# Vericel Corp: Form 10-Q for the period ended Sep 30, 2020

- Company: [Vericel Corp](/companies/vcel.md) (CIK 887359)
- Form: 10-Q
- Filed: 2020-11-05
- Accepted by EDGAR: Nov 5, 2020, 15:11 ET
- Period: 2020-09-30
- Accession: 0001628280-20-015697
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/887359/000162828020015697/vcel-20200930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/887359/000162828020015697/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2020-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2020-07-01 to 2020-09-30 | $31.0m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2020-01-01 to 2020-09-30 | $77.7m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2020-07-01 to 2020-09-30 | $9.8m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2020-01-01 to 2020-09-30 | $28.4m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2020-07-01 to 2020-09-30 | $22.5m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2020-01-01 to 2020-09-30 | $50.6m | us-gaap:GrossProfit |
| Research and development | 3 months, 2020-07-01 to 2020-09-30 | $2.9m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2020-01-01 to 2020-09-30 | $9.9m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2020-07-01 to 2020-09-30 | $16.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2020-01-01 to 2020-09-30 | $50.6m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2020-07-01 to 2020-09-30 | $3.5m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2020-01-01 to 2020-09-30 | −$9.9m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2020-07-01 to 2020-09-30 | $2.0k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2020-01-01 to 2020-09-30 | $5.0k | us-gaap:InterestExpense |
| Net income | 3 months, 2020-07-01 to 2020-09-30 | $3.6m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2020-01-01 to 2020-09-30 | −$9.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2020-07-01 to 2020-09-30 | $0.08 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2020-01-01 to 2020-09-30 | −$0.21 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2020-07-01 to 2020-09-30 | $0.08 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2020-01-01 to 2020-09-30 | −$0.21 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2020-07-01 to 2020-09-30 | 47,314,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2020-01-01 to 2020-09-30 | 45,112,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2020-01-01 to 2020-09-30 | $6.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2020-01-01 to 2020-09-30 | $1.6m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2020-09-30 | $43.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2020-09-30 | $125.4m | us-gaap:AssetsCurrent |
| Total assets | at 2020-09-30 | $157.5m | us-gaap:Assets |
| Current liabilities | at 2020-09-30 | $21.3m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2020-09-30 | $42.9m | us-gaap:Liabilities |
| Shareholders' equity | at 2020-09-30 | $114.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 31,413 characters.

### Overview

Vericel Corporation is a leader in advanced cell therapies and specialty biologics for the sports medicine and severe burn care markets. We currently market two FDA approved autologous cell therapy products in the United States. MACI® (autologous cultured chondrocytes on porcine collagen membrane) is an autologous cellularized scaffold product indicated for the repair of symptomatic, single or multiple full-thickness cartilage defects of the knee with or without bone involvement in adults. Epicel® (cultured epidermal autografts) is a permanent skin replacement Humanitarian Use Device (HUD) for the treatment of adult and pediatric patients with deep-dermal or full-thickness burns comprising greater than or equal to 30 percent of total body surface area (TBSA). We also hold an exclusive license from MediWound Ltd. for North American rights to NexoBrid, a registration-stage biological orphan product for debridement of severe thermal burns.

### COVID-19

The pandemic caused by the spread of a novel strain of coronavirus (COVID-19) has created volatility, uncertainty and economic disruption in both domestic and international markets. After the virus was first reported in China and rapidly spread globally, the World Health Organization (WHO) declared the outbreak a pandemic on March 11, 2020, and the President of the United States declared a national health emergency immediately thereafter. Following the President’s declaration, state governments, including those in Massachusetts and Michigan where our operations are located, began issuing orders requiring businesses that do not conduct essential services to temporarily close their physical workplaces to employees and customers. The status and application of those orders have varied on a state-by-state basis since the early days of the pandemic. Because Vericel is deemed an essential business, we continue to be exempt from such state orders in their current forms.

Notwithstanding being an essential business, Vericel’s business and operations have been adversely impacted by the effects of COVID-19. In mid-March, the American College of Surgeons and United States Surgeon General recommended that each hospital, health system, and surgeon minimize, postpone, or cancel electively scheduled surgeries. These recommendations were followed by numerous state level executive orders either restricting or partially restricting elective surgeries. Because MACI is an elective surgical procedure, as a result of these restrictions, beginning in mid-March 2020, we began to experience a significant increase in cancellations of scheduled MACI procedures as well as a slowdown in new MACI orders. By early April 2020, 45 states, representing over 95% of total U.S. surgical capacity had issued either mandates or recommendations and guidelines suspending elective surgical procedures. The widespread suspension of elective procedures impacted our business and operations during the first and second quarters of 2020. These restrictions began to ease in May and, by the end of September 2020, there were no state orders in place that directly impacted a surgeon’s or patient’s ability to move forward with a MACI surgery. Consequently, MACI procedure and order volumes have recovered in recent months. In late September and October 2020, the number of COVID-19 infections began to increase markedly in various geographies, and on November 1, 2020, the rolling seven-day average of new daily coronavirus cases in the United States reached the highest level at any point during the pandemic. Although hospitals are now better prepared for a subsequent surge in COVID-19 patients, the risk remains that regional or local restrictions could again be placed on the performance of elective surgical procedures if the number of COVID-19 infections in the United States continues to rise. Because Epicel is used almost exclusively in the emergent setting by burn centers and surgeons throughout the country, Epicel revenue and procedure volumes have been less effected by the pandemic.

