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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: September 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 October 30, 2020, 45,428,794 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)
 
 September 30,December 31,
 20202019
ASSETS  
Current assets:  
Cash and cash equivalents$43,507 $26,889 
Short-term investments42,035 42,829 
Accounts receivable (net of allowance for doubtful accounts of $187 and $306, respectively)
26,174 32,168 
Inventory10,080 6,816 
Other current assets3,586 2,953 
Total current assets125,382 111,655 
Property and equipment, net7,115 7,144 
Restricted cash211 89 
Right-of-use leased assets24,796 25,103 
Long-term investments 9,247 
Total assets$157,504 $153,238 
LIABILITIES AND SHAREHOLDERS’ EQUITY  
Current liabilities:  
Accounts payable$6,475 $6,345 
Accrued expenses8,695 7,948 
Current portion of operating lease liabilities6,102 5,461 
Other liabilities41 41 
Total current liabilities21,313 19,795 
Operating lease liabilities21,487 22,242 
Other long-term liabilities74 110 
Total liabilities$42,874 $42,147 
COMMITMENTS AND CONTINGENCIES
Shareholders’ equity:  
Common stock, no par value; shares authorized — 75,000; shares issued and outstanding — 45,315 and 44,864, respectively
$502,587 $489,749 
Other comprehensive gain 78 21 
Accumulated deficit(388,035)(378,679)
Total shareholders’ equity114,630 111,091 
Total liabilities and shareholders’ equity$157,504 $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 September 30,Nine Months Ended September 30,
 2020201920202019
Product sales, net$31,020 $30,499 $77,712 $78,460 
Other revenue1,238  1,238  
Total revenue32,258 30,499 78,950 78,460 
Cost of product sales9,787 9,324 28,369 26,986 
Gross profit22,471 21,175 50,581 51,474 
Research and development2,913 3,096 9,902 27,174 
Selling, general and administrative16,041 14,982 50,596 44,761 
Total operating expenses18,954 18,078 60,498 71,935 
Income (loss) from operations3,517 3,097 (9,917)(20,461)
Other income (expense):   
Interest income121 385 574 1,293 
Interest expense(2)(2)(5)(6)
Other income (expense)(18)(10)(8)8 
Total other income101 373 561 1,295 
Net income (loss)$3,618 $3,470 $(9,356)$(19,166)
Net income (loss) per share attributable to common shareholders (Basic) $0.08 $0.08 $(0.21)$(0.44)
Weighted average number of common shares outstanding (Basic)45,272 44,251 45,112 43,979 
Net income (loss) per share attributable to common shareholders (Diluted)$0.08 $0.07 $(0.21)$(0.44)
Weighted average number of common shares outstanding (Diluted)47,314 46,667 45,112 43,979 
 
The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements.




VERICEL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited, amounts in thousands)
 
 Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
Net income (loss)$3,618 $3,470 $(9,356)$(19,166)
Other comprehensive income (loss):
Unrealized gain (loss) on investments(68)(9)57 29 
Comprehensive income (loss)$3,550 $3,461 $(9,299)$(19,137)
 
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 
Net income— — — — 3,618 3,618 
Compensation expense related to stock options and restricted stock units granted, net of forfeitures— 2,675 — — — 2,675 
Stock option exercises77 500 — — — 500 
Shares issued under the Employee Stock Purchase Plan44 309 — — — 309 
Unrealized loss on investments— — — (68)— (68)
BALANCE, SEPTEMBER 30, 202045,315 $502,587 $ $78 $(388,035)$114,630 





















VERICEL CORPORATION 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(Unaudited, amounts in thousands)
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 
Net income— — — — 3,470 3,470 
Compensation expense related to stock options and restricted stock units granted, net of forfeitures— 3,285 — — — 3,285 
Stock option exercises416 1,427 — — — 1,427 
Shares issued under the Employee Stock Purchase Plan18 275 — — — 275 
Unrealized loss on investments— — — (9)— (9)
Exercise of warrants resulting in issuance of common stock20 104 (104)— —  
BALANCE, SEPTEMBER 30, 201944,520 $485,141 $ $29 $(388,180)$96,990 

























VERICEL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, amounts in thousands)
 
