Vericel (VCEL) - 2023 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents Vericel Corporation's unaudited condensed consolidated financial statements and detailed notes Condensed Consolidated Balance Sheets This section provides a snapshot of the company's financial position, detailing assets, liabilities, and equity Condensed Consolidated Balance Sheet Highlights (amounts in thousands): | Metric | March 31, 2023 | December 31, 2022 | | :-------------------------------- | :------------- | :---------------- | | Total assets | $265,096 | $273,003 | | Total liabilities | $71,118 | $80,731 | | Total shareholders' equity | $193,978 | $192,272 | | Cash and cash equivalents | $61,834 | $51,067 | | Short-term investments | $57,442 | $68,471 | | Accounts receivable (net) | $38,359 | $46,539 | | Inventory | $15,370 | $15,986 | Condensed Consolidated Statements of Operations This section outlines the company's financial performance, including revenue, expenses, and net loss over a period Condensed Consolidated Statements of Operations Highlights (Three Months Ended March 31, amounts in thousands, except per share amounts): | Metric | 2023 | 2022 | | :-------------------------- | :----- | :----- | | Total revenue | $41,017 | $36,074 | | Gross profit | $26,520 | $23,452 | | Total operating expenses | $34,697 | $30,725 | | Loss from operations | $(8,177) | $(7,273) | | Net loss | $(7,495) | $(7,091) | | Net loss per common share (Basic and diluted) | $(0.16) | $(0.15) | | Weighted-average common shares outstanding | 47,387 | 46,985 | Condensed Consolidated Statements of Comprehensive Loss This section details the total comprehensive loss, including net loss and other comprehensive income/loss items Condensed Consolidated Statements of Comprehensive Loss Highlights (Three Months Ended March 31, amounts in thousands): | Metric | 2023 | 2022 | | :-------------------------- | :----- | :----- | | Net loss | $(7,495) | $(7,091) | | Unrealized gain (loss) on investments | $342 | $(459) | | Comprehensive loss | $(7,153) | $(7,550) | Condensed Consolidated Statements of Shareholders' Equity This section tracks changes in shareholders' equity, reflecting net loss, stock-based compensation, and other equity transactions Changes in Shareholders' Equity (Three Months Ended March 31, amounts in thousands): | Item | 2023 Change | 2022 Change | | :------------------------------------ | :---------- | :---------- | | Net loss | $(7,495) | $(7,091) | | Stock-based compensation expense | $8,731 | $9,531 | | Stock option exercises | $2,009 | $1,155 | | Shares issued under ESPP | $216 | $310 | | Restricted stock withheld for tax | $(2,097) | $(1,423) | | Unrealized gain (loss) on investments | $342 | $(459) | | Total Shareholders' Equity (End of Period) | $193,978 | $172,485 | Condensed Consolidated Statements of Cash Flows This section summarizes cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows Highlights (Three Months Ended March 31, amounts in thousands): | Activity | 2023 | 2022 | | :------------------------------------------ | :----- | :------ | | Net cash provided by operating activities | $7,860 | $3,468 | | Net cash provided by (used in) investing activities | $2,800 | $(10,669) | | Net cash provided by financing activities | $107 | $503 | | Net increase (decrease) in cash, cash equivalents, and restricted cash | $10,767 | $(6,698) | | Cash, cash equivalents, and restricted cash at end of period | $61,834 | $61,843 | Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements 1. Organization Vericel Corporation is a commercial-stage biopharmaceutical company specializing in advanced therapies for sports medicine and severe burn care - Vericel Corporation markets three commercial-stage products in the U.S.: MACI® for cartilage defects, Epicel® for severe burns, and NexoBrid® for eschar removal in burns[23] - The company's liquidity position as of March 31, 2023, includes $61.8 million in cash and cash equivalents and $77.4 million in investments, expected to support operations for at least 12 months[27] - The effects of the COVID-19 pandemic on the company's business and operations have moderated, but a resurgence could lead to future disruptions[25] 2. Basis of Presentation The condensed consolidated financial statements are unaudited, prepared in accordance with U.S. GAAP, and include management's estimates - No new accounting standards were adopted during the three months ended March 31, 2023, and existing ASUs are expected to have minimal impact[32] 3. Revenue Vericel recognizes revenue from MACI biopsy kits and implants, Epicel grafts, and NexoBrid based on ASC 606 Revenue by Product (in thousands) - Three Months Ended March 31: | Product | 2023 | 2022 | Change ($) | Change (%) | | :-------------------------- | :----- | :----- | :--------- | :--------- | | MACI implants and kits | $34,190 | $25,995 | $8,195 | 31.5% | | Epicel | $6,827 | $9,857 | $(3,030) | (30.7)% | | NexoBrid revenue | $— | $222 | $(222) | (100.0)% | | Total revenue | $41,017 | $36,074 | $4,943 | 13.7% | - The total allowance for uncollectible consideration for MACI implants increased from $6.1 million as of December 31, 2022, to $7.1 million as of March 31, 2023[37] 4. Selected Balance Sheet Components This section details changes in inventory, property and equipment, intangible assets, and accrued expenses Inventory (in thousands): | Category | March 31, 2023 | December 31, 2022 | | :--------------- | :------------- | :---------------- | | Raw materials | $14,264 | $15,101 | | Work-in-process | $1,043 | $832 | | Finished goods | $63 | $53 | | Total inventory | $15,370 | $15,986 | Property and Equipment, net (in thousands): | Category | March 31, 2023 | December 31, 2022 | | :-------------------------- | :------------- | :---------------- | | Total property and equipment, gross | $37,399 | $34,139 | | Less accumulated depreciation | $(19,202) | $(18,302) | | Total property and equipment, net | $18,197 | $15,837 | | Construction in process | $8,121 | $5,438 | Intangible Assets, net (in thousands): | Asset | March 31, 2023 | December 31, 2022 | | :---------------- | :------------- | :---------------- | | NexoBrid license (Cost) | $7,500 | $7,500 | | Accumulated Amortization | $(156) | $— | | NexoBrid license (Net) | $7,344 | $7,500 | | Amortization expense (Q1 2023) | $200 | N/A | Accrued Expenses (in thousands): | Category | March 31, 2023 | December 31, 2022 | | :------------------------------ | :------------- | :---------------- | | Bonus related compensation | $3,588 | $7,132 | | Employee related accruals | $2,739 | $3,101 | | Insurance reimbursement-related liabilities | $5,769 | $5,030 | | Other accrued expenses | $1,015 | $927 | | Total accrued expenses | $13,111 | $16,190 | 5. Leases Vericel leases facilities in Ann Arbor and Cambridge, and is developing a new corporate headquarters in Burlington, Massachusetts - The Burlington Lease for a new 126,000 sq ft facility is expected to commence mid-2023, with an initial annual base rent of $57 per square foot, subject to annual increases[54][55][56] - The Burlington Lease includes a tenant improvement allowance of approximately $24.4 million from the landlord[56] Lease Assets and Liabilities (in thousands): | Category | March 31, 2023 | December 31, 2022 | | :-------------------------------- | :------------- | :---------------- | | Right-of-use assets (Operating) | $40,851 | $41,535 | | Property and equipment, net (Finance) | $28 | $37 | | Current portion of operating lease liabilities | $4,497 | $4,302 | | Operating lease liabilities (Non-current) | $42,365 | $43,268 | | Total leased liabilities | $46,882 | $47,611 | 6. Investments Vericel's marketable debt securities are classified as available-for-sale and carried at fair value Marketable Debt Securities (in thousands) - March 31, 2023: | Category | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | | :------------------------ | :------------- | :--------------------- | :---------------------- | :------------------- | | Commercial paper | $14,306 | $— | $(48) | $14,258 | | Corporate notes | $43,157 | $— | $(559) | $42,598 | | U.S. government securities | $4,920 | $5 | $— | $4,925 | | U.S. government agency bonds | $15,600 | $— | $(29) | $15,571 | | Total | $77,983 | $5 | $(636) | $77,352 | | Short-term investments | | | | $57,442 | | Long-term investments | | | | $19,910 | - As of March 31, 2023, the company's marketable securities had a gross unrealized loss of $636 thousand[62] 7. Fair Value Measurements The company classifies fair value measurements into Level 1, 2, or 3 categories based on observability of inputs Fair Value Measurement Categories (in thousands) - March 31, 2023: | Asset | Total Fair Value | Level 1 | Level 2 | Level 3 | | :------------------------ | :--------------- | :------ | :------ | :------ | | Money market funds | $39,906 | $39,906 | $— | $— | | Commercial paper | $14,258 | $— | $14,258 | $— | | Corporate notes | $42,598 | $— | $42,598 | $— | | U.S. government securities | $4,925 | $— | $4,925 | $— | | U.S. government agency bonds | $15,571 | $— | $15,571 | $— | | Total Assets | $117,258 | $39,906 | $77,352 | $— | 8. Revolving Credit Agreement Vericel has a $150.0 million five-year senior secured revolving credit agreement, with $6.2 million currently utilized for letters of credit - The company has a $150.0 million five-year senior secured revolving credit agreement, with a $15.0 million sub-facility for letters of credit, of which approximately $6.2 million is utilized[66] - As of March 31, 2023, there are no outstanding borrowings under the Revolving Credit Agreement, and the company is in compliance with all covenants[69][123] 9. Stock-Based Compensation This section details the company's stock-based compensation plans and related expenses Non-Cash Stock-Based Compensation Expense (in thousands) - Three Months Ended March 31: | Category | 2023 | 