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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 Form 10-Q
 
      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED: June 30, 2020 
or
         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission File Number 001-35280
 
VERICEL CORPORATION
(Exact name of registrant as specified in its charter)
Michigan 94-3096597
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
 
64 Sidney Street
Cambridge, MA 02139
(Address of principal executive offices, including zip code) 

Registrant’s telephone number, including area code: (617) 588-5555 

 Securities registered pursuant to Section 12(b) of the Act: 
Title of ClassTrading Symbol(s)Name of Each Exchange on Which Registered
Common Stock (No par value)VCELNASDAQ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes x No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
 Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  No x
 
 
As of July 31, 2020, 45,250,402 shares of Common Stock, no par value per share, were outstanding. 




VERICEL CORPORATION
 QUARTERLY REPORT ON FORM 10-Q
 TABLE OF CONTENTS
 
  Page
 PART I - FINANCIAL INFORMATION 
Item 1.
Financial Statements (Unaudited):
  
 
  
 
 
  
 
  
Item 2.
  
Item 3.
  
Item 4.
PART II — OTHER INFORMATION
Item 1.
  
Item 1A.
  
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Exhibits
  
Exhibit Index
Signature



PART I - FINANCIAL INFORMATION
 
Item 1.                                                         Financial Statements

VERICEL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, amounts in thousands)
 
 June 30,December 31,
 20202019
ASSETS  
Current assets:  
Cash and cash equivalents$55,704  $26,889  
Short term investments25,086  42,829  
Accounts receivable (net of allowance for doubtful accounts of $207 and $306, respectively)23,655  32,168  
Inventory8,417  6,816  
Other current assets2,900  2,953  
Total current assets115,762  111,655  
Property and equipment, net7,040  7,144  
Restricted cash89  89  
Right-of-use leased assets23,800  25,103  
Long term investments  9,247  
Total assets$146,691  $153,238  
LIABILITIES AND SHAREHOLDERS’ EQUITY  
Current liabilities:  
Accounts payable$4,535  $6,345  
Accrued expenses7,975  7,948  
Current portion of operating lease liabilities5,570  5,461  
Other liabilities41  41  
Total current liabilities18,121  19,795  
Operating lease liabilities20,881  22,242  
Other long-term liabilities93  110  
Total liabilities$39,095  $42,147  
COMMITMENTS AND CONTINGENCIES
Shareholders’ equity:  
Common stock, no par value; shares authorized — 75,000; shares issued and outstanding — 45,194 and 44,864, respectively$499,103  $489,749  
Other comprehensive gain 146  21  
Accumulated deficit(391,653) (378,679) 
Total shareholders’ equity107,596  111,091  
Total liabilities and shareholders’ equity$146,691  $153,238  
 
The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements.




VERICEL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, amounts in thousands, except per share amounts)
 
 Three Months Ended June 30,Six Months Ended June 30,
 2020201920202019
Product sales, net$20,014  $26,151  $46,692  $47,961  
Cost of product sales8,660  9,022  18,582  17,662  
Gross profit11,354  17,129  28,110  30,299  
Research and development3,226  21,070  6,989  24,078  
Selling, general and administrative16,486  16,259  34,555  29,779  
Total operating expenses19,712  37,329  41,544  53,857  
Loss from operations(8,358) (20,200) (13,434) (23,558) 
Other income (expense):   
Interest income147  428  453  908  
Interest expense(1) (2) (3) (4) 
Other income (expense)(57) (18) 10  18  
Total other income (expense)89  408  460  922  
Net loss$(8,269) $(19,792) $(12,974) $(22,636) 
Net loss per share attributable to common shareholders (Basic and Diluted) $(0.18) $(0.45) $(0.29) $(0.52) 
Weighted average number of common shares outstanding (Basic and Diluted)45,137  43,956  45,031  43,841  
 
The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements.




VERICEL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited, amounts in thousands)
 
 Three Months Ended June 30,Six Months Ended June 30,
 2020201920202019
Net loss$(8,269) $(19,792) $(12,974) $(22,636) 
Other comprehensive loss:
Unrealized gain on investments84  35  125  38  
Comprehensive loss$(8,185) $(19,757) $(12,849) $(22,598) 
 
The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements.




