Vericel Corporation — Form 10-Q Summary
Reporting period: Quarterly and year-to-date periods ended June 30, 2016; filed August 8, 2016. Vericel is a commercial-stage cell-therapy company marketing Carticel and Epicel in the United States and developing MACI and ixmyelocel-T.
Financial performance and liquidity
| Metric | Three months ended June 30, 2016 | Three months ended June 30, 2015 | Six months ended June 30, 2016 | Six months ended June 30, 2015 |
|---|---|---|---|---|
| Revenue | $12.8 million | $13.6 million | $26.9 million | $24.4 million |
| Gross profit / margin | $5.5 million / 43% | $6.7 million / 49% | $13.1 million / 49% | $12.0 million / 49% |
| Operating expenses | $10.5 million | $9.0 million | $20.0 million | $18.8 million |
| Loss from operations | $(5.0) million | $(2.3) million | $(7.0) million | $(6.8) million |
| Net loss | $(3.0) million | $(2.2) million | $(6.7) million | $(7.0) million |
| Net loss per common share | $(0.22) | $(0.16) | $(0.46) | $(0.43) |
| Cash flow from operations | Not separately provided | Not separately provided | $(6.4) million | $(8.6) million |
Cash was $9.8 million at June 30, 2016, compared with $14.6 million at December 31, 2015. Total assets were $29.4 million and shareholders’ equity was $17.1 million. Inventory increased to $2.4 million from $1.4 million, while accounts receivable declined to $9.0 million from $10.9 million.
At June 30, 2016, the company had $2.4 million outstanding under its revolving credit facility and $7.2 million of remaining revolver capacity. The financing agreement provides for up to $15.0 million of total debt financing, including term loans and a revolving line. Vericel reported compliance with all financial and non-financial debt covenants.
Material changes versus the prior comparable period
- Second-quarter revenue decreased approximately 6%, primarily because Carticel and Epicel cleanrooms were unavailable for about two weeks during rooftop air-handler replacement. Six-month revenue increased approximately 10%, driven mainly by higher Epicel sales and Carticel pricing.
- Carticel revenue was $9.0 million in the quarter and $17.8 million year to date, compared with $9.1 million and $16.2 million, respectively. Epicel revenue was $3.8 million and $9.1 million, compared with $4.3 million and $7.9 million.
- Second-quarter gross margin declined to 43% from 49% because of the cleanroom downtime; year-to-date gross margin remained 49%.
- Operating expenses increased 17% in the quarter and 7% year to date. Research and development increased in the quarter due to ixCELL-DCM and MACI activities, while selling, general and administrative expenses increased due to Carticel reimbursement and patient-support startup costs, preparation for a potential MACI launch, legal and facility costs, and higher personnel expenses.
- The reported second-quarter loss benefited from a $1.9 million non-cash decrease in the fair value of warrant liabilities. The comparable benefit in 2015 was $0.1 million. The six-month 2016 benefit was $0.3 million versus a $0.2 million expense in 2015.
- Operating cash use improved to $6.4 million from $8.6 million, but cash declined by $4.7 million during the first six months, partly offset by $2.4 million of revolver borrowings.
Guidance, outlook, risks and unusual items
- FDA review of the MACI biologics license application was ongoing, with a Prescription Drug User Fee Act goal date of January 3, 2017. The FDA stated that it was not currently planning an advisory committee meeting.
- Vericel reported that the Phase 2b ixCELL-DCM trial met its primary endpoint. However, several secondary measures, including time to first event, left ventricular measures and functional outcomes, did not show statistically significant differences versus placebo. Further development depends on regulatory discussions and available financing.
- Management stated that cash on hand and available debt capacity were expected to support operations for twelve months beyond June 30, 2016, but additional capital may be required if results differ from projections. Substantial additional funding is expected for ixmyelocel-T development and potentially for a U.S. MACI launch.
- Potential equity funding included $11.3 million of remaining capacity under the Lincoln Park agreement and approximately $7.8 million of net capacity under a legacy at-the-market agreement, although accessing the latter would require an updated Form S-3 registration statement. Use of these facilities could dilute shareholders.
- Customer concentration was significant: one distributor represented 69% of second-quarter revenue and 65% of six-month revenue, and 78% of accounts receivable at June 30, 2016.
- Epicel received FDA approval in February 2016 to add pediatric labeling. As a result, it was no longer subject to the prior HDE profit restrictions, subject to the applicable annual distribution number.
- The company disclosed a material weakness in internal control over financial reporting relating to segregation-of-duties conflicts in its financial management/ERP system. Remediation actions were completed by June 30, 2016, but operating effectiveness must be assessed through year-end before management can conclude that the weakness is fully remediated.
- Future lease and other contractual obligations totaled approximately $26.1 million, including $25.5 million of operating lease commitments. No material pending legal proceedings or off-balance-sheet arrangements were reported.
Investor verification points
- Verify the timing and outcome of the FDA’s MACI review and the company’s expected commercialization costs.
- Assess whether operating cash use and available financing are sufficient for planned development and launch activities.
- Monitor covenant compliance, borrowing-base availability and the repayment terms of the SVB financing.
- Evaluate the effect of cleanroom capacity, manufacturing interruptions and Epicel’s low-volume seasonality on quarterly revenue and margins.
- Review customer concentration and distributor receivable exposure.
- Confirm remediation and audit conclusions regarding the disclosed material weakness.
- Track potential dilution from preferred-stock conversion, options, warrants and equity financing arrangements.