|
|
$
|
16.31
|
|
|
|
|
|
|
Forfeited
|
|
(190,766
|
)
|
|
$
|
3.35
|
|
|
|
|
|
|
Outstanding at September 30, 2017
|
|
4,576,877
|
|
|
$
|
3.84
|
|
|
8.2
|
|
$
|
13,336
|
|
Exercisable at September 30, 2017
|
|
1,870,011
|
|
|
$
|
5.18
|
|
|
7.5
|
|
$
|
4,988
|
|
As of
September 30, 2017
there was approximately
$3.4 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
3.0
years.
The total fair value of options vested during the
three and nine
months ended
September 30, 2017
was
$0.6 million
and
$1.8 million
, respectively, and
$0.6 million
and
$1.6 million
, respectively, for the same periods in 2016.
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 2, 2017, employees purchased
40,683
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
nine
months ended
September 30, 2017
was approximately
$0.1 million
.
|
|
9.
|
Fair Value Measurements
|
The Company’s fair value measurements are classified and disclosed in one of the following three categories:
|
|
•
|
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
|
|
|
•
|
Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
|
|
|
•
|
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
|
There was no movement between level 1 to level 2 or between level 2 to level 3. The following table summarizes the valuation of the Company’s financial instruments that are measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
|
|
|
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
|
|
$
|
1,269
|
|
|
$
|
—
|
|
|
$
|
1,269
|
|
|
$
|
—
|
|
|
$
|
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, 2016
|
$
|
757
|
|
Increase in fair value
|
512
|
|
Balance at September 30, 2017
|
$
|
1,269
|
|
Revolving and Term Loan Credit Agreements
At
September 30, 2017
and
December 31, 2016
, we had a total of
$10.0 million
and
$10.1 million
, respectively, outstanding under our revolving and term loan credit agreements, which are variable rate loans. The fair value of these loans approximates book value based on the borrowing rates currently available for variable rate loans obtained from third party lending institutions. These fair values represent Level 2 under the three-tier hierarchy described above.
At-the-Market Sales Agreement
On October 10, 2016, the Company entered into our at-the-market sales agreement with Cowen (ATM Agreement), pursuant to which the Company may sell shares of our common stock through Cowen, as sales agent, in registered transactions from our 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. A total of
2,222,240
shares of common stock have been sold under the ATM Agreement of which
1,864,384
were sold in 2017 for proceeds of
$6.7 million
(net of
$0.3 million
in commission and issuance costs) and as of
September 30, 2017
had remaining capacity of approximately
$17.2 million
. We currently intend to use the net proceeds for research, development, manufacturing, and general and administrative expenses, and for other general corporate purposes.
Series B Convertible Preferred Stock
On February 10, 2017, the Company sent notice to Eastern Capital Limited (Eastern), an existing holder of shares of the Company’s Series B-1 Non-Voting Convertible Preferred Stock or Series B-2 Voting Convertible Preferred Stock (Preferred Stock), informing Eastern of the Company's election to convert all
12,308
of the outstanding shares of Preferred Stock held by Eastern, plus
9,570
shares of Preferred Stock in accumulated but undeclared dividends thereon, into
1,093,892
shares of the Company's common stock pursuant to the terms of the Amended and Restated Certificate of Designations, Preferences and Rights of Series B-1 Non-Voting Preferred Stock and Series B-2 Voting Preferred Stock of the Company (Mandatory Conversion). After the Mandatory Conversion on March 9, 2017,
no
shares of Preferred Stock of the Company remain outstanding as of
September 30, 2017
.
|
|
12.
|
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 were 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 September 30,
|
|
Nine months ended September 30,
|
(Amounts in thousands except per share amounts)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,407
|
)
|
|
$
|
(6,675
|
)
|
|
$
|
(17,573
|
)
|
|
$
|
(13,369
|
)
|
Dividends accumulated on convertible preferred stock
|
|
—
|
|
|
(1,931
|
)
|
|
—
|
|
|
(5,591
|
)
|
Net loss attributable to common shareholders
|
|
$
|
(5,407
|
)
|
|
$
|
(8,606
|
)
|
|
$
|
(17,573
|
)
|
|
$
|
(18,960
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic and diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
33,667
|
|
|
22,744
|
|
|
32,783
|
|
|
22,678
|
|
Net loss per share attributable to common shareholders (basic and diluted)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.38
|
)
|
|
$
|
(0.54
|
)
|
|
$
|
(0.84
|
)
|
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, 2017
and
2016
were
5.4 million
and
6.5 million
, respectively.