VERICEL CORPORATION 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(Unaudited, amounts in thousands)
Common StockWarrantsAccumulated Other Comprehensive IncomeAccumulated DeficitTotal Shareholders' Equity
SharesAmountAmount
BALANCE, DECEMBER 31, 201944,864  $489,749    $21  $(378,679) $111,091  
Net loss—  —  —  —  (4,705) (4,705) 
Compensation expense related to stock options and restricted stock units granted, net of forfeitures—  3,768  —  —  —  3,768  
Stock option exercises57  196  —  —  —  196  
Shares issued under the Employee Stock Purchase Plan20  224  —  —  —  224  
Issuance of stock upon restricted stock unit vesting36  —  —  —  —    
Restricted stock withheld for employee tax remittance(14) (163) —  —  —  (163) 
Unrealized gain on investments—  —  —  41  —  41  
BALANCE, MARCH 31, 202044,963  $493,774  $  $62  $(383,384) $110,452  
Net loss—  —  —  —  (8,269) (8,269) 
Compensation expense related to stock options and restricted stock units granted, net of forfeitures—  4,376  —  —  —  4,376  
Stock option exercises188  696  —  —  —  696  
Shares issued under the Employee Stock Purchase Plan32  257  —  —  —  257  
Issuance of stock for restricted stock unit vesting11  —  —  —  —    
Unrealized gain on investments—  —  —  84  —  84  
BALANCE, JUNE 30, 202045,194  $499,103  $  $146  $(391,653) $107,596  


Common StockWarrantsAccumulated Other Comprehensive Income (Loss)Accumulated DeficitTotal Shareholders' Equity
SharesAmountAmount
BALANCE, DECEMBER 31, 201843,578  $471,180  $104  $(39) $(369,014) $102,231  
Net loss—  —  —  —  (2,844) (2,844) 
Compensation expense related to stock options and restricted stock units granted, net of forfeitures—  2,628  —  —  —  2,628  
Stock option exercises228  780  —  —  —  780  
Shares issued under the Employee Stock Purchase Plan19  218  —  —  —  218  
Unrealized gain on investments—  —  —  42  —  42  
BALANCE, MARCH 31, 201943,825  $474,806  $104  $3  $(371,858) $103,055  
Net loss—  —  —  —  (19,792) (19,792) 
Compensation expense related to stock options and restricted stock units granted, net of forfeitures—  4,183  —  —  —  4,183  
Stock option exercises227  850  —  —  —  850  
Shares issued under the Employee Stock Purchase Plan14  211  —  —  —  211  
Unrealized gain on investments—  —  —  35  —  35  
BALANCE, JUNE 30, 201944,066  $480,050  $104  $38  $(391,650) $88,542  





VERICEL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, amounts in thousands)
 
 Six Months Ended June 30,
 20202019
Operating activities:  
Net loss$(12,974) $(22,636) 
Adjustments to reconcile net loss to net cash provided by (used for) operating activities:  
Depreciation and amortization expense1,079  698  
Stock compensation expense8,144  6,810  
Foreign currency translation loss45  13  
Loss on sale of fixed assets30    
Amortization of premiums and discounts on marketable securities(25) (408) 
Amortization and interest accretion related to operating leases1,603  1,139  
Changes in operating assets and liabilities:  
Inventory(1,601) (1,230) 
Accounts receivable8,513  2,370  
Prepaid and other current assets53  680  
Accounts payable(1,692) (2,238) 
Accrued expenses27  (2,229) 
Operating lease liabilities(1,537) (1,007) 
Other non-current assets and liabilities, net  (187) 
Net cash provided by (used for) operating activities1,665  (18,225) 
Investing activities:  
Purchases of short term investments(5,657) (32,402) 
Maturities of short term investments32,797  45,477  
Expenditures for property, plant and equipment(1,186) (1,224) 
Net cash provided by investing activities25,954  11,851  
Financing activities:  
Net proceeds from common stock issuance due to stock option exercises1,373  2,059  
Payments on employee's behalf for taxes related to vesting of restricted stock unit awards(163)   
Other(14) (9) 
Net cash provided by financing activities1,196  2,050  
Net increase in cash, cash equivalents, and restricted cash28,815  (4,324) 
Cash, cash equivalents, and restricted cash at beginning of period26,978  18,286  
Cash, cash equivalents, and restricted cash at end of period$55,793  $13,962  
 
The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements.



VERICEL CORPORATION
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
1.     Organization
 
Vericel Corporation, a Michigan corporation (together with its consolidated subsidiaries referred to herein as the Company, Vericel, we, us or our), was incorporated in March 1989 and began employee-based operations in 1991. The Company is a fully-integrated, commercial-stage biopharmaceutical company and is a leader in advanced cell therapies for the sports medicine and severe burn care markets. Vericel currently markets two cell therapy products, MACI® and Epicel®, in the United States. Vericel obtained both products in May 2014, as part of the acquisition of certain assets and the assumption of certain liabilities from Sanofi, a French société anonyme (Sanofi).

