Vericel (VCEL) - 2018 Q4 - Annual Report

PART I Business Overview Vericel Corporation specializes in advanced cell therapies, marketing MACI for cartilage repair and Epicel for severe burns, with a strategy to boost revenue and achieve profitability - Vericel Corporation is a leader in advanced cell therapies for sports medicine and severe burn care markets, with two marketed products: MACI® for cartilage defects and Epicel® for severe burns[16] - The company's strategy is to become the leading developer in these markets by increasing MACI and Epicel revenue, lowering manufacturing costs, and generating positive operating income[17][19] Key Product Net Revenues (Year Ended December 31, 2018) | Product | Net Revenue (in millions) | | :------ | :------------------------ | | MACI | $67.7 | | Epicel | $23.1 | - MACI sales volumes show significant seasonality, with the fourth quarter historically representing the highest percentage (35%) of annual sales due to insurance copay limits and patient rehabilitation preferences[30][31] - Epicel is the only FDA-approved autologous epidermal product for large total surface area burns (≥30% TBSA) in both adult and pediatric patients, with an Annual Distribution Number (ADN) of 360,400 devices[32][35][298] - The company has no current plans to initiate or fund a Phase 3 trial for ixmyelocel-T, its development-stage multicellular therapy for advanced heart failure, due to high development costs and a focus on existing commercial products[41][302] - Vericel operates a single cell-manufacturing facility in Cambridge, Massachusetts, for U.S. manufacturing and distribution of MACI and Epicel, which also houses its research and development function[42] - The company's intellectual property includes patents for chondrocyte implants and related technologies (expiring between 2023 and 2033) and trademarks for MACI, Epicel, and Carticel. MACI is entitled to twelve years of data exclusivity until December 13, 2028[46][47] - As of December 31, 2018, Vericel employed approximately 216 full-time employees[112] Risk Factors Vericel faces significant risks from single-facility reliance, sole-source suppliers, reimbursement challenges, intense competition, and the need to manage growth and achieve profitability - The company's commercial manufacturing operations in the U.S. depend on a single facility in Cambridge, Massachusetts, posing a significant risk of supply disruption if the facility is damaged or experiences difficulties[118] - Vericel relies on third-party sole or single-source suppliers for critical components (e.g., Matricel for MACI membrane), and the inability to secure or qualify alternative suppliers could impair manufacturing and commercialization[121][122] - Failure to obtain and maintain adequate reimbursement and favorable rates from third-party payers for MACI and Epicel could materially adversely affect financial condition and operating results[132][133][134] - The company has incurred net losses since inception, including $8.1 million in 2018, and anticipates continuing losses, with profitability dependent on increasing sales, improving gross margins, and successful commercialization of new products[144][145] - The markets for Vericel's products are highly competitive, with numerous well-established multinational medical device, pharmaceutical, and biotechnology companies possessing greater resources[105][197] - The company has no patent protection for Epicel, making it vulnerable to competition from other cultured epidermal autografts[233] - The market price of Vericel's common stock has been volatile, ranging between $5.70 and $18.44 in 2018, and is subject to fluctuations based on various internal and external factors[255][258] Unresolved Staff Comments The company has no unresolved staff comments to report Properties Vericel leases facilities in Cambridge, MA (57,000 sq ft) and Ann Arbor, MI (6,000 sq ft) for manufacturing, R&D, and offices, with leases expiring in 2022 and 2023 respectively - Vericel leases a 57,000 sq ft facility in Cambridge, MA (lease expires Feb 2022, option to extend to Feb 2027) and a 6,000 sq ft facility in Ann Arbor, MI (lease expires April 2023)[265] - The Cambridge facility houses clean rooms, laboratories for MACI and Epicel manufacturing, and office space[265] Legal Proceedings Vericel Corporation is not currently involved in any material legal proceedings - The company is not currently party to any material legal proceedings[266] Mine Safety Disclosures Vericel Corporation has no mine safety disclosures to report PART II Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchase of Equity Securities Vericel's common stock trades on NASDAQ under "VCEL", experiencing volatility, with no cash dividends paid or anticipated, and details on equity compensation and recent unregistered sales - Vericel's common stock is quoted on the NASDAQ Capital Market under the symbol "VCEL"[270] Common Stock Price Range (2017-2018) | Period | High | Low | | :----------------------- | :------ | :------ | | Year ended Dec 31, 2017 | | | | First Quarter | $3.10 | $2.50 | | Second Quarter | $3.45 | $2.55 | | Third Quarter | $6.00 | $3.00 | | Fourth Quarter | $5.98 | $3.65 | | Year ended Dec 31, 2018 | | | | First Quarter | $12.30 | $5.70 | | Second Quarter | $14.60 | $9.60 | | Third Quarter | $14.80 | $9.10 | | Fourth Quarter | $18.44 | $10.77 | - As of February 22, 2019, 43,753,005 shares of Common Stock were outstanding[5] - The company has never declared or paid cash dividends on its common stock and does