13. Commitments and Contingencies
The Company leases facilities in Ann Arbor, Michigan and Cambridge, Massachusetts. In March 2016, the Company amended its current lease in Cambridge to, among other provisions, extend the 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, 2017
, the Company has recorded
$1.0 million
of leasehold improvements funded by the tenant improvement allowance
.
In addition to the property leases, the Company also leases an offsite warehouse, various vehicles and computer equipment. The Company's purchase commitments consist of minimum purchase amounts of material in manufacturing.
As of
September 30, 2017
, future minimum payments related to leases and other contractual obligations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Total
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
More than 5 Years
|
Operating leases
|
|
$
|
20,378
|
|
|
$
|
1,317
|
|
|
$
|
4,806
|
|
|
$
|
4,473
|
|
|
$
|
4,475
|
|
|
$
|
4,546
|
|
|
$
|
761
|
|
Purchase commitments
|
|
2,940
|
|
|
45
|
|
|
681
|
|
|
576
|
|
|
546
|
|
|
546
|
|
|
546
|
|
Capital leases
|
|
43
|
|
|
11
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
23,361
|
|
|
$
|
1,373
|
|
|
$
|
5,519
|
|
|
$
|
5,049
|
|
|
$
|
5,021
|
|
|
$
|
5,092
|
|
|
$
|
1,307
|
|
Rent expense for the
three and nine
months ended
September 30, 2017
was
$1.5 million
and
$4.1 million
, respectively, and
$1.2 million
and
$3.6 million
, respectively, for the
three and nine
months ended
September 30, 2016
.
License Agreement
On May 10, 2017,
the Company announced that it has entered into a License Agreement (License Agreement) with Innovative Cellular Therapeutics Co. Ltd, (ICT), a leading cell therapy company and developer of CAR-T cell therapy for cancer treatment,
for the development and distribution of the Vericel product portfolio in Greater China, South Korea, Singapore, and other countries in Asia. ICT will acquire an exclusive license to certain patent rights, know-how and intellectual property relating to Carticel, MACI, ixmyelocel-T, and Epicel as well as enter into a warrant purchase agreement. As part of the license and warrant purchase agreements, the Company will receive an upfront payment of
$6.0 million
, less any applicable taxes, within
60
days of the effective date of the License Agreement. The initiation of the technology transfer, the license grants in the License Agreement and the warrant purchase are contingent upon Vericel’s receipt of the upfront payment. Vericel is eligible to receive approximately
$8.0 million
in development and commercial milestones. ICT has also agreed to pay tiered royalties to Vericel equal to a percentage of net sales of each Licensed Product in the low double digits for the commercial life of the applicable Licensed Product. ICT will be responsible for funding the development of the programs and manufacturing of the products for commercialization in China and the rest of the territory. The funding transfer is subject to approval by the State Administration of Foreign Exchange of the People's Republic of China and has not occurred as of issuance date of the financial statements. As a result, the parties have amended the agreement monthly to provide additional time for ICT to pay and reset certain terms of the warrant. The initiation of the technology transfer, the license grants in the License Agreement and the warrant purchase have not occurred. As partial consideration for an amount included in the upfront payment Vericel will issue to ICT a warrant, exercisable for the number of shares of Vericel’s Common Stock equal to
$5.0 million
less the withholding tax payable thereon divided by
$4.90
currently (formerly
$3.05
), with a strike price of
$0.01
per share.