 Nine Months Ended September 30,
 20202019
Operating activities:  
Net loss$(9,356)$(19,166)
Adjustments to reconcile net loss to net cash provided by (used for) operating activities:  
Depreciation and amortization expense1,649 1,174 
Stock compensation expense10,819 10,095 
Foreign currency translation loss59 21 
Loss on sale of fixed assets30  
Amortization of premiums and discounts on marketable securities24 (529)
Amortization and interest accretion related to operating leases3,312 2,011 
Changes in operating assets and liabilities:  
Inventory(3,264)(3,265)
Accounts receivable5,994 3,496 
Other current assets(633)(425)
Accounts payable(52)(1,895)
Accrued expenses747 30 
Operating lease liabilities(3,110)(1,804)
Other non-current assets and liabilities, net16 (76)
Net cash provided by (used for) operating activities6,235 (10,333)
Investing activities:  
Purchases of short-term investments(29,049)(46,303)
Maturities of short-term investments39,123 73,777 
Expenditures for property, plant and equipment(1,556)(2,255)
Net cash provided by investing activities8,518 25,219 
Financing activities:  
Net proceeds from common stock issuance due to stock option exercises2,182 3,762 
Payments on employee's behalf for taxes related to vesting of restricted stock unit awards(163) 
Other(32)(29)
Net cash provided by financing activities1,987 3,733 
Net increase in cash, cash equivalents, and restricted cash16,740 18,619 
Cash, cash equivalents, and restricted cash at beginning of period26,978 18,286 
Cash, cash equivalents, and restricted cash at end of period$43,718 $36,905 
 
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 therapies for the sports medicine and severe burn care markets. Vericel currently markets two cell therapy products in the United States, MACI® and Epicel®. Vericel obtained both products in May 2014, as part of the acquisition of certain assets and the assumption of certain liabilities of 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. Epicel® (cultured epidermal autografts) is a permanent skin replacement 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 also holds an exclusive license from MediWound Ltd. (MediWound) for North American rights to NexoBrid®, a registration-stage biological orphan product for debridement of severe thermal burns. 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 pandemic caused by the spread of a novel strain of coronavirus (COVID-19) has created significant volatility, uncertainty, and economic disruption in both domestic and international markets. 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 the Company’s 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. Because Vericel is deemed an essential business, the Company continues to be exempt from such state orders in their current forms.

Notwithstanding being an essential business, the Company’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, the Company 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 the Company’s 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. 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 affected by 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.

In March 2020, the Company 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 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. The Company is reviewing these measures regularly as the pandemic evolves and may take additional actions to the extent required.

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. For the three and nine months ended September 30, 2020, the Company had net income of $3.6 million and a net loss of $9.4 million, respectively, and had an accumulated deficit of $388.0 million as of September 30, 2020. The Company had cash and cash equivalents of $43.5 million and investments of $42.0 million as of September 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 effects of the COVID-19 pandemic continue to evolve and may result in irrecoverable losses of customers and significantly impact long-term liquidity requiring the Company to engage in layoffs, furloughs and/or reductions in salaries. To the extent the United States experiences a resurgence in COVID-19 infections and elective surgery restrictions are reinstated on a widespread basis and significantly impact 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 September 30, 2020 and for the three and nine months ended September 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 U.S. generally accepted accounting principles (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 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 September 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 nine months ended September 30, 2020 and 2019:
Nine Months Ended September 30,
(In thousands)20202019
Supplementary Cash Flows information:
Non-cash information:
Right-of-use asset and lease liability recognized$3,140 $2,338 
Additions to property, plant and equipment included in accounts payable340 46 
Warrants exercised for common stock 104 
Cash information:
Interest paid (net of interest capitalized)$5 $6 

Total cash, cash equivalents, and restricted cash of $43.7 million as of September 30, 2020, shown in the statement of cash flows is comprised of cash and cash equivalents of $43.5 million and restricted cash of $0.2 million which is included in other long-term assets on the consolidated balance sheet. As of September 30, 2019, cash and cash equivalents were $36.9 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 were recognized when it was probable that the loss had 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 created a more consistent disclosure framework that increased clarity and removed, modified and added 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 on 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 on its condensed consolidated financial statements.