2022 | Change ($) | Change (%) | | :------------------------------------ | :----- | :----- | :--------- | :--------- | | Cost of product sales | $885 | $1,118 | $(233) | (20.8)% | | Research and development | $977 | $1,350 | $(373) | (27.6)% | | Selling, general and administrative | $6,869 | $7,063 | $(194) | (2.7)% | | Total non-cash stock-based compensation expense | $8,731 | $9,531 | $(800) | (8.4)% | - The weighted-average grant-date fair value of service-based options granted decreased from $20.99 in Q1 2022 to $18.00 in Q1 2023[75] - The weighted-average grant-date fair value of restricted stock units granted decreased from $34.97 in Q1 2022 to $29.82 in Q1 2023[76] 10. Net Loss Per Common Share This section reports the basic and diluted net loss per common share for the period Net Loss Per Common Share (Three Months Ended March 31, amounts in thousands, except per share amounts): | Metric | 2023 | 2022 | | :------------------------------------------ | :----- | :----- | | Net loss | $(7,495) | $(7,091) | | Basic weighted-average common shares outstanding | 47,387 | 46,985 | | Basic loss per common share | $(0.16) | $(0.15) | | Diluted loss per common share | $(0.16) | $(0.15) | 11. NexoBrid License and Supply Agreements Vericel holds exclusive North American rights to NexoBrid, with associated milestone payments and royalties - The FDA approved NexoBrid on December 28, 2022, for commercial use in the U.S., leading to a $7.5 million regulatory milestone payment by Vericel to MediWound in February 2023, recorded as an intangible asset[78][80] - Vericel is obligated to pay MediWound up to $125.0 million contingent upon meeting certain sales milestones, with the first $7.5 million triggered when annual net sales exceed $75.0 million[81] - MediWound announced additional BARDA funding of $3 million in May 2023 to support the replacement of expired NexoBrid previously procured for emergency response preparedness[83] 12. Commitments and Contingencies The company is not currently a party to any material ongoing legal proceedings or investigations - As of March 31, 2023, Vericel has no material ongoing litigation or investigations by government or regulatory authorities[85] 13. Subsequent Events This section details significant events that occurred after the balance sheet date - In April 2023, Vericel funded approximately $28.3 million (50% of its required cost) into a construction escrow account for tenant improvement costs at the Burlington facility, with the remaining 50% expected in late 2023 or early 2024[86] - The company plans to invest in the acquisition and installation of specialized manufacturing and laboratory equipment to support the expansion of autologous cell manufacturing operations at the new Burlington facility[86] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Vericel's financial condition and operational results for Q1 2023 Overview Vericel is a commercial-stage biopharmaceutical company focused on sports medicine and severe burn care, marketing FDA-approved products - Vericel is a fully-integrated, commercial-stage biopharmaceutical company with three FDA-approved products: MACI, Epicel, and NexoBrid[88] - Commercial launch activities for NexoBrid are underway following its FDA approval on December 28, 2022, with U.S. commercial sales anticipated to begin in the third quarter of 2023[88] Business Environment and Risks The company's operations are influenced by external factors such as COVID-19, global economic uncertainty, and product portfolio developments COVID-19 The effects of the COVID-19 pandemic on the company's business have moderated, but a resurgence could lead to future disruptions - The effects of the COVID-19 pandemic on the company's business and results of operations have moderated, but a resurgence could lead to future disruptions[89] The War in Ukraine The ongoing war between Russia and Ukraine creates substantial uncertainty in the global economy, though Vericel has no direct exposure - The ongoing war between Russia and Ukraine creates substantial uncertainty in the global economy, though Vericel has no direct operations or exposure in these regions[90] Manufacturing MACI and Epicel are manufactured in Cambridge, Massachusetts, while NexoBrid manufacturing is conducted by MediWound in Israel - MACI and Epicel are manufactured in Cambridge, Massachusetts, while NexoBrid manufacturing is conducted by MediWound in Israel, with raw materials from Taiwan[91] Product Portfolio Vericel is evaluating arthroscopic delivery for MACI and potential indication expansion, while Epicel is now eligible for profit, and NexoBrid expands the burn care market - Vericel is evaluating arthroscopic delivery for MACI and a potential indication expansion for cartilage damage in the ankle, with a human factors validation study for arthroscopic delivery planned for Q3 2023[95][96] - Epicel is no longer subject to HDE profit restrictions due to the inclusion of