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. The Company also markets Epicel® (cultured epidermal autografts), 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). The Company operates its business primarily in the U.S. in one reportable segment — the research, product development, manufacture and distribution of biopharmaceuticals for use in the treatment of specific diseases.

COVID-19

The novel coronavirus (COVID-19) outbreak was first reported by China in late December 2019 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 two days later. Subsequently most states' governments, including those in Massachusetts and Michigan where the Company's operations are located, issued orders requiring businesses that do not conduct essential services to temporarily close their physical workplaces to employees and customers. The status of such orders varies on a state-by-state basis and is likely to continue to vary. Because Vericel is deemed an essential business, the Company is exempt from these state orders in their current form.

Notwithstanding being an essential business, the Company’s business and operations have been, and are expected to continue to be, adversely impacted by the effects of COVID-19 as a result of various factors including, without limitation, patients’ potential reluctance to undergo elective surgical procedures, healthcare facility restrictions regarding elective surgical procedures, the recent economic downturn due to the pandemic, the imposition of related public health measures and travel and business restrictions and disruptions to the ability of the Company’s employees to perform their jobs.

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 has resulted in a reduction in MACI sales. The stated purpose for these recommendations was that every elective surgery could spread COVID-19 within a facility, use up personal protective equipment (PPE) which may be needed by healthcare workers treating COVID-19 patients, and burden hospital workforce who may be needed to respond to COVID-19. These recommendations were followed by numerous state level executive orders either banning or partially banning elective surgeries. As a result of these restrictions, beginning in mid-March 2020, the Company started 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. These restrictions began to ease in May and, by the end of June 2020, states representing an estimated 90% total U.S. surgical capacity had lifted restrictions suspending elective procedures. It is likely that restrictions will continue to be both lifted and re-imposed as regional COVID 19 cases rates fall and rise. The Company’s MACI business will continue to be negatively impacted so long as multiple state orders and/or facilities restrict elective surgical procedures.





Going Concern

The accompanying condensed consolidated financial statements have been prepared on a basis which assumes that the Company will continue as a going concern and contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.  As of June 30, 2020, the Company had an accumulated deficit of $391.7 million and incurred a net loss of $8.3 million and $13.0 million for the three and six months ended June 30, 2020, respectively.  The Company had cash and cash equivalents of $55.8 million and investments of $25.1 million as of June 30, 2020. The Company expects that existing cash, cash equivalents and investments will be sufficient to support the Company’s current operations through at least 12 months from the issuance of these financial statements. However, the continuing effects of the COVID-19 pandemic may require the Company to engage in layoffs, furloughs and/or reductions in salary, all of which may result in irrecoverable losses of customers and significantly impact long-term liquidity. If elective surgery restrictions are reinstated on a widespread basis, significantly impacting the Company's business, the Company may need to access additional capital; however, the Company may not be able to obtain financing on acceptable terms or at all, particularly in light of the impact of COVID-19 on the global economy and financial markets. The terms of any financing may adversely affect the holdings or the rights of the Company’s shareholders.

2. Basis of Presentation
The accompanying condensed consolidated financial statements as of June 30, 2020 and for the three and six months ended June 30, 2020 are unaudited and have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (SEC).  The preparation of condensed consolidated financial statements in conformity with generally accepted accounting principles in U.S. GAAP requires management to make estimates, judgments, and assumptions that may affect the reported amounts of assets, liabilities, equity, revenues and expenses. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to such rules and regulations. The financial statements reflect, in the opinion of management, all adjustments (consisting only of normal, recurring adjustments) necessary to state fairly the financial position and results of operations as of and for the periods indicated. We base our estimates on historical experience and on various other assumptions that we believe are reasonable, the results of which form the basis for making judgments about the carrying values of assets, liabilities and equity and the amount of revenues and expenses. The full extent to which the COVID-19 pandemic will continue to directly or indirectly impact our business, results of operations and financial condition, including sales, expenses, reserves and allowances, manufacturing, clinical trials, research and development costs and employee-related amounts, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to continue to contain it or treat COVID-19, as well as the economic impact on our customers. We have made estimates of the impact of COVID-19 within our financial statements and there may be changes to those estimates in future periods. Actual results may differ from these estimates. As of June 30, 2020, the Company has not recorded impairments to investments, inventory, other current assets or long-lived assets as a result of the COVID-19 pandemic and does not expect material impairments in the future. The Company has assessed the impact of COVID-19 on accounts receivables (see note 4).
 