In March 2020, Vericel put in place a comprehensive workplace protection plan, which institutes protective measures in response to COVID-19. These measures include mandatory employee training on social distancing and hygiene protocols, conducting daily health screenings of all employees, vendors and visitors entering our facilities, canceling all international business travel, limiting domestic business travel to essential purpose travel only, requesting that employees limit non-essential personal travel, enhancing our facilities’ janitorial and sanitary procedures, making certain physical modifications and enhancements to our facilities to enable effective social distancing among employees, providing certain personal protective equipment to employees working in our offices, encouraging employees to work from home to the extent their job function enables them to do so, limiting third-party access to our facilities, encouraging the use of virtual employee meetings, modifying the manner and schedule of on-site production activities, and providing guidance to our field-based commercial teams concerning their communications and contact with customers and healthcare professionals. In addition, we put certain expense reduction measures in place including a reduction of discretionary spending. We are reviewing these measures regularly as the pandemic evolves and may take additional actions to the extent required.

We continue to manufacture MACI and Epicel and are maintaining a significant safety stock of all key raw materials. We do not expect current supply chain interruptions will impact our ongoing manufacturing operations. With respect to customer delivery, MACI final product has an established shelf life of 6 days and established shipping shelf life of 3 days. Currently, MACI is picked up by courier and shipped by commercial air or ground transportation to customer surgical sites. Epicel final product has an established shelf life of 24 hours and is hand carried to customer hospitals by courier. Transportation is primarily by commercial or charter airline. Although we have not experienced material shipping delays or materially increased costs to date, significant disruption of air travel could result in the inability to deliver MACI or Epicel final products to customer sites within appropriate timeframes, which could further adversely impact our business. There is no expected impact of COVID-19 on our distributors, operations or third-party service providers' ability to manage patient cases.

The COVID-19 pandemic remains fluid and continues to evolve differently across various geographies. Although state, local and hospital facility restrictions were largely lifted by the end of September 2020, the location, extent, and timing of those restrictions varied greatly as the virus spread across the United States, beginning in March. In some specific areas of the country, restrictions on elective surgical procedures were lifted and re-imposed multiple times. We believe it is likely that we will continue to experience variable impacts on our business, based on the resurgence of COVID-19 in various areas of the United States. Measures taken to limit the impact of COVID-19 at the international, national and local level, including shelter-in-place orders, social distancing measures, travel bans and restrictions, and business and government shutdowns, may continue to create significant negative economic impacts on a global basis. Given that uncertainty, we cannot reliably estimate the extent to which the COVID-19 pandemic may continue to impact utilization and revenues of our products in the fourth quarter of 2020 and beyond.

For a discussion of additional risks associated with COVID-19, please see Item 1A. Risk Factors.

### Manufacturing

We have a cell-manufacturing facility in Cambridge, Massachusetts which is used for U.S. manufacturing and distribution of MACI and Epicel.

### Product Portfolio

Our marketed products include two FDA approved autologous cell therapies. MACI, a third-generation autologous implant for the repair of symptomatic, full-thickness cartilage defects of the knee in adult patients and Epicel, a permanent skin replacement for adult and pediatric patients with deep dermal or full thickness burns greater than or equal to 30% of TBSA. Both products are currently marketed in the U.S. In addition, we have entered into exclusive license and supply agreements with MediWound to commercialize NexoBrid in North America. NexoBrid is currently in clinical development in North America and on September 16, 2020 we announced that the FDA accepted the BLA for review and has assigned a PDUFA goal date of June 29, 2021. Until 2017, our active product candidate portfolio included ixmyelocel-T, a patient-specific multicellular therapy for the treatment of advanced heart failure due to dilated cardiomyopathy, or DCM. We have no current plans to continue the development of ixmyelocel-T.

### MACI

MACI is a third-generation autologous chondrocyte implantation (ACI) product for the repair of symptomatic, single or multiple full-thickness cartilage defects of the knee with or without bone involvement in adults.

Our target audience of U.S. physicians is approximately 5,000 orthopedic surgeons and is divided into two segments - a group of orthopedic surgeons who self-identify and/or have a formal specialty as sports medicine physicians, and a sub-population of general orthopedic surgeons who perform a high volume of cartilage repair procedures. As of September 30, 2020, we have expanded the number of MACI sales representatives to 76 to enable the sales force to call on 2,000 of the general orthopedic surgeons. Most private payers have a medical policy that covers treatment with MACI with the top 30 largest commercial payers having a formal medical policy for MACI or ACI in general. Even for private payers which have not yet approved a medical policy for MACI, for medically appropriate cases, we often obtain approval on a case-by-case basis. For the three and nine months ended, September 30, 2020, net revenues for MACI were $24.4 million and $59.7 million, respectively, and $20.6 million and $58.0 million, respectively, for the same periods in 2019.

