Vericel (VCEL) - 2024 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION This section presents Vericel Corporation's unaudited condensed consolidated financial statements and management's discussion for the three months ended March 31, 2024 Item 1. Financial Statements (Unaudited) This section presents Vericel Corporation's unaudited condensed consolidated financial statements and related notes for the three months ended March 31, 2024 and 2023 Condensed Consolidated Balance Sheets This table provides a snapshot of Vericel's financial position, detailing assets, liabilities, and equity as of March 31, 2024, and December 31, 2023 Condensed Consolidated Balance Sheets (in millions) | Metric | March 31, 2024 (in millions) | December 31, 2023 (in millions) | | :----- | :--------------------------- | :------------------------------ | | Total Assets | $356.661 | $353.657 | | Total Liabilities | $122.765 | $127.705 | | Total Shareholders' Equity | $233.896 | $225.952 | Condensed Consolidated Statements of Operations This table details Vericel's financial performance, including revenue, expenses, and net loss for the three months ended March 31, 2024 and 2023 Condensed Consolidated Statements of Operations (in millions, except per share amounts) | Metric | Three Months Ended March 31, 2024 (in millions) | Three Months Ended March 31, 2023 (in millions) | Change ($) | Change (%) | | :----- | :---------------------------------------------- | :---------------------------------------------- | :--------- | :--------- | | Total Revenue | $51.281 | $41.017 | $10.264 | 25.0% | | Cost of Product Sales | $15.927 | $14.497 | $1.430 | 9.9% | | Gross Profit | $35.354 | $26.520 | $8.834 | 33.3% | | Research and Development | $6.418 | $5.212 | $1.206 | 23.1% | | Selling, General and Administrative | $34.400 | $29.485 | $4.915 | 16.7% | | Total Operating Expenses | $40.818 | $34.697 | $6.121 | 17.6% | | Loss from Operations | $(5.464) | $(8.177) | $2.713 | (33.2)% | | Total Other Income | $1.602 | $0.682 | $0.920 | 134.9% | | Net Loss | $(3.862) | $(7.495) | $3.633 | (48.5)% | | Basic and Diluted Net Loss Per Common Share | $(0.08) | $(0.16) | $0.08 | (50.0)% | Condensed Consolidated Statements of Comprehensive Loss This table presents Vericel's net loss and other comprehensive income/loss components for the three months ended March 31, 2024 and 2023 Condensed Consolidated Statements of Comprehensive Loss (in millions) | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :----- | :-------------------------------- | :-------------------------------- | | Net Loss | $(3.862) | $(7.495) | | Unrealized (Loss) Gain on Investments | $(0.145) | $0.342 | | Comprehensive Loss | $(4.007) | $(7.153) | Condensed Consolidated Statements of Shareholders' Equity This section outlines changes in Vericel's shareholders' equity, reflecting net loss, stock-based compensation, and other equity transactions - Total shareholders' equity increased from $225.952 million as of December 31, 2023, to $233.896 million as of March 31, 2024[15] - Key contributors to the increase include stock-based compensation expense ($9.834 million) and stock option exercises ($6.779 million), partially offset by net loss ($3.862 million) and restricted stock withheld for employee tax remittance ($4.909 million)[15] Condensed Consolidated Statements of Cash Flows This table summarizes Vericel's cash inflows and outflows from operating, investing, and financing activities for the three months ended March 31, 2024 and 2023 Condensed Consolidated Statements of Cash Flows (in millions) | Cash Flow Activity | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :----------------- | :-------------------------------- | :-------------------------------- | | Net Cash Provided by Operating Activities | $7.202 | $7.860 | | Net Cash (Used in) Provided by Investing Activities | $(25.452) | $2.800 | | Net Cash Provided by Financing Activities | $2.126 | $0.107 | | Net (Decrease) Increase in Cash, Cash Equivalents, and Restricted Cash | $(16.124) | $10.767 | | Cash, Cash Equivalents, and Restricted Cash at End of Period | $70.742 | $61.834 | Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements 1. Organization This note describes Vericel's business, commercial products, operational segment, and ongoing monitoring of geopolitical risks - Vericel is a fully-integrated, commercial-stage biopharmaceutical company providing advanced therapies for sports medicine and severe burn care markets[22] - Commercial products include MACI® (autologous cultured chondrocytes on porcine collagen