These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019 as filed with the SEC on February 25, 2020 (Annual Report).





Consolidated Statement of Cash Flows

The following table presents certain supplementary cash flows information for the six months ended June 30, 2020 and 2019:
Six Months Ended June 30,
(In thousands)20202019
Supplementary Cash Flows information:
Non-cash information:
Right-of-use asset and lease liability recognized$429  $560  
Additions to property, plant and equipment included in accounts payable55  365  
Cash information:
Interest paid (net of interest capitalized)$3  $4  

Total cash, cash equivalents, and restricted cash of $55.8 million as of June 30, 2020, shown in the statement of cash flows is comprised of cash and cash equivalents of $55.7 million and restricted cash of $0.1 million which is included in other long term assets on the consolidated balance sheet. As of June 30, 2019, cash and cash equivalents were $14.0 million and the Company did not have any restricted cash.

3. Recent Accounting Pronouncements

Measuring Credit Losses on Financial Instruments

The FASB issued updated guidance on measuring credit losses on financial instruments. The guidance removes the thresholds that companies apply to measure credit losses on financial instruments measured at amortized cost, such as loans, receivables, and held-to-maturity debt securities. Prior to the updated guidance, credit losses are recognized when it is probable that the loss has been incurred. The revised guidance removes all recognition thresholds and requires companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that a company expected to collect over the instrument’s contractual life. The Accounting Standard Update (ASU) 2016-13, Financial Instruments-Credit Losses (Topic 326), became effective for the Company January 1, 2020. See note 4 and note 8 for further discussion.

Fair Value Measurement Disclosure

The FASB issued updated guidance through ASU 2018-13, Fair Value Measurement (Topic 820) Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The revised guidance is intended to develop a more consistent disclosure framework that will increase clarity, remove, modify and add certain fair value disclosures to improve the effectiveness of the Company’s disclosures in the notes of the financial statements. This guidance became effective for the Company January 1, 2020 and had no impact to its condensed consolidated financial statements.

Simplifying the Accounting for Income Taxes

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (ASC 740). The ASU enhances and simplifies various aspects of the income tax accounting guidance in ASC 740, including requirements related to hybrid tax regimes, the tax basis step-up in goodwill obtained in a transaction that is not a business combination, separate financial statements of entities not subject to tax, the intra-period tax allocation exception to the incremental approach, ownership changes in investments, changes from a subsidiary to an equity method investment, interim-period accounting for enacted changes in tax law, and the year-to-date loss limitation in interim-period tax accounting. This guidance is effective for the Company for annual and interim periods beginning after December 31, 2020; however, early adoption is permitted. The Company is currently in the process of evaluating the impact to its condensed consolidated financial statements.




4. Revenue
Revenue Recognition and Net Product Sales
The Company recognizes product revenue from sales of MACI kits, MACI implants and Epicel grafts following the five-step model in Accounting Standards Codification 606, Revenue Recognition, (ASC 606).
MACI Kits
MACI kits are sold directly to hospitals based on contracted rates in the approved contract or sales order. The Company recognizes MACI kit revenue upon delivery of the biopsy kit at which time the customer (the facility) is in control of the kit. The kit provides the doctor the ability to biopsy a sampling of cells to provide to the Company that can be used later to manufacture the implant. The ordering of the kit does not obligate the Company to manufacture an implant nor does the receipt of the cell tissue. The customer’s order of an implant is separate from the process of ordering the kit. Therefore, the sale of the kit and any subsequent sale of an implant are distinct contracts and are accounted for separately.
MACI Implants
The Company contracts with two specialty pharmacies, Orsini Pharmaceutical Services, Inc. (Orsini) and AllCare Plus Pharmacy, Inc. (AllCare) to distribute its MACI product in arrangements whereby the Company retains the credit and collection risk from the end customer. The Company pays both specialty pharmacies a fee for each patient to whom MACI is dispensed. Both Orsini and AllCare perform collection activities to receive payment from customers. The Company has engaged a third-party to provide services in connection with a patient support program to manage patient cases and to ensure complete and correct billing information is provided to the insurers and hospitals. In addition, the Company also sells MACI directly to DMS Pharmaceutical (DMS) for military implants. The sales directly to DMS are sold at a contracted rate.