### Epicel

Epicel is a permanent skin replacement for deep dermal or full-thickness burns greater than or equal to 30% of total body surface area (TBSA). Epicel is regulated by the Center for Biologics Evaluation and Research, or CBER of the U.S. Food and Drug Administration under medical device authorities, and is the only FDA-approved cultured epidermal autograft product available for large total surface area burns. Epicel was designated as a Humanitarian Use Device (HUD) in 1998 and a Humanitarian Device Exception (HDE) application for the product was submitted in 1999. HUDs are devices that are intended for diseases or conditions that affect fewer than 8,000 individuals annually in the U.S. Under an HDE approval, a HUD cannot be sold for an amount that exceeds the cost of research and development, fabrication and distribution unless certain conditions are met. A HUD is eligible to be sold for profit after receiving HDE approval if the device meets certain eligibility criteria, including where the device is intended for the treatment of a disease or condition that occurs in pediatric patients and such device is labeled for use in pediatric patients. If the FDA determines that a HUD meets the eligibility criteria, the HUD is permitted to be sold for profit so long as the number of devices distributed in any calendar year does not exceed the Annual Distribution Number (ADN). The ADN is defined as the number of devices reasonably needed to treat a population of 8,000 individuals per year in the U.S.

On February 18, 2016, the FDA approved our HDE supplement to revise the labeled indications of use for Epicel to specifically include pediatric patients. The revised product label also now specifies that the probable benefit of Epicel, mainly related to survival, was demonstrated in two Epicel clinical experience databases and a physician-sponsored study comparing outcomes in patients with massive burns treated with Epicel relative to standard care. Because of the change in the label to specifically include use in pediatric patients, Epicel is no longer subject to the HDE profit restrictions. In conjunction with adding the pediatric labeling and meeting the pediatric eligibility criteria, the FDA has determined the ADN number for Epicel is 360,400 which is approximately 45 times larger than the volume of grafts sold in 2019. We currently have an eleven-person field force comprised of 7 sales representatives and 4 clinical support specialists. For the three and nine months ended September 30, 2020, net revenues for Epicel were $6.7 million and $18.0 million, respectively and $9.9 million and $20.4 million, respectively, for the same periods in 2019.

### NexoBrid

Our portfolio also includes NexoBrid, a topically-administered biological product that enzymatically removes nonviable burn tissue, or eschar, in patients with deep partial and full-thickness thermal burns. NexoBrid is currently in clinical development in North America, and on June 30, 2020, we announced the submission of a BLA to the FDA seeking the approval of NexoBrid. On September 16, 2020, Vericel announced that the FDA has accepted the BLA for review and has assigned a PDUFA goal date of June 29, 2021. NexoBrid is approved in the European Union and other international markets and has been designated as an orphan biologic in the United States, European Union and other international markets. Pursuant to the terms of our existing license agreement, MediWound will continue to conduct all clinical activities described in the development plan to support the BLA with the FDA under the supervision of a Central Steering Committee comprised of members of each party. Under our license agreement with MediWound, NexoBrid is being manufactured for BARDA prior to approval by the FDA under an emergency use authorization. Vericel recorded revenue of $1.2 million associated with the first delivery of NexoBrid to BARDA during the three and nine months ended September 30, 2020.

### Ixmyelocel-T

Our preapproval stage portfolio also includes ixmyelocel-T, a unique multicellular therapy derived from an adult patient’s own bone marrow which utilizes our proprietary, highly automated and scalable manufacturing system. This multicellular therapy was developed for the treatment of advanced heart failure due to DCM. On September 29, 2017, the FDA indicated we would be required to conduct at least one additional Phase 3 clinical study to support a BLA for ixmyelocel-T. Given the expense required to conduct further development and our focus on growing our existing commercial products, at this time we have no current plans to initiate or fund a Phase 3 trial on our own.

### Results of Operations

#### Net Income

Our net income and loss for the three and nine months ended September 30, 2020 totaled $3.6 million and $9.4 million, respectively, and $3.5 million and $19.2 million, respectively, for the same periods in 2019.

*(In thousands)*

|  | Three Months Ended September 30, 2020 | 2019 | Nine Months Ended September 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Net revenues | $32,258 | $30,499 | $78,950 | $78,460 |
| Cost of product sales | 9,787 | 9,324 | 28,369 | 26,986 |
| Gross profit | 22,471 | 21,175 | 50,581 | 51,474 |
| Total operating expenses | 18,954 | 18,078 | 60,498 | 71,935 |
| Income (loss) from operations | 3,517 | 3,097 | (9,917) | (20,461) |
| Other income | 101 | 373 | 561 | 1,295 |
| Net income (loss) | $3,618 | $3,470 | $(9,356) | $(19,166) |

#### Net Revenues

Net revenues increased for the three and nine months ended September 30, 2020 compared to the same periods in 2019, primarily driven by a recovery in MACI volume growth as a result of the lifting of state and local restrictions on elective surgeries in the second quarter, which impacted surgical capacity. The increase in MACI net revenue was partially offset by a decrease of $2.5 million related to Epicel due to the variable occurrence of severe burns. Additionally, we recorded revenue associated with the first delivery of NexoBrid to BARDA for emergency response preparedness.