4. Revenue
Revenue Recognition of Net Product Sales and Other Revenue
The Company recognizes product revenue from sales of MACI biopsy kits, MACI implants, Epicel grafts and other revenue following the five-step model in Accounting Standards Codification 606, Revenue Recognition, (ASC 606).
Product Sales
MACI Biopsy Kits
MACI biopsy kits are sold directly to hospitals based on contracted rates in an 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 is used by the doctor to provide a sample of cartilage tissue to the Company, which can later be used to manufacture a MACI implant. The ordering of the kit does not obligate the Company to manufacture an implant nor does the receipt of the cartilage tissue. The customer’s order of an implant is separate from the process of ordering the biopsy kit. Therefore, the sale of the biopsy 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 MACI in a manner in which 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 collect 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 patients. The sales directly to DMS are made 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 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 estimated 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 estimates expected collections for these transactions using the portfolio approach. 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 September 30, 2020. The total allowance for uncollectible consideration as of September 30, 2020 and December 31, 2019 was $4.6 million and $3.9 million, respectively. The allowance includes less than $0.1 million 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% increase to the estimated uncollectible percentage could result in approximately a $0.2 million decrease in the revenue recognized for the nine months ended September 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 nine months ended September 30, 2020 resulted in an increase to revenue of less than $0.01 million and $0.7 million, respectively. During the same periods in 2019, the changes in estimates related to prior period sales resulted in an increase to revenue of $0.7 million and $0.4 million, respectively. The changes in estimates recorded during the three and nine months ended September 30, 2020, were primarily due to completion of the billing claims process for implants that occurred in 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 an approved contract or purchase order. Similar to MACI, there is no obligation to manufacture Epicel 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 Epicel grafts and the claim is billable to the hospital.
Other Revenue
NexoBrid
The Company entered into exclusive license and supply agreements with MediWound, under which MediWound will manufacture and supply NexoBrid on a unit price basis, which may be increased pursuant to the terms of the agreement. The U.S. Biomedical Advanced Research and Development Authority (BARDA) has committed to procure NexoBrid. As of September 30, 2020, the Company does not hold a direct contract or distribution agreement with BARDA, or take title to the product. The Company recognizes income from sales of NexoBrid to BARDA upon delivery, at which time BARDA is in control of the product. During the three months ended September 30, 2020, the first order of NexoBrid was delivered and the Company recognized $1.2 million of revenue. See note 11 for further discussion of the NexoBrid license and supply agreements.





Revenue by Product and Customer
The following table and description below shows the products from which the Company generated its revenue:
 Three Months Ended September 30,Nine Months Ended September 30,
Revenue by product (in thousands) 2020201920202019
MACI implants and kits
Implants based on contracted rate sold through a specialty pharmacy (a)$14,897 $11,779 $36,084 $34,555 
Implants subject to third party reimbursement sold through a specialty pharmacy (b)3,529 4,030 10,299 10,584 
Implants sold direct based on contracted rates (c)4,602 3,039 9,528 9,715 
Implants sold direct subject to third party reimbursement (d)782 573 1,793 1,176 
Biopsy kits - direct bill539 533 1,348 1,632 
Change in estimates related to prior periods (e)8 656 695 353 
Epicel
Direct bill (hospital)6,663 9,889 17,965 20,445 
Total product revenue$31,020 $30,499 $77,712 $78,460 
Other revenue (f)1,238  1,238  
Total net revenue$32,258 $30,499 $78,950 $78,460 
(a) Represents implants sold through Orsini and AllCare in both 2020 and 2019 whereby such specialty pharmacies have 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.
(b) Represents implants sold through Orsini or AllCare whereby 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. Also represents direct sales under a contract to the specialty distributor DMS.
(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.
(f) Represents income from sales of NexoBrid to BARDA, pursuant to the license agreement between the Company and MediWound.
Concentration of Credit Risk

The Company's total Epicel revenue concentration from a customer for the three months ended September 30, 2019 was 10%. For the Company's total Epicel and MACI revenue and accounts receivable balances there were no other customers for the three and nine months ended September 30, 2020, and for the nine months ended September 30, 2019, with a concentration greater than 10%.






