Vericel (VCEL) - 2022 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION Presents the unaudited financial statements, management's analysis of performance, market risk disclosures, and an evaluation of internal controls Item 1. Financial Statements (Unaudited) Presents the company's unaudited condensed consolidated financial statements and accompanying notes for the quarter ended March 31, 2022 Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheet Highlights (Amounts in thousands) | Metric | March 31, 2022 | December 31, 2021 | Change ($) | Change (%) | | :-------------------------------- | :------------- | :---------------- | :--------- | :--------- | | Total current assets | $151,880 | $158,462 | $(6,582) | -4.15% | | Total assets | $240,288 | $243,705 | $(3,417) | -1.40% | | Total current liabilities | $21,731 | $26,052 | $(4,321) | -16.59% | | Total liabilities | $67,803 | $73,243 | $(5,440) | -7.43% | | Total shareholders' equity | $172,485 | $170,462 | $2,023 | 1.19% | - Cash and cash equivalents decreased from $68.3 million at December 31, 2021, to $55.7 million at March 31, 2022[9] - Accounts receivable decreased from $37.4 million to $31.9 million, while inventory increased from $13.4 million to $14.4 million[9] Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations Highlights (Three Months Ended March 31, Amounts in thousands, except per share amounts) | Metric | 2022 | 2021 | Change ($) | Change (%) | | :-------------------------------- | :----- | :----- | :--------- | :--------- | | Total revenue | $36,074 | $34,568 | $1,506 | 4.4% | | Gross profit | $23,452 | $22,985 | $467 | 2.0% | | Total operating expenses | $30,725 | $26,290 | $4,435 | 16.9% | | Loss from operations | $(7,273) | $(3,305) | $(3,968) | 120.1% | | Net loss | $(7,091) | $(3,289) | $(3,802) | 115.6% | | Basic net loss per common share | $(0.15) | $(0.07) | $(0.08) | 114.3% | | Diluted net loss per common share | $(0.15) | $(0.07) | $(0.08) | 114.3% | - Research and development expenses increased by 33.9% to $4.9 million, and selling, general and administrative expenses increased by 14.1% to $25.9 million[11] Condensed Consolidated Statements of Comprehensive Loss Condensed Consolidated Statements of Comprehensive Loss (Three Months Ended March 31, Amounts in thousands) | Metric | 2022 | 2021 | Change ($) | Change (%) | | :-------------------------- | :----- | :----- | :--------- | :--------- | | Net loss | $(7,091) | $(3,289) | $(3,802) | 115.6% | | Unrealized loss on investments | $(459) | $(61) | $(398) | 652.5% | | Comprehensive loss | $(7,550) | $(3,350) | $(4,200) | 125.4% | Condensed Consolidated Statements of Shareholders' Equity Shareholders' Equity Changes (Three Months Ended March 31, Amounts in thousands) | Item | 2022 | 2021 | | :------------------------------------ | :----- | :----- | | Balance, December 31 | $170,462 | $134,260 | | Net loss | $(7,091) | $(3,289) | | Stock-based compensation expense | $9,531 | $7,019 | | Stock option exercises | $1,155 | $3,532 | | Shares issued under ESPP | $310 | $249 | | Restricted stock withheld for tax | $(1,423) | $(1,501) | | Unrealized loss on investments | $(459) | $(61) | | Balance, March 31 | $172,485 | $140,209 | - Total shareholders' equity increased from $170.5 million at December 31, 2021, to $172.5 million at March 31, 2022, primarily due to stock-based compensation and stock option exercises, partially offset by net loss and unrealized losses on investments[14] Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows Highlights (Three Months Ended March 31, Amounts in thousands) | Activity | 2022 | 2021 | Change ($) | Change (%) | | :------------------------------------------ | :----- | :----- | :--------- | :--------- | | Net cash provided by operating activities | $3,468 | $10,086 | $(6,618) | -65.6% | | Net cash (used in) provided by investing activities | $(10,669) | $12,186 | $(22,855) | -187.5% | | Net cash provided by financing activities | $503 | $2,262 | $(1,759) | -77.8% | | Net (decrease) increase in cash, cash equivalents, and restricted cash | $(6,698) | $24,534 | $(31,232) | -127.3% | | Cash, cash equivalents, and restricted cash at end of period | $61,843 | $58,365 | $3,478 | 5.96% | - The decrease in operating cash flow was primarily due to a net loss of $7.1 million and a net decrease of $1.1 million from working capital movements in 2022, compared to a net loss of $3.3 million and a net increase of $4.1 million from working capital in 2021[104][105] - Investing activities shifted from providing $12.2 million in 2021 to using $10.7 million in 2022, driven by increased investment purchases and property/equipment expenditures, with fewer investment sales[106][107] Notes to Condensed Consolidated Financial Statements 1. Organization - Vericel Corporation is a commercial-stage biopharmaceutical company specializing