Net revenues for the three and nine months ended September 30, 2020 and 2019 are shown below.

| Revenue by product (In thousands) | Three Months Ended September 30, 2020 | 2019 | Nine Months Ended September 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| MACI | $24,357 | $20,610 | $59,747 | $58,015 |
| Epicel | 6,663 | 9,889 | 17,965 | 20,445 |
| NexoBrid | 1,238 | — | 1,238 | — |
| Total Revenue | $32,258 | $30,499 | $78,950 | $78,460 |

*Seasonality.* Over the last four years ACI sales volumes from the first through the fourth quarter have on average represented 19% (16%-24% range), 23% (21%-25% range), 22% (20%-23% range) and 36% (32%-38% range) respectively, of total annual volumes. MACI orders are consistently stronger in the fourth quarter due to several factors including insurance deductible limits and the time of year patients prefer to start rehabilitation. Due to the low incidence and variable occurrence of severe burns, Epicel revenue has inherent variability from quarter to quarter and does not exhibit significant seasonality. Over the past four years, Epicel revenue in a single quarter has ranged from as high as 34% to as low as 17% of annual revenue.

#### Gross Profit and Gross Profit Ratio

*(In thousands)*

|  | Three Months Ended September 30, 2020 | 2019 | Nine Months Ended September 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Gross profit | $22,471 | $21,175 | $50,581 | $51,474 |
| Gross profit % | 70% | 69% | 64% | 66% |

Gross profit increased for the three months ended September 30, 2020 compared to the same period in 2019 primarily due to the increase in MACI volume and other revenue related to NexoBrid.

Gross profit decreased for the nine months ended September 30, 2020 compared to the same period in 2019 due to the revenue impact from COVID-19 earlier in the year.

#### Research and Development Costs

*(In thousands)*

|  | Three Months Ended September 30, 2020 | 2019 | Nine Months Ended September 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Research and development costs | $2,913 | $3,096 | $9,902 | $27,174 |

The following table summarizes the approximate allocation of cost for our research and development projects:

*(In thousands)*

|  | Three Months Ended September 30, 2020 | 2019 | Nine Months Ended September 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| ACI | $1,655 | $1,804 | $5,409 | 6,165 |
| Epicel | 685 | 875 | 2,397 | 2,813 |
| NexoBrid | 573 | 415 | 2,080 | 18,164 |
| Other | — | 2 | 16 | 32 |
| Total research and development costs | $2,913 | $3,096 | $9,902 | $27,174 |

Research and development expenses for the three months ended September 30, 2020 were $2.9 million compared to $3.1 million for the same period in 2019.

Research and development expenses for the nine months ended September 30, 2020 were $9.9 million compared to $27.2 million for the same period in 2019. The prior period included $17.5 million for the upfront payment to MediWound for the North American rights to NexoBrid.

#### Selling, General and Administrative Costs

*(In thousands)*

|  | Three Months Ended September 30, 2020 | 2019 | Nine Months Ended September 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Selling, general and administrative costs | $16,041 | $14,982 | $50,596 | $44,761 |

Selling, general and administrative expenses for the three months ended September 30, 2020 were $16.0 million compared to $15.0 million for the same period in 2019. The increase in selling, general and administrative expenses during the three months ended September 30, 2020 is due primarily to an incremental $1.5 million in MACI sales force expenses due to the sales force expansion in the second quarter of 2020 and $0.3 million of patient reimbursement support services, which were partially offset by a reduction in discretionary spend as a result of the COVID-19 pandemic.

Selling, general and administrative expenses for the nine months ended September 30, 2020 increased to $50.6 million from $44.8 million for the same period in 2019. The increase in selling, general and administrative expenses during the nine months ended September 30, 2020 is due primarily to an incremental $3.2 million in MACI sales force expenses driven by the sales force expansion in the second quarter of 2020, a $1.2 million increase in stock compensation expense, $1.0 million of patient reimbursement support services, and $0.7 million in Epicel sales force expenses due to the team's growth over the past several quarters. Other areas of fixed expense growth such as facilities, depreciation, and insurance were offset by reductions to discretionary marketing programs as a result of the COVID-19 pandemic.

#### Other Income (Expense)

*(In thousands)*

|  | Three Months Ended September 30, 2020 | 2019 | Nine Months Ended September 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Net interest income | $119 | $383 | $569 | $1,287 |
| Other income (expense) | (18) | (10) | (8) | 8 |
| Total other income | $101 | $373 | $561 | $1,295 |

The decrease in interest income for the three and nine months ended September 30, 2020 compared to the same period in 2019 is due primarily to the lowering of our investment balance and decreasing rates of returns on our investments in various marketable debt securities compared to the prior period.

#### Stock Compensation

Non-cash stock-based compensation expense included in cost of goods sold, research and development expenses and selling, general and administrative expenses is summarized in the following table:

*(In thousands)*

|  | Three Months Ended September 30, 2020 | 2019 | Nine Months Ended September 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Cost of goods sold | $481 | $543 | $1,541 | $1,519 |
| Research and development | 458 | 583 | 1,455 | 1,993 |
| Selling, general and administrative | 1,736 | 2,159 | 7,823 | 6,583 |
| Total non-cash stock-based compensation expense | $2,675 | $3,285 | $10,819 | $10,095 |

The decrease in stock-based compensation expense for the three months ended September 30, 2020, and the increase in the nine months ended September 30, 2020, is due primarily to fluctuations in stock prices which impacts the fair value of the options and restricted stock units awarded and the expense recognized in the period.