5. Selected Balance Sheet Components
 
Inventory

Inventory as of September 30, 2020 and December 31, 2019:
 
(In thousands)September 30, 2020December 31, 2019
Raw materials$9,265 $6,085 
Work-in-process771 541 
Finished goods44 190 
Inventory$10,080 $6,816 
 
Property and Equipment

Property and Equipment, net as of September 30, 2020 and December 31, 2019:
 
(In thousands)September 30, 2020December 31, 2019
Machinery and equipment$3,683 $3,152 
Furniture, fixtures and office equipment810 775 
Computer equipment and software6,585 6,174 
Leasehold improvements5,436 5,256 
Construction in process1,190 859 
Financing right-of-use lease120 148 
Total property and equipment, gross17,824 16,364 
Less accumulated depreciation(10,709)(9,220)
Property and equipment, net$7,115 $7,144 
 
Depreciation expense for the three and nine months ended September 30, 2020 was $0.6 million and $1.6 million, respectively, and $0.4 million and $1.2 million for the same periods in 2019.
 
Accrued Expenses

Accrued Expenses as of September 30, 2020 and December 31, 2019 are as follows:
 
(In thousands)September 30, 2020December 31, 2019
Bonus related compensation$4,291 $5,116 
Employee related accruals2,674 1,785 
Other accrued expenses1,730 1,047 
Accrued expenses$8,695 $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 facilities include 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. Effective October 21, 2020 the Company entered into an agreement for one of its Cambridge, Massachusetts facility leases. This agreement extended the terms of the lease to expire on February 29, 2032, with monthly contractual lease payments ranging from $0.4 million to $0.6 million.

Leases with an initial term of 12 months or less are not recorded on the balance sheet and for both the three and nine months ended September 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 nine months ended September 30, 2020, the Company recognized $1.6 million and $4.5 million of operating lease expense and $1.4 million and $4.0 million for the same periods in 2019.

For both the three and nine months ended September 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 classified on the balance sheet, as of September 30, 2020 and December 31, 2019 are as follows:

(In thousands)ClassificationSeptember 30, 2020December 31, 2019
Assets
OperatingRight-of-use assets$24,796 $25,103 
FinanceProperty and equipment, net120 148 
$24,916 $25,251 
Liabilities
Current
OperatingCurrent portion of operating lease liabilities$6,102 $5,461 
FinanceOther liabilities41 41 
$6,143 $5,502 
Non-current
OperatingOperating lease liabilities$21,487 $22,242 
FinanceOther long-term liabilities74 110 
$21,561 $22,352 





7.     Stock-Based Compensation
 
Stock Option, Restricted Stock Units and Equity Incentive Plans
 
The Company has historically had various stock incentive plans and agreements that provide for the issuance of nonqualified and incentive stock options and restricted stock units as well as other equity awards. Such awards may be granted by the Company’s Board of Directors to certain of the Company’s employees, directors and consultants. 

Options granted to employees and non-employees under these plans expire no later than ten years from the date of grant. Options and restricted stock units generally become exercisable or vest over a four-year period, under a graded-vesting methodology for stock options and annually on the anniversary grant date for restricted stock units, following the date of grant.  The Company generally issues new shares upon the exercise of stock options or vesting of restricted stock units.

The 2019 Omnibus Incentive Plan (2019 Plan) was approved on May 1, 2019 and provides incentives through the grant of stock options, stock appreciation rights, restricted stock awards and restricted stock units. The exercise price of stock options granted under the 2019 Plan shall not be less than the fair market value of the Company’s common stock on the date of grant.  The 2019 Plan replaced the 1992 Stock Option Plan, the 2001 Stock Option Plan, the Amended and Restated 2004 Equity Incentive Plan, the 2009 Second Amended and Restated Omnibus Incentive Plan and the 2017 Omnibus Incentive Plan (Prior Plans), and no new grants have been granted under the Prior Plans after approval. However, the expiration or forfeiture of options previously granted under the Prior Plans will increase the number of shares available for issuance under the 2019 Plan.

The Amended and Restated 2019 Omnibus Incentive Plan (Amended and Restated 2019 Plan) was approved on April 29, 2020. The Amended and Restated 2019 Plan increased the total number of shares of the Company’s common stock reserved for issuance under the 2019 Plan by 2,400,000 shares, revised the ratio at which “full-value” awards are counted against the share reserve from 1.25 to 1.4, and extended the term of the plan to April 29, 2030.
 