in advanced therapies for sports medicine (MACI) and severe burn care (Epicel) in the U.S. It also holds North American rights to NexoBrid for severe thermal burns[20] - The COVID-19 pandemic has intermittently disrupted MACI procedures due to restrictions on elective surgeries and healthcare network strains, particularly in late 2021 and early 2022. Epicel revenue has been less affected due to its emergent use[22][23] - The Company maintains sufficient liquidity with $55.7 million in cash and $67.7 million in investments as of March 31, 2022, expecting to support operations for at least 12 months. However, prolonged COVID-19 impacts could necessitate additional capital[27] 2. Basis of Presentation - The unaudited condensed consolidated financial statements are prepared in accordance with SEC rules and U.S. GAAP, requiring management estimates and judgments. The full impact of COVID-19 remains uncertain, but no impairments to assets were recorded as of March 31, 2022[28][29] - No new Accounting Standards were adopted during the quarter ended March 31, 2022[32] 3. Revenue - Revenue is recognized following the five-step model in ASC 606. MACI biopsy kit revenue is recognized upon delivery, while MACI implant revenue is recognized upon delivery and when the claim is billable, net of estimated contractual allowances[33][34][36][37] - Epicel revenue is recognized upon delivery to the hospital. NexoBrid revenue is recognized based on a percentage of gross profits for sales to BARDA upon delivery[39][40] Revenue by Product (Three Months Ended March 31, Amounts in thousands) | Product | 2022 | 2021 | Change ($) | Change (%) | | :---------------------- | :----- | :----- | :--------- | :--------- | | MACI implants and kits | $25,995 | $23,797 | $2,198 | 9.2% | | Epicel | $9,857 | $9,830 | $27 | 0.3% | | NexoBrid revenue | $222 | $941 | $(719) | -76.4% | | Total revenue | $36,074 | $34,568 | $1,506 | 4.4% | - The total allowance for uncollectible consideration for MACI implants was $6.7 million as of March 31, 2022, down from $7.0 million at December 31, 2021[37] 4. Selected Balance Sheet Components Inventory (Amounts in thousands) | Category | March 31, 2022 | December 31, 2021 | | :--------------- | :------------- | :---------------- | | Raw materials | $13,264 | $12,676 | | Work-in-process | $1,057 | $644 | | Finished goods | $64 | $61 | | Total inventory | $14,385 | $13,381 | Property and Equipment, Net (Amounts in thousands) | Category | March 31, 2022 | December 31, 2021 | | :-------------------------- | :------------- | :---------------- | | Total property and equipment, gross | $29,646 | $27,630 | | Less accumulated depreciation | $(15,195) | $(14,322) | | Total property and equipment, net | $14,451 | $13,308 | Accrued Expenses (Amounts in thousands) | Category | March 31, 2022 | December 31, 2021 | | :-------------------------- | :------------- | :---------------- | | Bonus related compensation | $2,483 | $6,305 | | Employee related accruals | $3,112 | $3,616 | | Insurance reimbursement-related liabilities | $5,111 | $3,973 | | Other accrued expenses | $87 | $151 | | Total accrued expenses | $10,793 | $14,045 | 5. Leases - Vericel entered into a new Lease Agreement for approximately 126,000 square feet of manufacturing, laboratory, and office space in Burlington, Massachusetts, to serve as its new corporate headquarters and primary manufacturing facility[49] - The Burlington Lease term is 144 months, with annual base rent starting at $57 per square foot, subject to 2.5% annual increases. The Company also received a tenant improvement allowance of approximately $25.1 million[50][51] Operating and Finance Lease Assets and Liabilities (Amounts in thousands) | Category | March 31, 2022 | December 31, 2021 | | :-------------------------------- | :------------- | :---------------- | | Operating right-of-use assets | $44,653 | $45,720 | | Finance property and equipment, net | $65 | $73 | | Current operating lease liabilities | $3,147 | $2,950 | | Non-current operating lease liabilities | $46,053 | $47,147 | 6. Stock-Based Compensation - The 2022 Omnibus Incentive Plan was approved on April 27, 2022, replacing prior plans and providing for various equity incentives[56][57] Non-Cash Stock-Based Compensation Expense (Three Months Ended March 31, Amounts in thousands) | Category | 2022 | 2021 | Change ($) | Change (%) | | :------------------------------------ | :----- | :----- | :--------- | :--------- | | Cost of product sales | $1,118 | $911 | $207 | 22.7% | | Research and development | $1,350 | $863 | $487 | 56.4% | | Selling, general and administrative | $7,063 | $5,245 | $1,818 | 34.7% | | Total non-cash stock-based compensation expense | $9,531 | $7,019 | $2,512 | 35.8% | - The Company granted 993,589 service-based stock options in Q1 2022 (weighted-average fair value $20.99) and 