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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: March 31, 2021 

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 Class			Trading Symbol(s)			Name of Each Exchange on Which Registered
Common Stock (No par value)			VCEL			NASDAQ

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 filer			☒			Accelerated filer			☐
Non-accelerated filer			☐			Smaller 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 April 30, 2021, 46,355,625 shares of Common Stock, no par value per share, were outstanding. 

1

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VERICEL CORPORATION

 QUARTERLY REPORT ON FORM 10-Q

 TABLE OF CONTENTS

 

						Page
			PART I - FINANCIAL INFORMATION
Item 1.			Financial Statements (Unaudited):			3
			Condensed Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020			3
			Condensed Consolidated Statements of Operations for the three months ended March 31, 2021 and 2020			4
			Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2021 and 2020			5
			Condensed Consolidated Statements of Shareholders' Equity from December 31, 2020 to March 31, 2021 and from December 31, 2019 to March 31, 2020			6
			Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020			7
			Notes to Condensed Consolidated Financial Statements			8
Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
Item 3.			Quantitative and Qualitative Disclosures About Market Risk			28
Item 4.			Controls and Procedures			28
			PART II — OTHER INFORMATION
Item 1.			Legal Proceedings			29
Item 1A.			Risk Factors			29
Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds			32
Item 3.			Defaults Upon Senior Securities			33
Item 4.			Mine Safety Disclosures			33
Item 5.			Other Information			33
Item 6.			Exhibits			34
Exhibit Index						34
Signatures						35

2

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PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements (Unaudited)

VERICEL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, amounts in thousands)

 

						March 31,						December 31,
						2021						2020
ASSETS
Current assets:
Cash and cash equivalents						$	58,154					$	33,620
Short-term investments						25,402						42,187
Accounts receivable (net of allowance for doubtful accounts of $121 and $143, respectively)						29,122						34,504
Inventory						10,322						9,356
Other current assets						4,213						3,893
Total current assets						127,213						123,560
Property and equipment, net						9,076						7,633
Restricted cash						211						211
Right-of-use assets						48,943						50,105
Long-term investments						26,021						24,099
Total assets						$	211,464					$	205,608
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable						$	8,826					$	6,755
Accrued expenses						9,965						11,293
Current portion of operating lease liabilities						4,398						4,394
Other liabilities						41						41
Total current liabilities						23,230						22,483
Operating lease liabilities						47,968						48,789
Other long-term liabilities						57						76
Total liabilities						$	71,255					$	71,348
COMMITMENTS AND CONTINGENCIES
Shareholders’ equity:
Common stock, no par value; shares authorized — 75,000; shares issued and outstanding 46,225 and 45,804, respectively						519,360						510,061
Accumulated other comprehensive income (loss)						(47)						14
Accumulated deficit						(379,104)						(375,815)
Total shareholders’ equity						140,209						134,260
Total liabilities and shareholders’ equity						$	211,464					$	205,608

 

The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements.

3

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VERICEL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, amounts in thousands, except per share amounts)

 

						Three Months Ended March 31,
						2021						2020
Product sales, net						$	33,627					$	26,678
Other revenue						941						—
Total revenue						34,568						26,678
Cost of product sales						11,583						9,922
Gross profit						22,985						16,756
Research and development						3,630						3,763
Selling, general and administrative						22,660						18,069
Total operating expenses						26,290						21,832
Loss from operations						(3,305)						(5,076)
Other income (expense):
Interest income						76						306
Interest expense						(1)						(2)
Other income						84						67
Total other income						159						371
Net loss before tax provision						(3,146)						(4,705)
Tax provision						(143)						—
Net loss						$	(3,289)					$	(4,705)
Net loss per share attributable to common shareholders (Basic and diluted)						$	(0.07)					$	(0.10)
Weighted average number of common shares outstanding (Basic and diluted)						45,984						44,924

 

The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements.

4

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VERICEL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited, amounts in thousands)

 

						Three Months Ended March 31,
						2021						2020
Net loss						$	(3,289)					$	(4,705)
Other comprehensive loss:
Unrealized gain (loss) on investments						(61)						41
Comprehensive loss						$	(3,350)					$	(4,664)

 

The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements.