not expect to do so in the foreseeable future, intending to retain all future earnings for business development[272][261] Equity Compensation Plan Information (as of December 31, 2018) | Category | Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights | Weighted Average Exercise Price of Outstanding Options, Warrants and Rights | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans | | :------------------------------------------- | :---------------------------------------------------------------------------------------- | :-------------------------------------------------------------------------- | :------------------------------------------------------------------------------------------- | | Equity compensation plans approved by security holders (employees and directors) | 4,790,683 | $5.85 | 2,983,774 | | Employee stock purchase plan | 18,407 | $11.86 | 473,980 | - In 2017, Innovative Cellular Therapeutics CO., LTD. (ICT) purchased a warrant for 818,424 shares of common stock for $4.0 million, which was exercised via cashless exercise for 816,850 shares[279] - In 2018, Silicon Valley Bank and MidCap Financial Trust exercised warrants via cashless exercise for a total of 115,085 shares of common stock[280] - There were no repurchases of common stock during the year ended December 31, 2018[281] Selected Financial Data This section provides a five-year summary of Vericel's key financial data, including statements of operations and balance sheets, highlighting net losses, revenue growth, and financial position changes Selected Consolidated Statements of Operations Data (in thousands, except per share amounts) | Metric | 2018 | 2017 | 2016 | 2015 | 2014 | | :---------------------------------------------- | :-------- | :-------- | :-------- | :-------- | :-------- | | Product sales, net | $90,857 | $62,760 | $54,383 | $51,168 | $28,796 | | Total revenue | $90,857 | $63,924 | $54,383 | $51,168 | $28,796 | | Cost of product sales | $32,160 | $30,354 | $28,307 | $26,470 | $17,293 | | Gross profit | $58,697 | $33,570 | $26,076 | $24,698 | $11,503 | | Research and development | $13,599 | $12,944 | $15,295 | $18,890 | $21,263 | | Selling, general and administrative | $49,007 | $35,610 | $27,388 | $22,479 | $13,774 | | Loss on impairment of intangible asset | — | — | $2,638 | — | — | | Total operating expenses | $62,606 | $48,554 | $45,321 | $41,369 | $35,037 | | Loss from operations | $(3,909) | $(14,984) | $(19,245) | $(16,671) | $(23,534) | | Total other (expense) income | $(4,228) | $(2,302) | $(321) | $331 | $3,614 | | Net loss | $(8,137) | $(17,286) | $(19,566) | $(16,340) | $(19,920) | | Net loss per share (Basic and Diluted) | $(0.20) | $(0.52) | $(1.18) | $(0.97) | $(2.23) | Selected Consolidated Balance Sheet Data (in thousands) | Metric | 2018 | 2017 | 2016 | 2015 | 2014 | | :---------------------------------------------- | :-------- | :-------- | :-------- | :-------- | :-------- | | Cash and cash equivalents | $18,286 | $26,862 | $22,978 | $14,581 | $30,343 | | Marketable securities | $64,638 | — | — | — | — | | Total cash, cash equivalents, and marketable securities | $82,924 | $26,862 | $22,978 | $14,581 | $30,343 | | Working capital | $97,991 | $37,416 | $31,870 | $15,235 | $29,661 | | Property and equipment, net | $5,906 | $4,071 | $3,875 | $4,049 | $2,892 | | Total assets | $118,689 | $54,577 | $48,598 | $34,309 | $47,579 | | Total liabilities | $16,458 | $32,037 | $23,890 | $12,179 | $11,938 | | Total shareholders' equity (deficit) | $102,231 | $22,540 | $24,708 | $22,130 | $35,641 | - The $2.6 million loss on impairment of intangible asset in 2016 was due to the write-off of commercial use rights for Carticel following MACI's approval and replacement[285] - Loss on extinguishment of debt occurred in 2018 ($0.8 million) and 2017 ($0.9 million) due to debt prepayment and modification, respectively[285] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Vericel's financial performance, condition, and outlook, detailing net loss, revenue growth from MACI and Epicel, operating expenses, liquidity, and capital resources - Vericel reported a net loss of $8.1 million for the year ended December 31, 2018, an improvement from $17.3 million in 2017 and $19.6 million in 2016[303][304] Net Revenues by Product (in thousands) | Product | 2018 | 2017 | 2016 | | :---------------- | :-------- | :-------- | :-------- | | Carticel and MACI | $67,741 | $43,902 | $38,871 | | Epicel | $23,116 | $18,858 | $15,512 | | License Revenue | — | $1,164 | — | | Total | $90,857 | $63,924 | $54,383 | - Net revenues increased significantly in 2018 to $90.9 million (from $63.9 million in 2017) primarily due to increased MACI cartilage implants and continued growth in Epicel demand[305][308] Gross Profit and Gross Profit Ratio (in thousands) | Metric | 2018 | 2017 | 2016 | | :--------------- | :-------- | :-------- | :-------- | | Gross profit | $58,697 | $33,570 | $26,076 | | Gross profit % | 64.6% | 52.5% | 47.9% | - Gross profit increased due to higher sales volumes for MACI and Epicel, combined with a highly fixed manufacturing cost structure[309] Research and Development Costs by Project (in thousands) | Project | 2018 | 2017 | 2016 | | :---------------------- | :-------- | :-------- | :-------- | | Dilated Cardiomyopathy | $1,345 | $4,909 | $8,195 | | ACI | $9,099 | $5,814 | $4,964 | | Epicel | $3,155 | $2,221 | $2,136 | | Total R&D costs | $13,599 | $12,944 | $15,295 | - Selling, general and administrative expenses increased to $49.0 million in 2018 (from $35.6 million in 