343,022 restricted stock units (weighted-average fair value $34.97)[59][60] 7. Investments Marketable Securities (Amounts in thousands) | Category | Amortized Cost (Mar 31, 2022) | Estimated Fair Value (Mar 31, 2022) | Amortized Cost (Dec 31, 2021) | Estimated Fair Value (Dec 31, 2021) | | :--------------- | :---------------------------- | :---------------------------------- | :---------------------------- | :---------------------------------- | | Commercial paper | $15,241 | $15,203 | $10,243 | $10,231 | | Corporate notes | $53,063 | $52,488 | $50,666 | $50,524 | | Total | $68,304 | $67,691 | $60,909 | $60,755 | - The Company's marketable debt securities are classified as available-for-sale and carried at fair value. As of March 31, 2022, total estimated fair value of investments was $67.7 million, with a gross unrealized loss of $613 thousand[61] 8. Fair Value Measurements - The Company classifies fair value measurements into Level 1 (quoted prices in active markets), Level 2 (observable inputs), and Level 3 (unobservable inputs). Commercial paper and corporate notes are classified as Level 2[63][65] Fair Value Measurement Category (Amounts in thousands) | Asset | Total (Mar 31, 2022) | Level 1 (Mar 31, 2022) | Level 2 (Mar 31, 2022) | Total (Dec 31, 2021) | Level 1 (Dec 31, 2021) | Level 2 (Dec 31, 2021) | | :---------------- | :------------------- | :--------------------- | :--------------------- | :------------------- | :--------------------- | :--------------------- | | Money market funds | $1,884 | $1,884 | $— | $1,258 | $1,258 | $— | | Commercial paper | $15,203 | $— | $15,203 | $18,229 | $— | $18,229 | | Corporate notes | $52,488 | $— | $52,488 | $50,524 | $— | $50,524 | | Total | $69,575 | $1,884 | $67,691 | $70,011 | $1,258 | $68,753 | 9. Net Loss Per Common Share Net Loss Per Common Share (Three Months Ended March 31, Amounts in thousands, except per share amounts) | Metric | 2022 | 2021 | | :------------------------------------------ | :----- | :----- | | Net loss | $(7,091) | $(3,289) | | Basic weighted-average common shares outstanding | 46,985 | 45,984 | | Diluted weighted-average common shares outstanding | 46,985 | 45,984 | | Basic loss per common share | $(0.15) | $(0.07) | | Diluted loss per common share | $(0.15) | $(0.07) | - Anti-dilutive shares excluded from diluted net loss per common share were 6,479 thousand stock options and 625 thousand restricted stock units in Q1 2022[66] 10. NexoBrid License and Supply Agreements - Vericel holds exclusive North American rights to NexoBrid, a biological product for severe thermal burns, through agreements with MediWound. The FDA issued a complete response letter for NexoBrid's BLA in June 2021, and the Company is working with MediWound, BARDA, and the FDA on resubmission[67][68] - The Company paid MediWound $17.5 million for the license in 2019 and is obligated to pay $7.5 million upon U.S. regulatory approval and up to $125.0 million for sales milestones. Tiered royalties on net sales will also be paid[69] - BARDA has committed to procure NexoBrid directly from MediWound under an emergency use authorization, with Vericel receiving a percentage of gross profit for these sales[70] 11. Commitments and Contingencies - As of March 31, 2022, Vericel had no material ongoing litigation, regulatory, or other proceedings, nor any knowledge of investigations by government or regulatory authorities that could materially adversely affect its business[71][72] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Provides management's analysis of financial condition and results of operations, including product performance, liquidity, and key accounting policies Overview - Vericel is a commercial-stage biopharmaceutical company focused on advanced therapies for sports medicine (MACI) and severe burn care (Epicel). It also holds North American rights to NexoBrid, a registration-stage product for severe thermal burns, which received a complete response letter from the FDA in June 2021[74] COVID-19 - The COVID-19 pandemic has caused significant disruptions, particularly impacting MACI procedures due to restrictions on elective surgeries, physician availability, and healthcare staffing, leading to slowdowns in Q3/Q4 2021 and Q1 2022[76] - Epicel revenue has been less affected due to its emergent use. Vericel has maintained operations and supply chain stability by implementing workplace protection plans and significant safety stock of raw materials[77][79][80] - The Company anticipates potential variable impacts on its business from future COVID-19 resurgences, making it difficult to estimate the ongoing effect on product utilization and revenue[81] Manufacturing - Vericel operates a cell manufacturing facility in Cambridge, Massachusetts, for the U.S. manufacturing and distribution of MACI and Epicel[82] Product Portfolio - Vericel's