### Liquidity and Capital Resources

Our primary focus has been to invest in our existing commercial business with the goal of growing revenue. We have raised significant funds in order to complete our product development programs and to market and commercialize our products. To date, we have financed our operations primarily through cash received through Epicel and MACI sales and public and private sales of our equity securities.

Our cash and cash equivalents totaled $43.5 million and short-term investments totaled $42.0 million as of September 30, 2020. The $6.2 million of cash provided by operations during the nine months ended September 30, 2020 was the result of cash collections and a decrease in accounts receivable of $6.0 million from the prior quarter, including noncash charges of $10.8 million in stock compensation expense, $3.3 million of operating lease amortization and $1.6 million in depreciation and amortization expense offset by a $9.4 million net loss.

Our cash and cash equivalents totaled $36.9 million and short-term investments totaled $37.8 million at September 30, 2019. The $10.3 million of cash used by operations during the nine months ended September 30, 2019 was largely the result of our net loss of $19.2 million which included a cash outflow of $17.5 million for the upfront payment for the NexoBrid license. The net loss was offset by noncash charges including $10.1 million in stock compensation expense, and $1.2 million in depreciation and amortization expense.

The change in cash provided by investing activities during the nine months ended September 30, 2020 is the result of $39.1 million of investment maturities offset by $29.0 million in short-term investment purchases and property plant and equipment purchases of $1.6 million primarily for manufacturing upgrades through September 30, 2020. The cash provided by investing activities for the nine months ended September 30, 2019 is the result of $46.3 million in short-term investments purchases offset by $73.8 million of maturities and property plant and equipment purchases of $2.3 million primarily for manufacturing upgrades and leasehold improvements.

The change in cash provided from financing activities is the result of net proceeds from the exercise of stock options of $2.2 million, slightly offset by the payment of employee withholding taxes related to the vesting of restricted stock units of $0.2 million during the nine months ended September 30, 2020. The change in cash provided from financing activities during the nine months ended September 30, 2019 is the result of proceeds from the exercise of stock options of $3.8 million.

We believe that our current cash on hand, cash equivalents and investments will be sufficient to support our current operations through at least 12 months from the issuance of these financial statements. However, the continuing effects of the COVID-19 pandemic continue to evolve and may result in irrecoverable losses from customers and significantly impact long-term liquidity requiring us to engage in layoffs, furloughs, and/or reductions in salaries. We have implemented a number of initiatives to maintain our near-term and future growth opportunities while supporting patients and reducing non-essential discretionary spending.

If revenues decline for a sustained period, we may need to access additional capital; however, we may not be able to obtain financing on acceptable terms or at all. Market volatility resulting from the COVID-19 pandemic or other factors could also adversely impact our ability to access financing as and when needed. The terms of any financing may adversely affect the holdings or the rights of our shareholders. Actual cash requirements may differ from projections and will depend on many factors, including the ultimate duration of the effects of the COVID-19 pandemic, the level of future research and development, the scope and results of ongoing and potential clinical trials, the costs involved in filing, prosecuting and enforcing patents, the need for additional manufacturing capacity, competing technological and market developments, costs of possible acquisition or development of complementary business activities, and the cost to market our products.

### Off-Balance Sheet Arrangements

At September 30, 2020, we were not party to any off-balance sheet arrangements.

### Critical Accounting Policies

Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires the application of appropriate technical accounting rules and guidance, as well as the use of estimates. The application of these policies necessarily involves judgments regarding future events. These estimates and judgments, in and of themselves, could materially impact the condensed consolidated financial statements and disclosures based on varying assumptions. The accounting policies discussed in our Form 10-K, filed with the SEC on February 25, 2020 (Annual Report), for the fiscal year ended December 31, 2019 are considered by management to be the most important to an understanding of the consolidated financial statements because of their significance to the portrayal of our financial condition and results of operations. There have been no material changes to that information disclosed in our Annual Report during the nine months ended September 30, 2020.

### Forward-Looking Statements

This report, including the documents that we incorporate by reference, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). Any statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These statements are often, but are not always, made through the use of words or phrases such as “anticipates,” “estimates,” “plans,” “projects,” “trends,” “opportunity,” “current,” “intention,” “position,” “assume,” “potential,” “outlook,” “remain,” “continue,” “maintain,” “sustain,” “seek,” “target,” “achieve,” “continuing,” “ongoing,” “expects,” “management believes,” “we believe,” “we intend” and similar words or phrases, or future or conditional verbs such as “will,” “would,” “should,” “could,” “may,” or similar expressions. Accordingly, these statements involve estimates, assumptions and uncertainties which could cause actual results to differ materially from those expressed in them. The factors described in our Annual Report, among others, could have a material adverse effect upon our business, results of operations and financial conditions.

Because the factors referred to in the preceding paragraph could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements we make, you should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. These forward-looking statements include statements regarding:

- manufacturing and facility capabilities;
- potential strategic collaborations with others;
- future capital needs and financing sources;
- adequacy of existing capital to support operations for a specified time;
- reimbursement for our products;
- the timing of the FDA’s review of the BLA for NexoBrid;
- expectations regarding approval by the FDA of the BLA for NexoBrid;
- product development and marketing plans;
- features and successes of our therapies;
- clinical trial plans, including publication thereof;
- the effects of the COVID-19 pandemic on our business, including economic slowdowns or recessions, impact to our operations or to the healthcare industry generally, which could reduce demand for our products;
- anticipation of future losses;
- replacement of manufacturing sources;
- commercialization plans; or
- revenue expectations and operating results.