pediatric patients in its labeled indications, with an Annual Distribution Number (ADN) of 360,400[97][99] - NexoBrid's FDA approval expands Vericel's burn care franchise, targeting over 30,000 hospitalized thermal burn patients annually in the U.S., and commercial sales are expected to begin in Q3 2023[101][102] Results of Operations Vericel reported increased total revenue and gross profit for Q1 2023, but also higher operating expenses and an increased operating loss Summary of Consolidated Results This section provides a consolidated overview of the company's financial performance for the period Consolidated Results of Operations (Three Months Ended March 31, in thousands): | Metric | 2023 | 2022 | Change ($) | Change (%) | | :-------------------------- | :----- | :----- | :--------- | :--------- | | Total revenue | $41,017 | $36,074 | $4,943 | 13.7% | | Cost of product sales | $14,497 | $12,622 | $1,875 | 14.9% | | Gross profit | $26,520 | $23,452 | $3,068 | 13.1% | | Research and development | $5,212 | $4,860 | $352 | 7.2% | | Selling, general and administrative | $29,485 | $25,865 | $3,620 | 14.0% | | Total operating expenses | $34,697 | $30,725 | $3,972 | 12.9% | | Loss from operations | $(8,177) | $(7,273) | $(904) | 12.4% | | Total other income | $682 | $182 | $500 | 274.7% | | Net loss | $(7,495) | $(7,091) | $(404) | 5.7% | Total Revenue Total revenue increased by 13.7% to $41.0 million, driven by MACI volume and price growth, offsetting Epicel and NexoBrid declines Revenue by Product (in thousands) - Three Months Ended March 31: | Product | 2023 | 2022 | Change ($) | Change (%) | | :---------- | :----- | :----- | :--------- | :--------- | | MACI | $34,190 | $25,995 | $8,195 | 31.5% | | Epicel | $6,827 | $9,857 | $(3,030) | (30.7)% | | NexoBrid | $— | $222 | $(222) | (100.0)% | | Total revenue | $41,017 | $36,074 | $4,943 | 13.7% | - MACI sales volumes historically show seasonality, with stronger orders in the fourth quarter (average 35% of annual volumes) due to insurance deductibles and patient preferences for rehabilitation timing[105] Gross Profit Gross profit increased by $3.1 million (13.1%) due to higher MACI volume and price growth, despite increased costs - Gross profit increased by $3.1 million (13.1%) for Q1 2023 compared to Q1 2022, primarily driven by higher MACI volume and price growth, partially offset by increased employee costs, raw material prices, and external storage/manufacturing facility costs[103][106] Research and Development Expenses Research and development expenses increased by $0.4 million (7.2%), primarily due to lower reimbursement from MediWound Research and Development Expenses (in thousands) - Three Months Ended March 31: | Product | 2023 | 2022 | Change ($) | Change (%) | | :---------- | :----- | :----- | :--------- | :--------- | | MACI | $3,073 | $2,989 | $84 | 2.8% | | Epicel | $1,171 | $1,220 | $(49) | (4.0)% | | NexoBrid | $968 | $651 | $317 | 48.7% | | Total R&D expenses | $5,212 | $4,860 | $352 | 7.2% | - The increase in R&D expenses is primarily due to lower reimbursement of expenses from MediWound related to the NexoBrid BLA resubmission[107] Selling, General and Administrative Expenses Selling, general and administrative expenses increased by $3.6 million (14.0%) due to higher headcount, travel, and marketing - Selling, general and administrative expenses increased by $3.6 million (14.0%) to $29.5 million for Q1 2023, driven by higher headcount and employee expenses, increased travel and in-person events, and higher marketing expenses[103][108] Total Other Income Total other income increased significantly by $0.5 million (274.7%), mainly due to investment returns - Total other income increased significantly by $0.5 million (274.7%) for Q1 2023, primarily due to fluctuations in returns on marketable debt securities, partially offset by interest expense from the Revolving Credit Agreement[103][110] Stock-based Compensation Expense Total non-cash stock-based compensation expense decreased by $0.8 million (8.4%) due to fluctuations in stock prices and award mix - Total non-cash stock-based compensation expense decreased by $0.8 million (8.4%) to $8.7 million for Q1 2023, mainly due to fluctuations in stock prices and the mix of service-based options and restricted stock units awarded[111] Liquidity and Capital Resources Vericel's liquidity is supported by cash from product sales, existing cash, investments, and available borrowing capacity Cash Flows This section summarizes the company's cash inflows and outflows from operating, investing, and financing activities Summary of Cash Flows (in thousands) - Three Months Ended March 31: | Activity | 2023 | 2022 | | :------------------------------------------ | :----- | :------ | | Net cash provided by operating activities | $7,860 | $3,468 | | Net cash provided by (used in) investing activities | $2,800 | $(10,669) | | Net cash provided by financing activities | $107 | $503 | | Net