Prior authorization and confirmation of coverage level by the patient’s private insurance plan, hospital or government payer is a prerequisite to the shipment of product to a patient. The Company recognizes product revenues from sales of all MACI implants upon delivery at which time the customer obtains control of the implant and the claim is billable. The total consideration which the Company expects to collect in exchange for MACI implants (the transaction price) may be fixed or variable. Direct sales to hospitals or distributors are recorded at a contracted price, and other than customary prompt pay discounts, there are typically no forms of variable consideration.

When the Company sells MACI the patient is responsible for payment, however, the Company is typically reimbursed by a third-party insurer or government payer, subject to a patient co-pay amount. Reimbursements from third-party insurers and government payers vary by patient and payer and are based on either contracted rates, publicly available rates or a fee schedule. Net product revenue is recognized net of contractual allowances, which considers historical collection experience from both the payer and patient and the terms of the Company’s contractual arrangements. The Company estimates expected collections for these transactions using the portfolio approach. These estimates include the impact of contractual allowances, which considers historical collection experience from both the payer and patient, denial rates and the terms of the Company’s contractual arrangements. The Company records a reduction to revenue at the time of sale for its estimate of the amount of consideration that will not be collected. In addition, potential credit risk exposure has been evaluated for the Company's accounts receivable in accordance with ASC 326, Financial Instruments - Credit Losses. The Company assesses risk and determines a loss percentage by pooling account receivables based on similar risk characteristics. The loss percentage is based on current and historical information as well as reasonable and supportable forecasts. This loss percentage was applied to the accounts receivables as of June 30, 2020. The total allowance for uncollectible consideration was $4.4 million as of June 30, 2020 and $3.9 million at December 31, 2019. The allowance includes less than $0.1 million of which is related to COVID-19 potential impacts on accounts receivable from third-party insurers, government payers, hospitals and patients. Changes to the estimate of the amount of consideration that will not be collected could have a material impact to the revenue recognized. A 0.5% change to the estimated uncollectible percentage could result in approximately a $0.1 million decrease in the revenue recognized for the six months ended June 30, 2020.

Changes in estimates of the transaction price are recorded through revenue in the period in which such change occurs. Changes in estimates related to prior period sales for the three and six months ended June 30, 2020 resulted in a decrease to revenue of $0.2 million and increase to revenue of $1.1 million, respectively, and an increase to revenue of $0.09 million and $0.05 million, respectively for the same period in 2019. The changes in estimates recorded during the three and six months ended June 30, 2020, were primarily due to completion of the billing claims process for implants that occurred in late 2019. Upon completion of the billing claims process, the Company concluded that it was probable that a significant reversal in the amount of revenue recognized would not occur.





Epicel
The Company sells Epicel directly to hospitals based on contracted rates stated in the approved contract or purchase order. Similar to MACI, there is no obligation to manufacture skin grafts upon receipt of a skin biopsy, and Vericel has no contractual right to receive payment until the product is delivered to the hospital. The Company recognizes product revenues from sales of Epicel upon delivery to the hospital at which time the customer is in control of the skin grafts and the claim is billable to the hospital.
Revenue by Product and Customer
The following table and description below shows the products from which the Company generated its revenue:
 Three Months Ended June 30,Six Months Ended June 30,
Revenue by product (in thousands) 2020201920202019
MACI implants and kits
Implants based on contracted rate sold through a specialty pharmacy (a)$9,790  $12,989  $21,218  $22,776  
Implants subject to third party reimbursement sold through a specialty pharmacy (b)2,819  3,459  6,335  6,202  
Implants sold direct based on contracted rates (c)1,806  3,450  4,916  6,676  
Implants sold direct subject to third party reimbursement (d)589  281  1,016  603  
Biopsy kits - direct bill348  557  811  1,099  
Change in estimates related to prior periods (e)(248) 87  1,095  50  
Epicel
     Direct bill (hospital)4,910  5,328  11,301  10,555  
Total revenue$20,014  $26,151  $46,692  $47,961  
(a) Represents implants sold through Orsini and AllCare in both 2020 and 2019 in which such specialty pharmacies have entered into a direct contract with the underlying insurance provider. The amount of reimbursement is based on contracted rates at the time of sale supported by the pharmacy's direct contracts. Also represents direct sales under a contract to the specialty distributor DMS.
(b) Represents implants sold through Orsini or AllCare in which such specialty pharmacy does not have a direct contract with the underlying payer. The amount of reimbursement is established based on a payer or state fee schedule and/or payer history.
(c) Represents implants sold directly from the Company to the facility based on a contract and known price agreed upon prior to the surgery date.
(d) Represents implants sold directly from the Company to the facility based on a contract and known price agreed upon prior to the surgery date. The payment terms are subject to third-party reimbursement from an underlying insurance provider.
(e) Primarily represents changes in estimates related to implants sold through Orsini or AllCare in which such specialty pharmacy does not have a direct contract with the underlying payer. The initial estimate of the amount of reimbursement is established based on a payer or state fee schedule and/or payer history. The change in estimates is a result of additional information or actual cash collections received in the current period.