As of September 30, 2020, there were 4,553,487 shares available for future grant under the Amended and Restated 2019 Plan.

Employee Stock Purchase Plan

Employees are able to purchase stock under the Vericel Corporation Employee Stock Purchase Plan (ESPP). The ESPP allows for the issuance of an aggregate of 1,000,000 shares of common stock of which 693,498 shares have been issued since the inception of the plan in 2015. Participation in this plan is available to substantially all employees. The ESPP is a compensatory plan accounted for under the expense recognition provisions of the share-based payment accounting standards. Compensation expense is recorded based on the fair market value of the options at the grant date, which corresponds to the first day of each purchase period and is amortized over the purchase period. In October 2020, employees purchased 20,591 shares resulting in proceeds from the sale of common stock of $0.3 million under the ESPP for the third quarter of 2020.

Service-Based Stock Options
 
During the three and nine months ended September 30, 2020, the Company granted service-based options to purchase common stock of 28,000 and 1,324,890, respectively, and 111,600 and 1,750,110, respectively, for the same periods in 2019.  The exercise price of the options is the fair market value per share of common stock on the grant date, and the options generally vest over four years (other than non-employee director options which vest over one year) and have a term of ten years. The Company issues new shares upon the exercise of stock options.  The weighted average grant-date fair value of service-based options granted during the three and nine months ended September 30, 2020 was $10.81 and $8.70, respectively and $13.28 and $12.77, respectively, for the same periods in 2019.

Restricted Stock Units

During the nine months ended September 30, 2020 and September 30, 2019, the Company granted 196,836 and 186,922 service-based restricted stock units, respectively. The restricted stock units vest annually over four years in equal installments commencing on the first anniversary of the grant date (other than non-employee director options which vest over one year from the grant date). The Company issues new shares upon the vesting of restricted stock units. Restricted stock awards are recorded at fair value at the date of grant, which is based on the closing share price on the grant date. Compensation expense is recorded for restricted stock units that are expected to vest based on their fair value at grant date and is amortized over the expected vesting period. The weighted average grant-date fair value of restricted stock units granted during the nine months ended



September 30, 2020 was $11.41, and $17.71 for the same period in 2019. The aggregate fair value of restricted stock units granted in the nine months ended September 30, 2020 was $2.2 million, and $3.3 million for the same period in 2019.

During the nine months ended September 30, 2020, 32,840 shares of common stock were issued upon the vesting of restricted stock units. These amounts are net of 13,872 shares, that were withheld for payment of taxes on the behalf of employees, during the nine months ended September 30, 2020.


Stock Compensation Expense
 
Non-cash stock-based compensation expense (employee stock purchase plan, service-based stock options and restricted stock units) included in cost of goods sold, research and development expenses and selling, general and administrative expenses is summarized in the following table: 
 Three Months Ended September 30,Nine Months Ended September 30,
(in thousands)2020201920202019
Cost of goods sold$481 $543 $1,541 $1,519 
Research and development458 583 1,455 1,993 
Selling, general and administrative1,736 2,159 7,823 6,583 
Total non-cash stock-based compensation expense$2,675 $3,285 $10,819 $10,095 


8. Cash Equivalents and Investments

Marketable debt securities held by the Company are classified as available-for-sale pursuant to ASC 320, Investments – Debt and Equity Securities, and carried at fair value in the accompanying condensed consolidated balance sheets on a settlement date basis. The following tables summarize the gross unrealized gains and losses of the Company’s marketable securities as of September 30, 2020 and December 31, 2019:
September 30, 2020
Gross UnrealizedEstimated Fair Value
Amortized CostGainsLossesCredit Losses
Money market funds$28,059 $ $ $ $28,059 
Commercial paper9,984    9,984 
Corporate notes11,161 25   11,186 
U.S. government securities13,764 40   13,804 
U.S. government agency bonds3,498 1   3,499 
U.S. asset-backed securities3,550 12   3,562 
$70,016 $78 $ $ $70,094 
Classified as:
Cash equivalents$28,059 
Short-term investments42,035 
$70,094 
December 31, 2019
Gross UnrealizedEstimated Fair Value
(In thousands)Amortized CostGainsLosses
Money market funds$5,381 $ $ $5,381 
Commercial paper11,892