5

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VERICEL CORPORATION 

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(Unaudited, amounts in thousands)

			Common Stock																		Accumulated Other Comprehensive Income (loss)						Accumulated Deficit						Total Shareholders' Equity
			Shares						Amount
BALANCE, DECEMBER 31, 2020			45,804						$	510,061											$	14					$	(375,815)					$	134,260
Net loss			—						—												—						(3,289)						(3,289)
Compensation expense related to stock options and restricted stock units granted, net of forfeitures			—						7,019												—						—						7,019
Stock option exercises			359						3,532												—						—						3,532
Shares issued under the Employee Stock Purchase Plan			14						249												—						—						249
Issuance of stock upon restricted stock unit vesting			76						—												—						—						—
Restricted stock withheld for employee tax remittance			(28)						(1,501)												—						—						(1,501)
Unrealized loss on investments			—						—												(61)						—						(61)
BALANCE, MARCH 31, 2021			46,225						$	519,360											$	(47)					$	(379,104)					$	140,209

			Common Stock																		Accumulated Other Comprehensive Income						Accumulated Deficit						Total Shareholders' Equity
			Shares						Amount
BALANCE, DECEMBER 31, 2019			44,864						$	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 exercises			57						196												—						—						196
Shares issued under the Employee Stock Purchase Plan			20						224												—						—						224
Issuance of stock upon restricted stock unit vesting			36						—																								—
Restricted stock withheld for employee tax remittance			(14)						(163)																								(163)
Unrealized gain on investments			—						—												41						—						41
BALANCE, MARCH 31, 2020			44,963						$	493,774											$	62					$	(383,384)					$	110,452

The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements.

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VERICEL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, amounts in thousands)

 

						Three Months Ended March 31,
						2021						2020
Operating activities:
Net loss						$	(3,289)					$	(4,705)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization expense						811						533
Stock compensation expense						7,019						3,768
Foreign currency translation loss						2						7
Gain on sale of fixed assets						(22)						—
Amortization of premiums and discounts on marketable securities						273						(20)
Non-cash lease cost						1,171						794
Changes in operating assets and liabilities:
Inventory						(966)						(466)
Accounts receivable						5,382						7,997
Other current assets						(320)						(549)
Accounts payable						2,174						(59)
Accrued expenses						(1,328)						(1,864)
Operating lease liabilities						(821)						(750)
Net cash provided by operating activities						10,086						4,686
Investing activities:
Purchases of investments						(10,426)						(5,676)
Sales and maturities of investments						24,955						20,135
Expenditures for property, plant and equipment						(2,343)						(717)
Net cash provided by investing activities						12,186						13,742
Financing activities:
Net proceeds from common stock issuance due to stock option exercises						3,781						420
Payments on employee's behalf for taxes related to vesting of restricted stock units						(1,501)						(97)
Other						(18)						(17)
Net cash provided by financing activities						2,262						306
Net increase in cash, cash equivalents, and restricted cash						24,534						18,734
Cash, cash equivalents, and restricted cash at beginning of period						33,831						26,978
Cash, cash equivalents, and restricted cash at end of period						$	58,365					$	45,712

 

The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements.

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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, or Vericel), 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® (autologous cultured chondrocytes on porcine collagen membrane) and Epicel® (cultured epidermal autografts).

MACI 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 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® (concentrate of proteolytic enzymes enriched in bromelain), a registration-stage biological orphan product for the 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 cellular therapies 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 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 many state, local and national governments – including those in Massachusetts and Michigan, where the Company's operations are located – have responded at times by issuing, extending and supplementing orders requiring quarantines, restrictions on travel, and the mandatory closure of certain non-essential businesses, among other actions. In the U.S., the status and application of these orders have varied on a state-by-state basis since the early days of the pandemic. Many of the restrictions have been periodically updated as infection rates in the U.S. have risen and fallen, as new virus “variants” have emerged, and as world health leaders learn more about the virus, its transmission pathway and who is most at risk. Because Vericel is deemed an essential business, the Company has been exempted from government orders requiring the closure of workplaces and the cessation of business operations.