membrane) for knee cartilage defects, Epicel® (cultured epidermal autografts) for deep-dermal or full-thickness burns, and NexoBrid® (anacaulase-bcdb) for eschar removal in thermal burns[22] - NexoBrid commercial sales in the U.S. began in Q3 2023 following FDA approval on December 28, 2022[22] - The company operates primarily in the U.S. in one reportable segment: research, product development, manufacture, and distribution of cellular therapies and specialty biologics[22] - The company is monitoring the ongoing conflicts in Ukraine and Israel/Gaza, particularly the potential impact on NexoBrid supply from MediWound's facilities in Israel[24][25][26] - As of March 31, 2024, the Company had an accumulated deficit of $407.0 million and a net loss of $3.9 million during the three months ended March 31, 2024. Cash and cash equivalents were $62.9 million and investments were $77.1 million[27] 2. Basis of Presentation This note outlines the accounting principles, management estimates, and recent accounting standard updates applied in the financial statements - Financial statements are unaudited and prepared in accordance with U.S. GAAP and SEC rules, requiring management estimates and judgments[30][31] - No new accounting standards were adopted during the three months ended March 31, 2024[33] - The company is evaluating the impact of ASU 2023-07 (Segment Reporting) and ASU 2023-09 (Improvements to Income Tax Disclosures), effective for fiscal years beginning after December 15, 2024[33][34] 3. Revenue This note details Vericel's revenue recognition policies and provides a breakdown of revenue by product for the reporting periods - Revenue recognition follows the five-step model in Accounting Standards Codification 606, Revenue Recognition[35] - MACI biopsy kit revenue is recognized upon delivery; MACI implant revenue is recognized upon delivery when the customer obtains control and the claim is billable, with estimates for contractual allowances and uncollectible consideration[36][38][39] - Epicel revenue is recognized upon delivery to the hospital[42] - NexoBrid revenue is recognized when specialty distributors take control of the product, typically upon delivery[45] Revenue by Product (in millions) | Product | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :------ | :-------------------------------- | :-------------------------------- | | MACI implants and kits | $40.181 | $34.190 | | Epicel | $10.664 | $6.827 | | NexoBrid | $0.436 | $0 | | Total Revenue | $51.281 | $41.017 | 4. Selected Balance Sheet Components This note provides detailed breakdowns of key balance sheet items, including inventory, property and equipment, intangible assets, and accrued expenses Inventory (in millions) | Component | March 31, 2024 | December 31, 2023 | | :-------- | :------------- | :---------------- | | Raw materials | $10.858 | $11.348 | | Work-in-process | $1.745 | $1.210 | | Finished goods | $0.954 | $0.529 | | Total Inventory | $13.557 | $13.087 | Property and Equipment, net (in millions) | Component | March 31, 2024 | December 31, 2023 | | :-------- | :------------- | :---------------- | | Construction in process | $47.474 | $32.531 | | Total Property and Equipment, net | $56.392 | $41.635 | - Intangible assets, net, primarily consist of the NexoBrid license, valued at $6.719 million as of March 31, 2024, with an estimated future amortization of $0.469 million for the remainder of 2024[53][54] Accrued Expenses (in millions) | Component | March 31, 2024 | December 31, 2023 | | :-------- | :------------- | :---------------- | | Bonus-related compensation | $3.932 | $9.757 | | Employee-related accruals | $3.394 | $3.503 | | Insurance reimbursement-related liabilities | $3.385 | $3.591 | | Other accrued expenses | $0.315 | $0.364 | | Total Accrued Expenses | $11.026 | $17.215 | 5. Leases This note describes Vericel's lease arrangements, particularly the Burlington Lease for its new headquarters and manufacturing facility - The Company entered into the Burlington Lease in January 2022 for approximately 126,000 square feet of manufacturing, laboratory, and office space, which will serve as its new corporate headquarters and primary manufacturing facility[56] - The term of the Burlington Lease began on June 1, 2023, and the Company gained control of the premises to commence tenant improvement work[58][60] - The Company funded approximately $28.3 million of its required tenant improvement construction costs in April 2024[57][126] - Operating lease expense for the three months ended March 31, 2024, was $3.2 million, compared