2017), primarily due to a $4.4 million increase in employee-related expenses from MACI sales force expansion, $4.0 million in selling expenses, and $2.7 million in stock-based compensation[312] Total Non-Cash Stock-Based Compensation Expense (in thousands) | Category | 2018 | 2017 | 2016 | | :------------------------------ | :------- | :------- | :------- | | Cost of goods sold | $1,015 | $428 | $427 | | Research and development | $1,672 | $506 | $497 | | General, selling and administrative | $4,536 | $1,746 | $1,575 | | Total | $7,223 | $2,680 | $2,499 | - As of December 31, 2018, Vericel had $18.3 million in cash and cash equivalents and $64.6 million in short-term investments, totaling $82.9 million. The company believes these resources are sufficient to sustain operations through at least February 2020[320][326] - In June 2018, the company completed a public offering of 5,750,000 shares of common stock, generating net proceeds of $70.1 million, primarily for general corporate purposes and potential business expansion[318] - On December 19, 2018, Vericel prepaid and terminated its outstanding debt under the SVB Loan Agreement, paying $17.1 million in borrowings plus a $0.2 million prepayment premium and a $0.5 million final payment[325] Contractual Obligations (in thousands) | Contractual Obligations | Total | 2019 | 2020 | 2021 | 2022 | 2023 | More than 5 Years | | :---------------------- | :------- | :------ | :------ | :------ | :----- | :----- | :---------------- | | Operating leases | $15,386 | $4,879 | $4,719 | $4,754 | $966 | $68 | — | | Purchase commitments | $2,761 | $741 | $711 | $674 | $635 | — | — | | Capital leases | $205 | $41 | $41 | $41 | $41 | $41 | — | | Total | $18,352 | $5,661 | $5,471 | $5,469 | $1,642 | $109 | — | Quantitative and Qualitative Disclosures About Market Risk Vericel's market risks include interest rate risk on marketable debt securities and foreign exchange risk from non-U.S. vendor transactions, managed without hedging or derivatives - Vericel is exposed to interest rate risk on its marketable debt securities (classified as available-for-sale) and manages this risk through short-duration investments[339][340] - The company faces foreign exchange risk primarily from recognized assets and liabilities due to vendors in countries outside the United States, typically paid in Euro[341] - Vericel does not enter into hedging transactions or purchase derivative instruments to manage market risks[340][341] Financial Statements and Supplementary Data This section presents Vericel's audited consolidated financial statements, including balance sheets, statements of operations, comprehensive loss, shareholders' equity, cash flows, and detailed notes Report of Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP audited Vericel's consolidated financial statements and internal controls, affirming fair presentation and effectiveness - PricewaterhouseCoopers LLP audited Vericel's consolidated financial statements as of December 31, 2018 and 2017, and for the three years ended December 31, 2018, concluding they present fairly in all material respects[346][347] - The firm also audited and opined that the company maintained effective internal control over financial reporting as of December 31, 2018, based on COSO criteria[347] Consolidated Balance Sheets This section presents Vericel's consolidated balance sheets for 2018 and 2017, detailing assets, liabilities, and shareholders' equity Consolidated Balance Sheets (in thousands) | ASSETS | December 31, 2018 | December 31, 2017 | | :---------------------------------------------- | :---------------- | :---------------- | | Cash and cash equivalents | $18,286 | $26,862 | | Short term investments | $64,638 | — | | Accounts receivable, net | $23,454 | $18,270 | | Inventory | $3,558 | $3,793 | | Other current assets | $2,847 | $1,581 | | Total current assets | $112,783 | $50,506 | | Property and equipment, net | $5,906 | $4,071 | | Total assets | $118,689 | $54,577 | | | | | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | Accounts payable | $7,108 | $5,552 | | Accrued expenses | $6,930 | $5,573 | | Deferred rent (current) | $566 | $420 | | Warrant liabilities | — | $1,014 | | Current portion of term loan credit agreement | — | $350 | | Other current liabilities | $188 | $181 | | Total current liabilities | $14,792 | $13,090 | | Revolving and term loan credit agreement (non-current) | — | $16,888 | | Deferred rent (non-current) | $1,666 | $2,059 | | Total liabilities | $16,458 | $32,037 | | Total shareholders' equity | $102,231 | $22,540 | - Total assets increased from $54.6 million in 2017 to $118.7 million in 2018, driven by a significant increase in short-term investments ($64.6 million in 2018 vs. none in 2017) and accounts receivable[355] - Total liabilities decreased from $32.0 million in 2017 to $16.5 million in 2018, primarily due to the prepayment and termination of the term loan credit agreement[355] - Total shareholders' equity increased from $22.5 million in 2017 to $102.2 million in 2018, largely due to proceeds from a public equity offering[355] Consolidated Statements of Operations This section presents Vericel's consolidated statements of operations for 2016-2018, detailing revenue, expenses, and net loss Consolidated Statements of Operations (in thousands, except per share amounts) | Metric | 2018 | 2017 | 2016 | | :---------------------------------------------- | :-------- | :-------- | :-------- | | Total revenue | $90,857 | $63,924 | $54,383 | | Gross profit | $58,697 | $33,570 | $26,076 | | Research and development | $13,599 | $12,944 | $15,295 | | Selling, general and administrative | $49,007 | $35,610 | $27,388 | | Loss on impairment of intangible asset | — | — | $2,638 | | Total operating expenses | $62,606 | $48,554 | $45,321 | | Loss from operations | $(3,909) | $(14,984) | $(19,245) | | Total other (expense) income | $(4,228) | $(2,302) | $(321) | | Net loss | $(8,137) | $(17,286) | $(19,566) | | Net loss per share (Basic and Diluted) | $(0.20) | $(0.52) | $(1.18) | | Weighted average common shares outstanding | 40,242 | 33,355 | 23,093 | - Net loss decreased from $17.3 million in 2017 to $8.1 million in 2018, reflecting improved operating performance[357] - Total revenue increased by 42.1% from $63.9 million in 2017 to $90.9 million in 2018[357] - Gross profit increased by 74.8% from $33.6 million in 2017 to $58.7 million in 2018, with the gross profit margin improving from 52.5% to 64.6%[357][309] Consolidated Statements of Comprehensive Loss This section presents Vericel's consolidated statements of comprehensive loss for 2016-2018, detailing net loss and other comprehensive income components Consolidated Statements of Comprehensive Loss (in thousands) | Metric | 2018 | 2017 | 2016 | | :-------------------------- | :-------- | :-------- | :-------- | | Net loss | $(8,137) | $(17,286) | $(19,566) | | Net change in unrealized loss on investments | $(39) | — | — | | Comprehensive loss | $(8,176) | $(17,286) | $(19,566) | - Comprehensive loss for 2018 was $(8.176) million, including a net change in unrealized loss on investments of $(39) thousand, which was not present in prior years[360] Consolidated Statements of Shareholders' Equity This section presents Vericel's consolidated statements of shareholders' equity for 2016-2018, detailing changes in common stock and accumulated deficit - Total shareholders' equity increased from $22.5 million at December 31, 2017, to $102.2 million at December 31, 2018[363][364] - This increase was primarily driven by $70.0 million in net proceeds from a public equity offering and $7.2 million in stock-based compensation expense in 2018[363][364] - In 2017, all 12,308 outstanding shares of Series B preferred stock, plus 9,570 shares in accumulated dividends, were converted into 1,093,892 shares of common stock, eliminating preferred stock from the balance sheet[363][443] Consolidated Statements of Cash Flows This section presents Vericel's consolidated statements of cash flows for 2016-2018, categorizing cash flows from operating, investing, and financing activities Consolidated Statements of Cash Flows (in thousands) | Activity | 2018 | 2017 | 2016 | | :---------------------------------------------- | :-------- | :-------- | :-------- | | Net cash used for operating activities | $(412) | $(13,183) | $(19,892) | | Net cash used for investing activities | $(67,027) | $(1,510) | $(1,415) | | Net cash provided by (used in) financing activities | $58,863 | $18,577 | $29,704 | | Net increase (decrease) in cash | $(8,576) | $3,884 | $8,397 | | Cash at end of period | $18,286 | $26,862 | $22,978 | - Net cash used for operating activities significantly decreased to $(0.4) million in 2018 from $(13.2) million in 2017, primarily due to a lower net loss and higher non-cash adjustments[367][320] - Investing activities used $67.0 million in 2018, mainly due to $66.5 million in short-term investment purchases, compared to $1.5 million in 2017[367][323] - Financing activities provided $58.9 million in 2018, driven by $70.0 million from an equity offering, offset by $17.5 million in debt payments[367][324] Notes to Consolidated Financial Statements This section provides detailed notes to Vericel's consolidated financial statements, covering accounting policies, pronouncements, and financial components 1. Organization Vericel Corporation, incorporated in 1989, is a biopharmaceutical company focused on advanced cell therapies for sports medicine and severe burn care - Vericel Corporation, incorporated in March 1989, is a fully integrated, commercial-stage biopharmaceutical company focused on advanced cell therapies for sports medicine (MACI®) and severe burn care (Epicel®) in the U.S.[369] - The company acquired the Cell Therapy and Regenerative Medicine (CTRM) business from Sanofi on May 30, 2014, which included MACI, Carticel, and Epicel products[369] - As of December 31, 2018, Vericel had an accumulated deficit of $369.0 million and a net loss of $8.1 million for the year, but expects existing cash and investments to sustain operations through at least February 2020[370] 2. Summary of Significant Accounting Policies This section outlines Vericel's significant accounting policies, including consolidation, revenue recognition, R&D, deferred tax assets, and warrant valuation - The consolidated financial statements include Vericel and its wholly-owned subsidiaries, with all inter-company transactions eliminated[371] - Key accounting policies include recognizing product revenue under ASC 606, expensing research and development costs as incurred, and valuing stock-based compensation using the Black-Scholes model[332][387][388] - A full valuation allowance is maintained on deferred tax assets due to historical and expected operating losses, indicating that realization is not more likely than not[335][456] - Warrants that could be cash settled or have anti-dilution price protection are recorded as liabilities at fair value, with changes recognized in other income (expense)[396] 3. Recent Accounting Pronouncements