## Market risk

As filed, 1,572 characters.

As of September 30, 2020, we held marketable debt securities, which are classified as available-for-sale and carried at fair value in the accompanying condensed consolidated balance sheet included in this Form 10-Q. The fair value of our cash equivalents and marketable securities is subject to changes in market interest rates. Our earnings and cash flows are subject to fluctuations due to changes in interest rates, principally in connection with our investments in marketable debt securities. We do not believe we are materially exposed to changes in interest rates related to our investments, and we do not currently use interest rate derivative instruments or hedging transactions to manage exposure to interest rate changes of our investments. We estimate that a 100 basis point, or 1%, unfavorable change in interest rates would have resulted in approximately a $0.2 million and $0.3 million decrease in the fair value of our investment portfolio as of September 30, 2020 and December 31, 2019, respectively.

We have evaluated the potential credit risk exposure for our accounts receivable and available-for sale investment securities in accordance with *ASC 326, Financial Instruments - Credit Losses.* See note 4 and note 8, for further discussion.

We operate in the United States only. We are primarily exposed to foreign exchange risk with respect to recognized assets and liabilities due to vendors in countries outside the United States which are typically paid in Euro. We do not enter into hedging transactions and do not purchase derivative instruments.

## Controls and procedures

As filed, 1,486 characters.

### Evaluation of Disclosure Controls and Procedures

Management of the Company, with the participation of its certifying officers, evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on the evaluation as of September 30, 2020, the Company’s certifying officers concluded that the Company’s disclosure controls and procedures were effective.

The Company has established disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and that such information is accumulated and communicated to management of the Company, with the participation of its Chief Executive Officer and Principal Financial Officer (its “Certifying Officers”), as appropriate, to allow timely decisions regarding required disclosure.

### Changes in Internal Control over Financial Reporting

During the three months ended September 30, 2020, there were no material changes made in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). The effects of the COVID-19 pandemic did not have a material impact on our internal control over financial reporting.

## Risk factors

As filed, 18,800 characters.

Certain risks described below update the risk factors discussed in Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, and expound upon and amend the specific risks resulting from the COVID-19 pandemic, which were first discussed in our Form 8-K filed on April 2, 2020, and which were updated in our Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2020 and June 30, 2020. Each of these risks, as well as those discussed in our previous filings could materially affect our business, financial condition, results of operations, or cash flows. The risks described below and in our previous filings are not the only risks we face. Additional risks and uncertainties not currently known or currently deemed to be immaterial also may materially and adversely affect our business, financial condition, results of operations or cash flows.

***The current pandemic of COVID-19 and the future outbreak of other highly infectious or contagious diseases, could seriously harm our research, development and commercialization efforts, increase our costs and expenses and have a material adverse effect on our business, financial condition and results of operations.***

Broad-based business or economic disruptions could adversely affect our ongoing or planned research, development and commercialization activities. For example, in December 2019, an outbreak of a novel strain of coronavirus originated in Wuhan, China, and has since spread globally. To date, the COVID-19 pandemic has caused significant disruptions to the U.S. and global economy and has contributed to significant volatility in financial markets. The global impact of the outbreak is continually evolving and, as the virus spreads and additional cases are identified, many countries, including the U.S., have reacted by instituting quarantines, restrictions on travel and mandatory closures of businesses. Since March 2020, certain states and cities, including where we or the third parties with whom we engage operate, have reacted by instituting quarantines, restrictions on travel, “shelter in place” rules, restrictions on types of business that may continue to operate, and/or restrictions on the types of construction projects that may continue. Companies and organizations conducting biopharmaceutical research and development have been largely exempted from closure orders as the sector has been deemed essential to maintaining continuity of operations of the critical infrastructure as determined by the federal government. Since March, the steps taken by many state and local officials, which have included requiring businesses to implement mandatory training and protection measures for their workforce, have helped to slow the spread of the virus in certain regions of the United States. As a result, some states – including Massachusetts and Michigan – have eased restrictions on workplaces and individuals in an effort to reopen the economies of those regions. The pandemic remains highly fluid throughout the country and around the world, however, and the number of COVID-19 infections has fluctuated significantly in various geographies over the course of the past seven months. As such, many state and local governments have re-instituted restrictions on businesses, travel, and personal activities from time-to-time and it is expected that additional such measures may occur in the future as the pandemic evolves.

In March 2020, we put in place a comprehensive workplace protection plan, which institutes protective measures in response to the COVID-19 pandemic. These measures include mandatory employee training on social distancing and hygiene protocols, conducting daily health screenings of all employees, vendors and visitors entering our facilities, canceling all international business travel, limiting domestic business travel to essential purposes, requesting that employees limit non-essential personal travel, enhancing our facilities’ janitorial and sanitary procedures, making certain physical modifications and enhancements to our facilities to enable effective social distancing among employees, providing certain personal protective equipment to employees working in our offices, encouraging employees to work from home to the extent their job function enables them to do so, limiting third-party access to our facilities, encouraging the use of virtual employee meetings, modifying the manner and schedule of on-site production activities, and providing guidance to our field-based commercial teams concerning their communications and contact with customers and healthcare professionals. We are reviewing these measures regularly as the situation evolves, and we are likely to take additional actions as we learn more and as instruction is provided by national, state and local governmental agencies. Both these existing measures and any future actions we take may result in continued disruption to our business.