Notwithstanding being an essential business, the Company’s business and operations were, at times, adversely impacted by the effects of COVID-19 during 2020. At the urging of the American College of Surgeons and the United States Surgeon General, hospitals, health systems and surgeons minimized, postponed, or canceled electively scheduled surgeries during the initial wave of the pandemic in the spring of 2020. 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 the Company experienced a significant increase in cancellations of scheduled MACI procedures as well as a slowdown in new MACI orders during March and April of 2020. The widespread suspension of surgical procedures impacted the Company’s business and operations during the first and second quarters of 2020. The level and degree of restriction on elective surgeries, on the ability of patients to seek treatment and on U.S. business operations generally fluctuated throughout 2020 as COVID-19 infection rates rose and fell during the summer months and into the autumn. By the first quarter of 2021, the pandemic’s effects on the Company’s MACI business had largely dissipated. Although hospitals are now better prepared for a subsequent surge in COVID-19 patients and COVID-19 vaccines have been approved and are being widely distributed in the United States, 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 were to rise again, or if new COVID-19 variants emerge which render current vaccine treatments ineffective. 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.

At the outset of the pandemic, 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 the Company’s facilities, encouraging the use of virtual employee

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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. Depending on the pandemic’s trajectory in the coming months, it may take additional actions to the extent required, or it may ease certain protective measures to the extent available data and state and local rules permit.

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 March 31, 2021, the Company had an accumulated deficit of $379.1 million, and had a net loss of $3.3 million during the three months ended March 31, 2021. The Company had cash and cash equivalents of $58.2 million and investments of $51.4 million as of March 31, 2021. The Company expects that cash from the sales of our products and 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 Condensed Consolidated Financial Statements. 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 March 31, 2021 and for the three months ended March 31, 2021 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, revenue 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. The Company bases its estimates on historical experience and on various other assumptions that it believes 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 revenue 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. The Company has 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 March 31, 2021, 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.

 

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, 2020, as filed with the SEC on February 24, 2021 (Annual Report).

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Consolidated Statement of Cash Flows

The following table presents certain supplementary cash flows information for the three months ended March 31, 2021 and 2020:

			Three Months Ended March 31,
(In thousands)			2021						2020
Supplementary Cash Flows information:
Non-cash information:
Right-of-use asset and lease liability recognized			$	—					$	326
Additions to property and equipment included in accounts payable			530						105
Restricted shares held for employee tax remittance included in accounts payable			65						66
Cash information:
Interest paid (net of interest capitalized)			$	1					$	2

						Three Months Ended March 31,
(In thousands)						2021						2020
Reconciliation of cash, cash equivalents, and restricted cash reported in the statement of financial position:
Cash and cash equivalents						$	58,154					$	45,623
Restricted cash, included in other long-term assets						211						89
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows						$	58,365					$	45,712

3. Recent Accounting Pronouncements

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 became effective for the Company on January 1, 2021 and had no material impact on its Condensed Consolidated Financial Statements.

4. Revenue

Revenue Recognition and Net Product Sales

The Company recognizes product revenue from sales of MACI biopsy kits, MACI implants, Epicel grafts and other sources following the five-step model in Accounting Standards Codification 606, Revenue Recognition.

MACI Biopsy Kits

MACI biopsy kits are sold directly to hospitals and ambulatory surgical centers 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.

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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 engages 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 revenue 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, fee schedules or based on a percentage of published rates. 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. The total allowance for uncollectible consideration as of March 31, 2021 and December 31, 2020 was $6.1 million and $5.3 million, respectively. 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 $0.2 million increase or decrease in the revenue recognized for the three months ended March 31, 2021.

Changes in estimates of the transaction price are recorded through revenue in the period in which such change occurs. During the three months ended March 31, 2021 and March 31, 2020, changes in estimates related to prior period sales resulted in an increase to revenue of $0.5 million and $1.2 million, respectively. The changes in estimates recorded during the three months ended March 31, 2021 and March 31, 2020, were primarily due to completion of the billing claims process for implants that occurred in 2020 or prior. 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.

Additionally, potential credit risk exposure has been evaluated for the Company’s accounts receivable in accordance with ASC 326, Financial Instruments - Credit Losses. The loss percentage is calculated by pooling account receivables containing similar risk characteristics and applying collectability forecasts which are derived from current and historical economic and financial information. The loss percentage calculated was applied to accounts receivables as of March 31, 2021 and December 31, 2020. The allowance related to the potential impacts of COVID-19 on accounts receivable from third-party insurers, government payers, hospitals and patients as of December 31, 2020 included less than $0.1 million, and no additional allowance was recorded during the three months ended March 31, 2021.