This section details Vericel's adoption of recent accounting pronouncements, including ASC 606, new lease guidance, and non-employee share-based payments - Vericel adopted ASC 606, Revenue Recognition, on January 1, 2018, using the modified retrospective method, with no material cumulative adjustment or change in revenue timing/amount[397] - The company evaluated new lease accounting guidance (effective after December 15, 2018) and expects to recognize material right-to-use assets and liabilities for operating leases, with no material impact on the income statement[398] - New guidance for non-employee share-based payment arrangements was adopted early on July 1, 2018, shifting to fixed grant date fair value principles, with no material impact[399] 4. Revenue This section details Vericel's revenue recognition for MACI and Epicel, distribution agreement changes, customer concentration, and license revenue - Revenue from MACI kits is recognized upon delivery to hospitals, as the kit order does not obligate implant manufacture[402][403] - MACI implant revenue is recognized upon delivery, contingent on prior authorization or coverage confirmation, with net revenues based on contracted or estimated payer rates[404] - In July/August 2018, amendments to the distribution agreement with Orsini Pharmaceutical Services, Inc. eliminated exclusivity and shifted credit and collection risk for implants after June 15, 2018, to Vericel[405] - Vericel also entered a non-exclusive dispensing agreement with AllCare Plus Pharmacy, Inc. in July 2018, retaining credit and collection risk for all implants dispensed through them[407] - Epicel revenue is recognized upon delivery to hospitals, based on contracted rates, as there is no obligation to manufacture grafts upon biopsy receipt[408] Revenue by Product (in thousands) | Revenue by product (in thousands) | 2018 | 2017 | 2016 | | :-------------------------------- | :-------- | :-------- | :-------- | | Implants - based on contracted rate | $40,830 | $30,366 | $17,027 | | Implants - based on third party reimbursement | $25,096 | $12,122 | $20,299 | | Biopsy kits - direct bill | $1,997 | $1,764 | $1,545 | | Change in estimates related to prior periods | $(182) | $(350) | — | | Epicel - Direct bill (hospital) | $23,116 | $18,858 | $15,512 | | License Revenue | — | $1,164 | — | - In 2017, Vericel recognized $1.2 million in license revenue from an agreement with Innovative Cellular Therapeutics CO., LTD. (ICT) for product development and commercialization in Greater China and other Asian countries[412][413] - The ICT license agreement includes future milestone and sales-based royalty payments, but these are not included in the current transaction price due to uncertainty of achievement and transfer of funds[414][415] Revenue and Accounts Receivable Concentration from Largest Customers | Product | Revenue Concentration (2018) | Revenue Concentration (2017) | Revenue Concentration (2016) | Accounts Receivable Concentration (2018) | Accounts Receivable Concentration (2017) | | :---------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------------------- | :--------------------------------------- | | Carticel and MACI | 16% | 35% | 31% | 2% | 46% | | Epicel | 7% | 10% | 11% | 4% | 3% | 5. Selected Balance Sheet Components This section provides detailed breakdowns of Vericel's inventory, property and equipment, and accrued expenses Inventory (in thousands) | Category | 2018 | 2017 | | :-------------- | :------- | :------- | | Raw materials | $2,872 | $3,532 | | Work-in-process | $638 | $226 | | Finished goods | $48 | $35 | | Total Inventory | $3,558 | $3,793 | Property and Equipment, net (in thousands) | Category | 2018 | 2017 | | :------------------------------ | :-------- | :-------- | | Machinery and equipment | $1,536 | $1,249 | | Furniture, fixtures and office equipment | $775 | $872 | | Computer equipment and software | $3,712 | $3,536 | | Leasehold improvements | $4,587 | $4,213 | | Construction in process | $2,801 | $822 | | Total | $13,411 | $10,692 | | Less accumulated depreciation | $(7,505) | $(6,621) | | Property and Equipment, net | $5,906 | $4,071 | - Depreciation expense was $1.4 million in 2018, $1.6 million in 2017, and $1.6 million in 2016[418] Accrued Expenses (in thousands) | Category | 2018 | 2017 | | :---------------------- | :------- | :------- | | Bonus | $5,161 | $2,693 | | Employee related accruals | $1,559 | $2,389 | | Other accrued expenses | $210 | $491 | | Total Accrued Expenses | $6,930 | $5,573 | 6. Debt This section details Vericel's debt activities, including the prepayment and termination of its Loan and Security Agreement in December 2018 - On December 19, 2018, Vericel prepaid in full and terminated its Loan and Security Agreement with Silicon Valley Bank and MidCap Financial Trust, paying $17.1 million in outstanding borrowings[420][421] - The termination included an additional prepayment premium of $0.2 million (1.5%) and a final payment of $0.5 million (3.6%)[421] - The prepayment in 2018 and debt modification in 2017 were accounted for as debt extinguishments, resulting in a loss of $0.8 million in 2018 and $0.9 million in 2017[422] 7. Cash Equivalents and Investments This section defines Vericel's cash equivalents and short-term investments, detailing their classification, fair value, and maturities - Cash equivalents consist of short-term, highly liquid investments with original maturities of three months or less, including demand deposits, money market funds, and repurchase agreements[375] - Short-term