to $1.7 million for the same period in 2023[62] - Operating right-of-use assets were $73.682 million and operating lease liabilities were $92.153 million as of March 31, 2024[63] 6. Investments This note details Vericel's marketable debt securities, classified as available-for-sale, and their fair values and maturities - Marketable debt securities held by the Company are classified as available-for-sale and carried at fair value[64] Marketable Securities (in millions) | Type | Amortized Cost (March 31, 2024) | Estimated Fair Value (March 31, 2024) | Amortized Cost (December 31, 2023) | Estimated Fair Value (December 31, 2023) | | :--- | :------------------------------ | :------------------------------------ | :--------------------------------- | :--------------------------------------- | | Commercial paper | $7.396 | $7.383 | $3.638 | $3.639 | | Corporate notes | $56.803 | $56.604 | $47.228 | $47.159 | | U.S. government securities | $2.473 | $2.472 | $0.983 | $0.983 | | U.S. government agency bonds | $10.713 | $10.684 | $14.003 | $13.971 | | Total | $77.385 | $77.143 | $65.852 | $65.752 | - All marketable securities had remaining contractual maturities of three years or less as of March 31, 2024[64] 7. Fair Value Measurements This note explains Vericel's fair value measurement hierarchy and provides a breakdown of financial instruments by fair value level - Fair value measurements are classified into Level 1 (quoted prices in active markets), Level 2 (observable inputs for similar instruments), and Level 3 (unobservable inputs)[65][69] - Commercial paper, corporate notes, U.S. government securities, and U.S. government agency bonds are classified as Level 2[65] - Money market funds are classified as Level 1[66] Fair Value of Financial Instruments (in millions) | Asset Type | Total (March 31, 2024) | Level 1 (March 31, 2024) | Level 2 (March 31, 2024) | Level 3 (March 31, 2024) | Total (December 31, 2023) | Level 1 (December 31, 2023) | Level 2 (December 31, 2023) | Level 3 (December 31, 2023) | | :--------- | :--------------------- | :----------------------- | :----------------------- | :----------------------- | :------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | | Money market funds | $36.617 | $36.617 | $0 | $0 | $34.672 | $34.672 | $0 | $0 | | Commercial paper | $8.873 | $0 | $8.873 | $0 | $4.876 | $0 | $4.876 | $0 | | Corporate notes | $56.606 | $0 | $56.606 | $0 | $47.159 | $0 | $47.159 | $0 | | U.S. government agency bonds | $10.684 | $0 | $10.684 | $0 | $13.971 | $0 | $13.971 | $0 | | U.S. government securities | $23.763 | $0 | $23.763 | $0 | $24.874 | $0 | $24.874 | $0 | | Total | $136.543 | $36.617 | $99.926 | $0 | $125.552 | $34.672 | $90.880 | $0 | 8. Revolving Credit Agreement This note outlines Vericel's $150.0 million revolving credit agreement, its utilization, and compliance with financial covenants - 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[67] - Approximately $6.2 million of the sub-facility is currently utilized for letters of credit[67] - As of March 31, 2024, there are no outstanding borrowings under the Revolving Credit Agreement[70] - The agreement includes financial covenants, such as a maximum Total Net Leverage Ratio of 3.50 to 1.00, with which the company is in compliance[71][125] 9. Stock-Based Compensation This note details Vericel's non-cash stock-based compensation expense and the fair values of granted options and restricted stock units Total Non-Cash Stock-Based Compensation Expense (in millions) | Category | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Change ($) | Change (%) | | :------- | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Cost of product sales | $1.241 | $0.885 | $0.356 | 40.2% | | Research and development | $1.221 | $0.977 | $0.244 | 25.0% | | Selling, general and administrative | $7.372 | $6.869 | $0.503 | 7.3% | | Total | $9.834 | $8.731 | $1.103 | 12.6% | - The weighted-average grant-date fair value of service-based options granted increased from $18.00 in Q1 2023 to $28.21 in Q1 2024[76] - The weighted-average grant-date fair value of restricted stock units granted increased from $29.82 in Q1 2023 to $48.25 in Q1 2024[77] 10. Net Loss Per Common Share This note presents Vericel's net loss per common share calculations, including basic and diluted figures Net Loss Per Common Share (in millions, except per share amounts) | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :----- | :-------------------------------- | :-------------------------------- | | Net Loss | $(3.862) | $(7.495) | | Basic and Diluted