The extent to which the COVID-19 pandemic, or the future outbreak of any other highly infectious or contagious disease, impacts our preclinical studies, clinical trial operations and current or future commercialization efforts will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of such pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others. The rapid development and fluidity of this situation precludes any prediction as to the full adverse impact of the COVID-19 pandemic. Nevertheless, the COVID-19 pandemic may adversely affect our business, financial condition and results of operations, and it may have the effect of heightening many of the risks described herein, including the below.

- The implantation of MACI is an elective surgical procedure. On March 13, 2020 and March 14, 2020, the American College of Surgeons and United States Surgeon General, respectively, recommended that each hospital, health system, and surgeon minimize, postpone, or cancel electively scheduled surgeries, which resulted in a reduction in MACI sales during the first and second quarters of 2020. These recommendations were followed by numerous state-level executive orders either banning or partially banning elective surgeries. By April 3, 2020, 31 U.S. states had issued executive mandates calling for the suspension of elective or non-essential surgeries.
- As a result of these restrictions, beginning in mid-March 2020, we started to experience a significant increase in cancellations of scheduled MACI procedures as well as a slowdown in new MACI orders. Those cancellations negatively impacted our results of operations for the first and second quarters of 2020. These restrictions began to ease in May and, by the end of September 2020, there were no state orders in place that directly impacted a surgeon's or patient's ability to move forward with a MACI surgery. However, the COVID-19 pandemic remains unpredictable and many areas of the United States, and the world, have experienced a resurgence of COVID-19 infections in recent weeks. Indeed, on November 1, 2020, the rolling seven-day average of new daily coronavirus cases in the United States reached the highest level at any point during the pandemic. Although hospitals are now better prepared for a subsequent surge in COVID-19 patients, the risk remains that regional or local restrictions could again be placed on the performance of elective surgical procedures if the number of COVID-19 infections in the United States continues to rise. We believe our MACI business may be negatively impacted if elective surgical procedures are again restricted. Further, continued, and prolonged material disruption to the operations of our employees, distributors, suppliers or customers will impact our sales and operating results that could lead to potential impairments to inventory and accounts receivable. We believe Epicel has been less directly impacted by the pandemic given the critical nature of severe burn injuries; however, trauma injury admissions have been reported to have declined due to various COVID-19 related restrictions. Given the variable occurrence of the severe burns Epicel is used to treat, it is difficult to ascertain whether a similar decline is occurring with severe burns.
- We are currently conducting the PEAK (A Study of MACI in Patients Aged 10 to 17 Years with Symptomatic Chondral or Osteochondral Defects of the Knee) Study at ten (10) sites throughout the United States. Although two (2) such sites have currently paused enrollment of new PEAK patients as a result of the effects of the pandemic, the Study has not experienced a slow-down in its traditional rate of patient enrollment. However, the PEAK Study or another of our clinical trials may in the future experience difficulties associated with patient visits and study monitoring, which may be paused or delayed due to changes in policies at various clinical sites, federal, state, local or foreign laws, rules and regulations, including closure of site access to outside medical monitors, quarantines or other travel restrictions, prioritization of healthcare resources toward pandemic efforts, including diminished attention of physicians serving as our clinical trial investigators and reduced availability of site staff supporting the conduct of our clinical trials, interruption or delays in the operations of the FDA, heightened exposure of patients, principal investigators and site staff to COVID-19 if an outbreak occurs in their geography, or other reasons related to the COVID-19 pandemic. Further, patients who are already recruited into our clinical trials may be unable or unwilling to attend follow-up visits within the timelines specified in our trial protocols, potentially impacting our ability to meet our clinical trial endpoints. An outbreak may also affect employees of third-party contract research organizations located in affected geographies that we rely upon to carry out our clinical trials.
- We continue to manufacture MACI and Epicel and we maintain a significant safety back-up of all key raw materials. We do not expect that current supply chain interruptions will impact our ongoing manufacturing operations. However, we currently rely on third parties to, among other things, manufacture and supply raw materials, which are used to produce our products, and supply other goods and services to run our business. If any such third parties in our supply chain are adversely impacted by current or future restrictions resulting from the COVID-19 pandemic for an extended period of time, including staffing shortages, production slowdowns and disruptions in delivery systems, our supply chain may be disrupted, limiting our ability to manufacture our products and product candidates and conduct our research and development operations, or commercially launch any of our product candidates, if approved. With respect to customer delivery, MACI final product has an established shelf life of 6 days and established shipping shelf life of 3 days. Currently, MACI is picked-up by courier and shipped by commercial air or ground transportation to our customers’ locations. Epicel final product has an established shelf life of 24 hours and is hand carried to customer hospital sites by courier. Transportation is primarily by commercial or charter airline. Although we have not experienced material shipping delays or increased costs to date, significant disruption of air travel could result in the

inability to deliver MACI or Epicel final products to customer sites within appropriate timeframes, which would have a material adverse effect on our business and results of operations.