portfolio includes MACI, a third-generation autologous cellularized scaffold for knee cartilage defects, and Epicel, a permanent skin replacement for severe burns, both FDA-approved. The company also has NexoBrid under license for North America, pending FDA approval[83][84][86][89] - MACI targets approximately 5,000 orthopedic surgeons, supported by 76 sales representatives, with most private payers covering the treatment. Epicel, designated as a Humanitarian Use Device (HUD), is no longer subject to profit restrictions after its label was revised to include pediatric patients in 2016, with an Annual Distribution Number (ADN) of 360,400[85][86][88] - NexoBrid is approved in the EU and other international markets and has orphan biologic designation. Vericel continues to work with MediWound, BARDA, and the FDA to address the complete response letter for its BLA[89][90] Results of Operations Condensed Consolidated Results of Operations (Three Months Ended March 31, Amounts in thousands) | Metric | 2022 | 2021 | Change ($) | Change (%) | | :-------------------------------- | :----- | :----- | :--------- | :--------- | | Total revenue | $36,074 | $34,568 | $1,506 | 4.4% | | Cost of product sales | $12,622 | $11,583 | $1,039 | 9.0% | | Gross profit | $23,452 | $22,985 | $467 | 2.0% | | Research and development | $4,860 | $3,630 | $1,230 | 33.9% | | Selling, general and administrative | $25,865 | $22,660 | $3,205 | 14.1% | | Total operating expenses | $30,725 | $26,290 | $4,435 | 16.9% | | Loss from operations | $(7,273) | $(3,305) | $(3,968) | 120.1% | | Net loss | $(7,091) | $(3,289) | $(3,802) | 115.6% | Total Revenue Revenue by Product (Three Months Ended March 31, Amounts in thousands) | Product | 2022 | 2021 | Change ($) | Change (%) | | :-------- | :----- | :----- | :--------- | :--------- | | MACI | $25,995 | $23,797 | $2,198 | 9.2% | | Epicel | $9,857 | $9,830 | $27 | 0.3% | | NexoBrid | $222 | $941 | $(719) | -76.4% | | Total Revenue | $36,074 | $34,568 | $1,506 | 4.4% | - Total revenue increased by 4.4% year-over-year, driven by MACI volume and price growth, partially offset by lower NexoBrid revenue[92] - MACI business seasonality has been disrupted by COVID-19, with historical Q4 sales typically strongest due to insurance deductibles and patient preferences. Epicel revenue does not exhibit significant seasonality[93] Gross Profit - Gross profit increased by 2.0% to $23.5 million for the three months ended March 31, 2022, as revenue growth more than offset increases in stock compensation and offsite storage costs, and a reduction in NexoBrid revenue (which has no associated cost of product sales)[91][94] Research and Development Expenses Research and Development Expenses by Product (Three Months Ended March 31, Amounts in thousands) | Product | 2022 | 2021 | Change ($) | Change (%) | | :-------- | :----- | :----- | :--------- | :--------- | | MACI | $2,989 | $1,888 | $1,101 | 58.3% | | Epicel | $1,220 | $934 | $286 | 30.6% | | NexoBrid | $651 | $808 | $(157) | -19.4% | | Total R&D | $4,860 | $3,630 | $1,230 | 33.9% | - Total R&D expenses increased by 33.9% to $4.9 million, primarily due to a $0.5 million increase in stock-based compensation expense and additional spending on instrument design for Arthroscopic MACI delivery[95] Selling, General and Administrative Expenses - Selling, general and administrative expenses increased by $3.2 million (14.1%) to $25.9 million, mainly due to a $1.8 million increase in stock-based compensation expenses, professional services, employee-related expenses, and depreciation[91][96] Total Other Income (Expense) - Total other income increased by 14.5% to $182 thousand, primarily due to fluctuations in rates of return on marketable debt securities[91][97] Income Tax Expense - No income tax expense was recognized for the three months ended March 31, 2022, compared to $0.1 million in the same period of 2021[91][98] Stock-Based Compensation Expense Non-Cash Stock-Based Compensation Expense (Three Months Ended March 31, Amounts in thousands) | Category | 2022 | 2021 | Change ($) | Change (%) | | :------------------------------------ | :----- | :----- | :--------- | :--------- | | Cost of product sales | $1,118 | $911 | $207 | 22.7% | | Research and development | $1,350 | $863 | $487 | 56.4% | | Selling, general and administrative | $7,063 | $5,245 | $1,818 | 34.7% | | Total non-cash stock-based compensation expense | $9,531 | $7,019 | $2,512 | 35.8% | - Total stock-based compensation expense increased by 35.8% to $9.5 million, primarily due to fluctuations in stock prices impacting the fair value of options and restricted stock units awarded[99] Liquidity and Capital Resources - Vericel generated $3.5 million in operating cash flows during Q1 2022 and believes its current cash, cash equivalents, and investments are sufficient to support