Weighted-Average Common Shares Outstanding | 48,141 | 47,387 | | Basic Loss Per Common Share | $(0.08) | $(0.16) | | Diluted Loss Per Common Share | $(0.08) | $(0.16) | - Anti-dilutive shares excluded from diluted net loss per common share were 6,730 for stock options and 1,201 for restricted stock units as of March 31, 2024[78] 11. NexoBrid License and Supply Agreements This note describes Vericel's exclusive license and supply agreements with MediWound for NexoBrid in North America - Vericel has exclusive license and supply agreements with MediWound for NexoBrid in North America[79] - The FDA approved NexoBrid on December 28, 2022, and the Biologics License Application (BLA) was transferred to Vericel effective February 20, 2023[79][80] - A $7.5 million regulatory milestone payment was made to MediWound in February 2023, recorded as an intangible asset[81] - The Company is obligated to pay MediWound up to $125.0 million in sales milestones (first $7.5 million triggered at $75.0 million annual net sales) and tiered royalties on net sales[82] - MediWound manufactures and supplies NexoBrid on a unit price basis[82] 12. Commitments and Contingencies This note confirms that Vericel is not currently involved in any material litigation or regulatory proceedings - The Company is not currently a party to any material ongoing litigation, regulatory, or other proceedings[86] - No knowledge of any investigations by government or regulatory authorities that could have a material adverse effect on the business[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 performance, operational highlights, and liquidity for the three months ended March 31, 2024 Overview This section provides an overview of Vericel's biopharmaceutical business, product portfolio, strategic initiatives, and market opportunities - Vericel is a fully-integrated, commercial-stage biopharmaceutical company providing advanced therapies for sports medicine and severe burn care[88] - Products include MACI (knee cartilage repair), Epicel (permanent skin replacement for severe burns), and NexoBrid (eschar removal for thermal burns)[88][93] - The company is developing arthroscopic delivery for MACI, with commercial launch anticipated in Q3 2024, and evaluating MACI for ankle cartilage damage, with a clinical trial expected in 2025[97][98] - NexoBrid's FDA approval expands the burn care franchise, targeting over 30,000 hospitalized thermal burn patients annually in the U.S[102] - The company monitors geopolitical conflicts (Ukraine, Israel/Gaza) for potential impacts on global economy, supply chain, and NexoBrid manufacturing by MediWound in Israel[89][91] Results of Operations This section analyzes Vericel's financial results, including revenue growth, changes in expenses, and net loss for the reporting period Total Revenue by Product (in millions) | Product | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Change ($) | Change (%) | | :------ | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | MACI | $40.181 | $34.190 | $5.991 | 17.5% | | Epicel | $10.664 | $6.827 | $3.837 | 56.2% | | NexoBrid | $0.436 | $0 | $0.436 | N/A | | Total Revenue | $51.281 | $41.017 | $10.264 | 25.0% | - Gross profit increased by 33.3% to $35.354 million for Q1 2024, driven by revenue growth and a fixed manufacturing cost structure[104][108] - Research and development expenses increased by 23.1% to $6.418 million, primarily due to higher headcount, employee expenses, and MACI arthroscopic development program costs[104][109] - Selling, general and administrative expenses increased by 16.7% to $34.400 million, mainly due to higher headcount, employee expenses, and lease expense associated with the Burlington Lease[104][110] - Net loss decreased by 48.5% to $(3.862) million for Q1 2024, compared to $(7.495) million in Q1 2023[104] - MACI sales historically exhibit seasonality, with Q4 typically being the strongest (average 35% of annual volumes), while Epicel revenue has inherent variability. NexoBrid seasonality is yet to be determined[106][107] Liquidity and Capital Resources This section discusses Vericel's cash position, cash flow activities, and its ability to fund operations for the foreseeable future - Cash, cash equivalents, and restricted cash totaled $70.7 million as of March 31, 2024[115] - Net cash provided by operating activities was $7.2 million for Q1 2024, primarily from non-cash charges and a decrease in accounts receivable[114][115] - Net cash used in investing activities was $25.5 million for Q1 2024, mainly due to $22.6 million in investment purchases and $14.0 million in property and equipment purchases (Burlington Lease construction), partially offset by $11.1 million from investment sales[114][117] - Net cash provided by financing activities was $2.1 million, driven by stock option exercises and employee stock purchase plan proceeds, offset by tax payments for restricted stock units[114][119] - The company believes current cash, equivalents, investments, and available borrowing capacity (including a $150.0 million revolving credit agreement) will be sufficient to support operations for at least 12 months[122][125] - The company funded the remaining $28.3 million for the Burlington Lease construction escrow in April 2024[126] Critical Accounting Policies This section confirms no material changes to Vericel's critical accounting policies and estimates during the reporting period - No material changes to critical accounting policies and estimates in the three months ended March 31, 2024[128] - Refer to the Annual Report on Form 10-K for the year ended December 31, 2023, for further information[128] Item 3. Quantitative and Qualitative Disclosures About Market Risk Vericel's exposures to market risk have not materially changed since December 31, 2023, with further details available in the company's Annual Report on Form 10-K - No material changes to market risk exposures since December 31, 2023[131] - Refer to Part II, Item 7A of the Annual Report on Form 10-K for the year ended December 31, 2023, for detailed disclosures[131] Item 4. Controls and Procedures Vericel's management concluded that disclosure controls and procedures were effective as of March 31, 2024, with no material changes in internal control - Disclosure controls and procedures were evaluated and deemed effective as of March 31, 2024[132][133] - No material changes in internal control over financial reporting during the three months ended March 31, 2024[134] PART II — OTHER INFORMATION This section covers other information including legal proceedings, risk factors, equity sales, and exhibits for the reporting period Item 1. Legal Proceedings Vericel Corporation is not currently involved in any material legal proceedings that could significantly impact its business - The Company is not a party to any material legal proceedings as of March 31, 2024[135] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in Vericel's Annual Report on Form 10-K for the fiscal year ended December 31, 2023 - No material changes to risk factors disclosed in the Annual Report on Form 10-K for the fiscal year ended December 31, 2023[136] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section is not applicable to Vericel for the reporting period, indicating no unregistered sales of equity securities or related use of proceeds - Not applicable[137] Item 3. Defaults Upon Senior Securities This section is not applicable to Vericel for the reporting period, indicating no defaults upon senior securities - Not applicable[138] Item 4. Mine Safety Disclosures This section is not applicable to Vericel for the reporting period, as the company does not have operations related to mine safety - Not applicable[139] Item 5. Other Information Several Section 16 officers and directors of Vericel adopted Rule 10b5-1 trading arrangements in March 2024, outlining potential future sales of common stock in accordance with company policy - In March 2024, several Section 16 officers and directors adopted Rule 10b5-1 trading arrangements for potential sales of common stock between August 2024 and August 2025[140][141] - These plans include Kevin McLaughlin (up to 35,000 shares), Robert Zerbe (up to 17,500 shares), Sean Flynn (up to 40,075 shares), Jonathan Siegal (up to 42,577 shares), and Joseph Mara (up to 5,000 shares)[141] Item 6. Exhibits This section lists all exhibits filed as part of the Quarterly Report on Form 10-Q, including organizational documents, capital stock descriptions, certifications, and XBRL documents - The report includes an Exhibit Index listing various documents such as Restated Articles of Incorporation, Amended and Restated Bylaws, Description of Capital Stock, CEO/CFO certifications (Sarbanes-Oxley Act), and Inline XBRL documents[142][143][144] Signatures The Quarterly Report on Form 10-Q is officially signed by Vericel Corporation's President and Chief Executive Officer, Dominick C. Colangelo, and Chief Financial Officer, Joseph A. Mara, on May 8, 2024 - The report is signed by Dominick C. Colangelo, President and Chief Executive Officer, and Joseph A. Mara, Chief Financial Officer, on May 8, 2024[147][148]