investments are debt securities classified as available-for-sale, carried at fair value, with maturities greater than 90 days but less than one year[376] Marketable Securities (as of December 31, 2018, in thousands) | Category | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | | :------------------------ | :------------- | :--------------------- | :---------------------- | :--------- | | Money market funds | $5,838 | — | — | $5,838 | | Repurchase agreements | $5,000 | — | — | $5,000 | | Commercial paper | $30,710 | — | — | $30,710 | | Corporate notes | $13,168 | — | $(24) | $13,144 | | U.S. government securities | $10,167 | — | $(1) | $10,166 | | U.S. asset-backed securities | $10,632 | — | $(14) | $10,618 | | Total | $75,515 | — | $(39) | $75,476 | - All marketable securities held as of December 31, 2018, had remaining contractual maturities of one year or less, and none were considered other-than-temporarily impaired[424][425] 8. Stock-Based Compensation This section details Vericel's stock-based compensation plans, including the 2017 Omnibus Incentive Plan and Employee Stock Purchase Plan - Vericel's 2017 Omnibus Incentive Plan, approved by shareholders, provides for stock options, stock appreciation rights, restricted stock awards, and restricted stock units, with 2,983,774 shares available for future grant as of December 31, 2018[429][430] - The Employee Stock Purchase Plan (ESPP) allows employees to purchase stock, with $0.3 million, $0.2 million, and $0.2 million in compensation expense recorded for 2018, 2017, and 2016, respectively[431] - In 2018, 1,644,160 service-based options were granted with a weighted average grant-date fair value of $6.96, generally vesting over four years[432] Total Non-Cash Stock-Based Compensation Expense (in thousands) | Category | 2018 | 2017 | 2016 | | :------------------------------ | :------- | :------- | :------- | | Cost of goods sold | $1,015 | $428 | $427 | | Research and development | $1,672 | $506 | $497 | | General, selling and administrative | $4,536 | $1,746 | $1,575 | | Total | $7,223 | $2,680 | $2,499 | - Total unrecognized compensation cost related to non-vested service-based stock options was approximately $7.2 million as of December 31, 2018, expected to be recognized over a weighted-average period of 3.0 years[436] 9. Shareholders' Equity This section details changes in Vericel's shareholders' equity, including proceeds from a public equity offering and dividend policy - In June 2018, Vericel sold 5,750,000 shares of common stock in a public offering at $13.00 per share, generating net proceeds of $70.1 million[439] - The company terminated its at-the-market sales agreement with Cowen on May 29, 2018, under which 2,340,879 shares were sold for $8.0 million (net) in prior periods[438] - No cash dividends have been declared or paid by the company since its inception[440] 10. Preferred Stock This section details the mandatory conversion of all outstanding Series B preferred stock into common stock on March 9, 2017 - On March 9, 2017, Vericel mandatorily converted all 12,308 outstanding shares of Series B-1 and B-2 preferred stock, plus 9,570 shares in accumulated dividends, into 1,093,892 shares of common stock[442][443] - Following this conversion, no shares of preferred stock remain outstanding[443] 11. Net Loss Per Common Share This section presents Vericel's net loss per common share calculation for 2016-2018, including anti-dilutive common equivalent shares Net Loss Per Common Share (in thousands, except per share amounts) | Metric | 2018 | 2017 | 2016 | | :---------------------------------------------- | :-------- | :-------- | :-------- | | Net loss | $(8,137) | $(17,286) | $(19,566) | | Less: earnings attributable to convertible preferred stock | — | — | $7,579 | | Numerator of basic and diluted EPS | $(8,137) | $(17,286) | $(27,145) | | Weighted-average common shares outstanding | 40,242 | 33,355 | 23,093 | | Net loss per share (Basic and Diluted) | $(0.20) | $(0.52) | $(1.18) | - Common equivalent shares (options, warrants, preferred stock) of 4.8 million, 5.4 million, and 5.3 million were excluded from diluted EPS calculations for 2018, 2017, and 2016, respectively, due to their anti-dilutive effect[444] 12. Stock Purchase Warrants This section details Vericel's outstanding stock purchase warrants, including exercise prices, expiration dates, and fair value measurement Outstanding Warrants (as of December 31, 2018) | Warrant Category | December 2017 Warrants | | :--------------------- | :--------------------- | | Exercise price | $4.27 | | Expiration date | December 6, 2023 | | Total shares issuable on exercise | 26,951 | - During 2018, 565,895 shares were issued upon exercise of August 2013 Warrants, which subsequently expired. SVB and MidCap also exercised 117,074 September 2016 Warrants and 26,951 December 2017 Warrants via cashless exercise[446] - The fair value of warrants is measured using the Black-Scholes valuation model, considering expected stock-price volatility, expected life, risk-free interest rate, and dividend yield[447] - In December 2017, ICT purchased a warrant for 818,424 shares for $4.0 million, which was exercised via cashless exercise for 816,850 shares, with no ICT warrants outstanding as of December 31, 2017[449] 13. Fair Value Measurements This section describes Vericel's fair value measurement classifications for assets and liabilities, detailing marketable securities and warrant liabilities - Vericel classifies fair value measurements into three