- We have largely restricted on-site staff in our facilities to only those personnel and contractors who must perform essential activities related to the manufacture, production and delivery of our products. We have encouraged the majority of our remaining employees to work remotely. Our continued reliance on personnel working from home may negatively impact productivity, or disrupt, delay, or otherwise adversely impact our business. Additionally, the continued spread or resurgence of COVID-19 or similar infectious diseases in the U.S. may lead to further government-imposed quarantines and restrictions, which may result in the closure of our administrative offices, with our employees working outside of our offices for an extended period of time. These actions may also result in the disruption of our manufacturing operations, which are currently accomplished within our administrative offices. Additionally, such quarantines and restrictions may adversely affect our ability to conduct certain product enhancement and business development activities.
- Our continued reliance on personnel working from home may also increase our cyber security risk, create data accessibility concerns, and make us more susceptible to communication disruptions, any of which could adversely impact our business operations or delay necessary interactions with local and federal regulators, institutional review boards and ethics committees, third party contractors and suppliers, clinical trial sites and other important agencies and contractors. Our business operations may be further disrupted if any of our employees, officers or board of directors contract an illness related to COVID-19 and are unable to perform their duties. For example, COVID-19 illness could impact members of management or our board of directors resulting in absenteeism from management meetings or meetings of the directors or committees of directors, and making it more difficult for management to effectively oversee our daily operations, or to convene the quorums of the full board of directors or its committees needed to conduct meetings for the management of our affairs.
- Continued spread or resurgence of the COVID-19 virus, may cause our employees, and employees of third-party contractors and licensees, including MediWound, responsible for conducting research and development activities to be unable to access laboratories and places of business for an extended period of time as a result of the temporary closure of such workspaces and the possibility that governmental authorities further modify current restrictions. As a result, this could delay timely completion of ongoing clinical trials or preclinical activities, and our ability to select future development candidates.
- NexoBrid is currently a pre-commercial product in North America. On September 16, 2020, we announced that the FDA has accepted for review a BLA seeking marketing approval for NexoBrid in the United States. However, health regulatory agencies globally, including the FDA, may experience disruptions in their operations as a result of the continued spread of the COVID-19 pandemic. For instance, the COVID-19 pandemic may impact the FDA’s response times to regulatory submissions, its ability to monitor our clinical trials, and/or conduct necessary reviews or inspections any or all of which may result in timelines being materially delayed, which could materially affect the development, study and ultimate commercialization of our product candidates. It is unknown how long these disruptions could continue, were they to occur.
- The trading prices for our common stock and that of other biopharmaceutical companies have been highly volatile as a result of the COVID-19 pandemic. As a result, we may face difficulties raising capital through sales of our common stock or such sales may be on unfavorable terms. In addition, a recession, depression or other sustained adverse market event resulting from the continued spread or resurgence of the COVID-19 pandemic could materially and adversely affect our business and the value of our common stock.
- Given the economic downturn and increased unemployment in the U.S. related to COVID-19, millions of individuals have lost and may lose their employer-based insurance coverage, which may adversely affect our ability to commercialize our products. In addition, market disruption and rising unemployment caused by the COVID-19 pandemic may lead to delays in obtaining insurance coverage and reimbursement of newly approved products as well as an increase in the numbers of uninsured patients and patients who may no longer be able to afford their co-insurance or co-pay obligations. These factors may lead to decreased utilization of our products, which could reduce revenue. The outbreak of COVID-19 may also negatively impact our commercialization strategy for our products and product candidates, if approved. Hospitals and other medical institutions have reduced and diverted staffing, diverted resources to patients suffering from COVID-19 and limited hospital access for non-patients, which may include our sales personnel. Hospitals may continue and increase these and similar measures in the future should the COVID-19 virus continue to spread or surge in certain areas. In addition, a resurgence of COVID-19 in the United States, may cause customers or patients to postpone or cancel previously scheduled surgeries or to decline to schedule surgeries utilizing our products, which would negatively impact our operations and financial results. In addition, continued travel

restrictions due to COVID-19 could impact the ability of our sales personnel to travel to customers. We have encouraged our sales personnel to conduct many of their interactions with physicians and patients through the use of webinars, telemedicine, direct-to-consumer advertising and social media. These circumstances may adversely affect the ability of our sales professionals to effectively market our products to physicians in the future, which may have a negative impact on our potential sales and our market penetration.

If any of these risks related to the impact of the COVID-19 pandemic were to occur, our preclinical activities, clinical development progress, data and timelines, commercialization efforts including any potential revenue from sales, supply chain continuity, and general business operations, could be delayed and/or materially harmed and our business, prospects, financial condition, and results of operations would suffer as a result. The extent to which the current pandemic, or a future pandemic, impacts our business and operations will depend on future developments, such as the ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions and governmental actions to contain the outbreak or treat its impact, which are highly uncertain and cannot be predicted with confidence.

Filed Nov 5, 2020.
Source: SEC EDGAR, the filing index for accession 0001628280-20-015697. Last ingested by Listed: Nov 12, 2026, 17:53 ET. No prices; not investment advice.