operations for at least 12 months[100][101] - The Company may need to access additional capital if revenue declines, potentially through equity or debt financings, but market volatility could impact availability and terms[112] - As of March 31, 2022, Vericel was not party to any off-balance sheet arrangements. The Company has an ATM Sales Agreement to sell up to $200.0 million of common stock, but no shares were sold as of March 31, 2022[102][110][111] Cash Flows Summary of Cash Flows (Three Months Ended March 31, Amounts in thousands) | Activity | 2022 | 2021 | Change ($) | Change (%) | | :------------------------------------------ | :----- | :----- | :--------- | :--------- | | Net cash provided by operating activities | $3,468 | $10,086 | $(6,618) | -65.6% | | Net cash (used in) provided by investing activities | $(10,669) | $12,186 | $(22,855) | -187.5% | | Net cash provided by financing activities | $503 | $2,262 | $(1,759) | -77.8% | | Net (decrease) increase in cash, cash equivalents, and restricted cash | $(6,698) | $24,534 | $(31,232) | -127.3% | - Operating cash flow decreased significantly due to a higher net loss and a net decrease in working capital. Investing activities shifted from a net inflow to a net outflow, driven by increased investment purchases and property/equipment expenditures[104][105][106][107] - Financing cash flow decreased, primarily from lower net proceeds from common stock issuance (stock options and ESPP) and reduced payments for employee withholding taxes related to restricted stock units[108][109] Contractual Obligations and Commitments - There have been no material changes to contractual obligations and commitments since December 31, 2021, except for the new Burlington Lease discussed in Note 5[113] Critical Accounting Policies - No material changes were made to critical accounting policies and estimates for the three months ended March 31, 2022. Further details are available in the Annual Report on Form 10-K[114][115] Cautionary Note Regarding Forward-Looking Statements - This report contains forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially, including those related to manufacturing, collaborations, capital needs, reimbursement, FDA approvals (NexoBrid), product development, clinical trials, and the ongoing impact of COVID-19[116][122] - The Company undertakes no obligation to publicly update any forward-looking statements, except as required by law[117] Item 3. Quantitative and Qualitative Disclosures About Market Risk Discloses that there have been no material changes to market risk exposures since the last annual report - The Company's exposures to market risk have not materially changed since December 31, 2021, as detailed in the Annual Report on Form 10-K[117] Item 4. Controls and Procedures Confirms the effectiveness of disclosure controls and procedures with no material changes to internal controls - Management, with CEO and CFO participation, concluded that the Company's disclosure controls and procedures were effective as of March 31, 2022[118] - No material changes were made in the Company's internal control over financial reporting during the three months ended March 31, 2022[120] PART II — OTHER INFORMATION Provides information on legal proceedings, risk factors, unregistered securities sales, exhibits, and report signatures Item 1. Legal Proceedings States that the Company is not currently involved in any material legal proceedings - Vericel is not currently a party to any material legal proceedings[121] Item 1A. Risk Factors Indicates no material changes to the risk factors previously disclosed in the Company's Annual Report on Form 10-K - There have been no material changes from the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2021[123] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This item is marked as not applicable for the reporting period - This item is not applicable[124] Item 3. Defaults Upon Senior Securities This item is marked as not applicable for the reporting period - This item is not applicable[125] Item 4. Mine Safety Disclosures This item is marked as not applicable for the reporting period - This item is not applicable[126] Item 5. Other Information This item is marked as not applicable for the reporting period - This item is not applicable[127] Item 6. Exhibits Lists all exhibits filed as part of the Quarterly Report on Form 10-Q, including corporate documents, certifications, and XBRL data Exhibit Index - The exhibit index includes Restated Articles of Incorporation, Bylaws, a new Lease Agreement (Burlington Lease), forms of Incentive Stock Option Agreements, certifications from the CEO and CFO (Sarbanes-Oxley Act), and Inline XBRL documents[131] Signatures Contains the duly authorized signatures of the registrant's 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 4, 2022[134][135]