levels: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[450] - As of December 31, 2018, money market funds were classified as Level 1, while repurchase agreements, commercial paper, corporate notes, U.S. government securities, and U.S. asset-backed securities were classified as Level 2[450][451] Fair Value Measurement Categories (as of December 31, 2018, in thousands) | Category | Total | Level 1 | Level 2 | Level 3 |\n| :------------------------ | :------- | :------- | :------- | :------ |\n| Assets: | | | | |\n| Money market funds | $5,838 | $5,838 | — | — |\n| Repurchase agreements | $5,000 | — | $5,000 | — |\n| Commercial paper | $30,710 | — | $30,710 | — |\n| Corporate notes | $13,144 | — | $13,144 | — |\n| U.S. government securities | $10,166 | — | $10,166 | — |\n| U.S. asset-backed securities | $10,618 | — | $10,618 | — |\n| Total Assets | $75,476 | $5,838 | $69,638 | — |\n| Liabilities: | | | | |\n| Warrant liabilities | — | — | — | — | - Warrant liabilities, which were $1.014 million at December 31, 2017, were reduced to zero by December 31, 2018, due to an increase in fair value and warrant exercises[450][452] 14. Income Taxes This section details Vericel's income (loss) before taxes, tax reconciliation, deferred tax assets, and the impact of the 2017 Tax Act Income (Loss) Before Income Taxes (in thousands) | Category | 2018 | 2017 | 2016 | | :-------------- | :-------- | :-------- | :-------- | | U.S. loss | $(8,056) | $(17,066) | $(19,302) | | Non U.S. loss | $(81) | $(220) | $(264) | | Total | $(8,137) | $(17,286) | $(19,566) | Reconciliation of Income Taxes (in thousands) | Item | 2018 | 2017 | 2016 | | :---------------------------------- | :-------- | :-------- | :-------- | | Loss before income taxes | $(8,137) | $(17,286) | $(19,566) | | Federal statutory rate | 21% | 34% | 34% | | Taxes computed at federal statutory rate | $(1,709) | $(5,877) | $(6,652) | | State taxes (net of federal benefit) | $(385) | $(1,106) | $(1,016) | | Nondeductible stock compensation | $(605) | $563 | $549 | | Federal and State Rate Change | $839 | $11,749 | $(614) | | Other | $172 | $116 | $56 | | Change in valuation allowance | $1,688 | $(5,445) | $7,677 | | Reported income taxes | — | — | — | Deferred Tax Assets (in thousands) | Category | 2018 | 2017 | | :-------------------------------- | :-------- | :-------- | | Net operating loss carryforwards | $10,969 | $10,487 | | Employee benefits and stock compensation | $2,798 | $2,128 | | Research and development costs | $9,067 | $8,275 | | Fixed assets | $418 | $508 | | Inventory reserve | $2,339 | $2,568 | | Other, net | $345 | $282 | | Total deferred tax assets | $25,936 | $24,248 | | Valuation allowance | $(25,936) | $(24,248) | | Net deferred tax assets | — | — | - As of December 31, 2018, U.S. federal and state net operating loss carryforwards were $44.6 million and $25.2 million, respectively, with a projected annual limitation of $0.8 million due to a 2014 change in control[455] - A full valuation allowance is maintained against net deferred tax assets due to historical and expected operating losses, indicating that realization is not more likely than not[456] - The Tax Cuts and Jobs Act of 2017 reduced the corporate tax rate to 21%, resulting in an $11.7 million increase to tax expense in 2017, offset by a valuation allowance reversal[459] 15. Employee Savings Plan This section reports Vericel's consistent annual contributions of $0.6 million to its 401(k) savings plan for employees - Vericel contributed $0.6 million to its 401(k) savings plan for participating employees in each of the years ended December 31, 2018, 2017, and 2016[460] 16. Commitments and Contingencies This section outlines Vericel's contractual obligations, including a supply agreement with Matricel GmbH and future minimum payments for leases and purchase commitments - Vericel has a long-term supply agreement with Matricel GmbH for the ACI-Maix collagen membrane used in MACI manufacturing, committing to purchase approximately $0.6 million annually until December 31, 2022, with renewal options[461][462] Future Minimum Payments for Contractual Obligations (in thousands) | Contractual Obligations | Total | 2019 | 2020 | 2021 | 2022 | 2023 | More than 5 Years | | :---------------------- | :------- | :------ | :------ | :------ | :----- | :----- | :---------------- | | Operating leases | $15,386 | $4,879 | $4,719 | $4,754 | $966 | $68 | — | | Purchase commitments | $2,761 | $741 | $711 | $674 | $635 | — | — | | Capital leases | $205 | $41 | $41 | $41 | $41 | $41 | — | | Total | $18,352 | $5,661 | $5,471 | $5,469 | $1,642 | $109 | — | - Rent expense for the years ended December 31, 2018, 2017, and 2016, was $5.5 million, $5.6 million, and $4.8 million, respectively[465] 17. Supplementary Quarterly Financial Information (unaudited) This section provides unaudited quarterly financial information for 2017-2018, detailing revenues, gross profit, and net profit/loss Unaudited Quarterly Financial Information (in thousands, except per share data) | Metric (2018) | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Year | | :------------------------ | :------------ | :------------- | :------------ | :------------- | :-------- | | Revenues | $18,027 | $19,011 | $22,484 | $31,335 | $90,857 | | Gross profit | $10,361 | $11,284 | $14,346 | $22,706 | $58,697 | | Profit (loss) from operations | $(4,322) | $(4,246) | $(1,336) | $5,995 | $(3,909) | | Net (loss) profit | $(7,659) | $(4,651) | $(1,069) | $5,242 | $(8,137) | | Net (loss) profit per share (Basic) | $(0.21) | $(0.12) | $(0.02) | $0.12 | $(0.20) | | Net (loss) profit per share (Diluted) | $(0.21) | $(0.12) | $(0.02) | $0.11 | $(0.20) | | | | | | | | | Metric (2017) | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Year | | :------------------------ | :------------ | :------------- | :------------ | :------------- | :-------- | | Revenues | $9,361 | $16,953 | $14,260 | $23,350 | $63,924 | | Gross profit | $2,252 | $9,283 | $7,074 | $14,961 | $33,570 | | Loss from operations | $(9,623) | $(2,521) | $(4,031) | $1,191 | $(14,984) | | Net loss | $(9,778) | $(2,388) | $(5,407) | $287 | $(17,286) | | Net (loss) profit per share (Basic and Diluted) | $(0.31) | $(0.07) | $(0.16) | $0.01 | $(0.52) | - Quarterly revenues for 2018 showed a strong upward trend, culminating in $31.3 million in Q4, compared to $23.4 million in Q4 2017[467] - Net profit was achieved in Q4 2018 ($5.2 million) and Q4 2017 ($0.3 million), contrasting with losses in earlier quarters of both years[467] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure Vericel Corporation reports no changes in or disagreements with its accountants on accounting and financial disclosure matters - There are no changes in or disagreements with accountants on accounting and financial disclosure to report[468] Controls and Procedures Vericel's management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2018 - As of December 31, 2018, Vericel's certifying officers concluded that the company's disclosure controls and procedures were effective[469] - Management assessed and concluded that internal control over financial reporting was effective as of December 31, 2018, a conclusion audited by PricewaterhouseCoopers LLP[471][472] - There were no material changes in internal control over financial reporting during the three months ended December 31, 2018[473] Other Information Vericel Corporation has no other information to report under this item PART III Directors, Executive Officers and Corporate Governance Information regarding Vericel's directors, executive officers, and corporate governance practices is incorporated by reference from the company's definitive Proxy Statement for the 2019 Annual Meeting of Shareholders - Information on directors, executive officers, and corporate governance is incorporated by reference from the Proxy Statement for the Annual Meeting of Shareholders scheduled for May 1, 2019[7][478] Executive Compensation Details on executive compensation are incorporated by reference from the company's definitive Proxy Statement - Information relating to executive compensation is incorporated by reference to the Proxy Statement under the caption "Executive Compensation and Related Information"[479] Security Ownership of Certain Beneficial Owners and Management, and Related Shareholder Matters Information concerning security ownership by certain beneficial owners and management, as well as related shareholder matters, is incorporated by reference from the company's definitive Proxy Statement - Information relating to ownership of equity securities by certain beneficial owners and management is incorporated by reference to the Proxy Statement under the caption "Stock Ownership of Certain Beneficial Owners and Management"[479] Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related person transactions, and director independence is incorporated by reference from the company's definitive Proxy Statement - Information relating to certain relationships and related person transactions, and director independence is incorporated by reference to the Proxy Statement under the caption "Certain Relationships and Related Party Transactions"[480] Principal Accountant Fees and Services Information concerning principal accountant fees and services is incorporated by reference from the company's definitive Proxy Statement - Information relating to principal accountant fees and services is incorporated by reference to the Proxy Statement under the caption "Ratification of Appointment of Independent Registered Public Accounting Firm"[480] PART IV Exhibits and Financial Statement Schedules This section lists the documents filed as part of the Annual Report on Form 10-K, including financial statements, schedules, and a comprehensive exhibit index - The section includes financial statements, all information within the financial statements or notes, and a list of exhibits[484] Form 10-K Summary The Annual Report on Form 10-K does not include a summary - This Annual Report on Form 10-K does not include a summary[483] Exhibit Index This index provides a detailed list of all exhibits filed with the Form 10-K, including corporate documents, agreements, and certifications, many of which are incorporated by reference from previous SEC filings - The Exhibit Index lists various corporate documents, agreements, and certifications, including Restated Articles of Incorporation, Bylaws, Equity Incentive Plans, Lease Agreements, and Distribution Agreements[486][487][488][489][490] - Many exhibits are incorporated by reference from prior SEC filings, and some portions have been granted confidential treatment[486][490] Signatures The report is duly signed on behalf of Vericel Corporation by its President and Chief Executive Officer, Dominick C. Colangelo, and Chief Financial Officer, Gerard J. Michel, along with other directors, as of February 26, 2019 - The report is signed by Dominick C. Colangelo (President and CEO), Gerard J. Michel (CFO and VP of Corporate Development), and other directors, dated February 26, 2019[494][495]