increase (decrease) in cash, cash equivalents, and restricted cash | $10,767 | $(6,698) | - Net cash provided by operating activities increased to $7.9 million in Q1 2023, primarily due to non-cash charges and a decrease in accounts receivable from strong collections[113] - Net cash provided by investing activities was $2.8 million in Q1 2023, a significant improvement from a $10.7 million use in Q1 2022, driven by higher investment sales/maturities and lower property/equipment expenditures, despite a $7.5 million NexoBrid milestone payment[115][116] Liquidity Outlook Vericel expects its current cash, investments, and borrowing capacity to support operations for at least the next 12 months - Vericel believes its current cash, cash equivalents, investments, and available borrowing capacity will be sufficient to support operations for at least 12 months from the report's issuance[120] Sources of Capital The company has a $200.0 million At-The-Market (ATM) program and a $150.0 million revolving credit agreement - The company has a $200.0 million At-The-Market (ATM) program for common stock sales, but no shares have been sold as of March 31, 2023[122] - Vericel has a $150.0 million five-year senior secured revolving credit agreement, with no outstanding borrowings as of March 31, 2023[123] Contractual Obligations and Commitments Vericel began funding $28.3 million into a construction escrow for tenant improvement costs related to the Burlington Lease - In April 2023, Vericel began funding approximately $28.3 million into a construction escrow account for tenant improvement costs related to the Burlington Lease, with the remaining 50% expected in late 2023 or early 2024[126] Critical Accounting Policies There have been no material changes to the company's critical accounting policies and estimates in Q1 2023 - There have been no material changes to the company's critical accounting policies and estimates in the three months ended March 31, 2023[128] Cautionary Note Regarding Forward-Looking Statements This section highlights that the report contains forward-looking statements subject to various risks and uncertainties - The report contains forward-looking statements regarding future business conditions, plans, and prospects, which are subject to significant business, economic, and competitive uncertainties[129][130] - Key risk factors include uncertainties associated with future revenue, market penetration for products, profitability, clinical trial timing, FDA approvals, competition, third-party coverage, NexoBrid commercial launch, supply chain disruptions, global geopolitical tensions, and the ongoing impacts of the COVID-19 pandemic[129] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's exposures to market risk have not materially changed since December 31, 2022 - The company's exposures to market risk have not changed materially since December 31, 2022[131] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2023 - The company's disclosure controls and procedures were evaluated and deemed effective as of March 31, 2023[132] - There were no material changes in internal control over financial reporting during the three months ended March 31, 2023[134] PART II — OTHER INFORMATION Item 1. Legal Proceedings The company is not currently a party to any material legal proceedings - Vericel is not currently a party to any material legal proceedings[135] Item 1A. Risk Factors A new risk factor concerning adverse developments affecting financial institutions has been added - A new risk factor has been added regarding adverse developments affecting financial institutions, which could impact the company's operations and liquidity[136][137] - The company maintains cash and investments in deposit accounts that exceed FDIC insurance coverage, and potential liquidity constraints or failures of financial institutions could severely affect operations[138][140] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This item is not applicable to the current report - Not applicable[141] Item 3. Defaults Upon Senior Securities This item is not applicable to the current report - Not applicable[142] Item 4. Mine Safety Disclosures This item is not applicable to the current report - Not applicable[143] Item 5. Other Information This item is not applicable to the current report - Not applicable[144] Item 6. Exhibits This section lists all exhibits filed as part of this Quarterly Report on Form 10-Q - The report includes an Exhibit Index listing various documents such as Restated Articles of Incorporation, Amended and Restated Bylaws, Description of Capital Stock, and Certifications of CEO and CFO[146][148] SIGNATURES The report is duly signed on behalf of Vericel Corporation by its President and Chief Executive Officer and Chief Financial Officer - The report is signed by Dominick C. Colangelo, President and Chief Executive Officer, and Joseph A. Mara, Chief Financial Officer, on May 10, 2023[152]