Concentration of Credit Risk

The table below shows the Company’s total Epicel revenue and accounts receivable balances from customers whose revenue or accounts receivable concentration is greater than 10% in any of the periods disclosed below. The Company did not have MACI revenue or accounts receivable concentrations greater than 10% in any of the periods disclosed below.
Revenue ConcentrationAccounts Receivable Concentration
Three Months Ended June 30,Six Months Ended June 30,June 30,December 31,
202020192020201920202019
Epicel6 %6 %10 %8 %3 %2 %

5. Selected Balance Sheet Components
 
Inventory

Inventory as of June 30, 2020 and December 31, 2019:
 
(In thousands)June 30, 2020December 31, 2019
Raw materials$7,853  $6,085  
Work-in-process513  541  
Finished goods51  190  
Inventory$8,417  $6,816  
 
Property and Equipment

Property and Equipment, net as of June 30, 2020 and December 31, 2019:
 
(In thousands)June 30, 2020December 31, 2019
Machinery and equipment$3,279  $3,152  
Furniture, fixtures and office equipment810  775  
Computer equipment and software6,393  6,174  
Leasehold improvements5,256  5,256  
Construction in process1,311  859  
Financing right-of-use lease129  148  
Total property and equipment, gross17,178  16,364  
Less accumulated depreciation(10,138) (9,220) 
$7,040  $7,144  
 
Depreciation expense for the three and six months ended June 30, 2020 was $0.5 million and $1.1 million, respectively, and $0.4 million and $0.7 million for the same periods in 2019.
 
Accrued Expenses

Accrued Expenses as of June 30, 2020 and December 31, 2019 are as follows:
 
(In thousands)June 30, 2020December 31, 2019
Bonus related compensation$2,872  $5,116  
Employee related accruals2,578  1,785  
Other accrued expenses2,525  1,047  
Accrued expenses$7,975  $7,948  





6.  Leases

The Company leases facilities in Ann Arbor, Michigan and Cambridge, Massachusetts. The Ann Arbor facility includes office space, and the Cambridge facility includes clean rooms, laboratories for MACI and Epicel manufacturing and office space. The Company also leases offsite warehouse space, vehicles and computer equipment. Certain of the Company’s lease agreements include lease payments that are adjusted periodically for an index or rate. The leases are initially measured using the projected payments adjusted for the index or rate in effect at the commencement date. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. All operating lease commitments with a lease term greater than 12 months are recognized as right to use assets and liabilities, on a discounted basis on the balance sheet. Leases with an initial term of 12 months or less are not recorded on the balance sheet and for both the three and six months ended June 30, 2020 and 2019, lease expense of less than $0.1 million was recorded related to short-term leases.

The contribution toward the cost of tenant improvements is recorded as a reduction of the operating lease assets. For the three and six months ended June 30, 2020, the Company recognized $1.4 million and $2.9 million of operating lease expense and $1.3 million and $2.6 million for the same periods in 2019.

For both the three and six months ended June 30, 2020 and 2019, the Company recognized less than $0.1 million of financing lease expense. The Company’s leases contain non-lease components and activities that do not transfer a good or service to the Company. The Company elected not to combine lease and non-lease components and therefore non-lease costs were not included in the net lease assets or lease liabilities.

Total leased assets and liabilities as reassessed under the updated guidance and classified on the balance sheet, as of June 30, 2020 and December 31, 2019 are as follows:

(In thousands)ClassificationJune 30, 2020December 31, 2019
Assets
OperatingRight-of-use assets$23,800  $25,103  
FinanceProperty and equipment, net129  148  
$23,929  $25,251  
Liabilities
Current
OperatingCurrent portion of operating lease liabilities$5,570  $5,461  
FinanceOther liabilities41  41  
$5,611  $5,502  
Non-current
OperatingOperating lease liabilities$20,881  $22,242  
FinanceOther long-term liabilities93  110  
$