Epicel

The Company sells Epicel directly to hospitals and burn centers 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 revenue 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.

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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) committed to procure NexoBrid directly from MediWound, under an emergency use authorization. As a result, during 2020, BARDA accepted the first shipments of NexoBrid, per the agreement between BARDA and MediWound. The Company recognizes revenue based on a percentage of gross profits for sales of NexoBrid to BARDA upon delivery, at which time BARDA is in control of the product. As of March 31, 2021, the Company did not take title to the product or hold a direct contract or distribution agreement with BARDA. During the three months ended March 31, 2021, the Company recognized $0.9 million of revenue. No revenue related to the procurement by BARDA was recognized for the three months ended March 31, 2020. See note 11 for further information.

Revenue by Product and Customer

The following table and description below shows the products from which the Company generated its revenue:

						Three Months Ended March 31,
Revenue by product (in thousands)						2021						2020
MACI implants and kits
Implants based on contracted rate sold through a specialty pharmacy (a)						$	13,206					$	11,338
Implants subject to third party reimbursement sold through a specialty pharmacy (b)						4,280						3,730
Implants sold direct based on contracted rates (c)						4,466						3,109
Implants sold direct subject to third party reimbursement (d)						849						436
Biopsy kits - direct bill						519						466
Change in estimates related to prior periods (e)						477						1,207
Epicel
Direct bill (hospital)						9,830						6,392
Total product revenue						$	33,627					$	26,678
NexoBrid revenue (f)						941						—
Total net revenue						$	34,568					$	26,678
(a) Represents implants sold through Orsini and AllCare 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 revenue based on a percentage of gross profits for sales of NexoBrid to BARDA, pursuant to the license agreement between the Company and MediWound.

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Concentration of Credit Risk

The Company's total Epicel revenue concentration from a customer for the three months ended March 31, 2021 was 14% and 12% for the same period in 2020. For the Company's total MACI revenue, and MACI and Epicel accounts receivable balances there were no customers for the three months ended March 31, 2021 or March 31, 2020, with a concentration greater than 10%.

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5. Selected Balance Sheet Components

 

Inventory

Inventory as of March 31, 2021 and December 31, 2020:

 

(In thousands)						March 31, 2021						December 31, 2020
Raw materials						$	9,409					$	8,775
Work-in-process						884						537
Finished goods						29						44
Inventory						$	10,322					$	9,356

 

Property and Equipment

Property and Equipment, net as of March 31, 2021 and December 31, 2020:

 

(In thousands)						March 31, 2021						December 31, 2020
Machinery and equipment						$	3,701					$	3,672
Furniture, fixtures and office equipment						810						809
Computer equipment and software						6,967						6,846
Leasehold improvements						5,594						5,560
Construction in process						4,071						2,021
Financing right-of-use lease						102						111
Total property and equipment, gross						21,245						19,019
Less accumulated depreciation						(12,169)						(11,386)
Property and equipment, net						$	9,076					$	7,633

 

Depreciation expense for the three months ended March 31, 2021 was $0.8 million and $0.5 million for the same period in 2020.

 

Accrued Expenses

Accrued Expenses as of March 31, 2021 and December 31, 2020 are as follows:

 

(In thousands)						March 31, 2021						December 31, 2020
Bonus related compensation						$	2,605					$	5,721
Employee related accruals						4,300						3,482
Other accrued expenses						3,060						2,090
Accrued expenses						$	9,965					$	11,293

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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 present value of 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-of-use assets and liabilities, on a discounted basis on the balance sheet. Effective October 21, 2020 the Company entered into an agreement with one of its Cambridge, Massachusetts facility leases. The 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. The agreement also provides a tenant improvement allowance of approximately $4.3 million, available through December 31, 2023.

Leases with an initial term of 12 months or less are not recorded on the balance sheet. During the three months ended March 31, 2021 and 2020, lease expense of less than $0.1 million was recorded related to short-term leases. During the three months ended March 31, 2021, the Company recorded $0.2 million of leasehold improvements funded by tenant improvement allowances available under the lease agreements. The contribution toward the cost of tenant improvements is recorded as a reduction of the operating lease assets. For the three months ended March 31, 2021, the Company recognized $1.9 million of operating lease expense and $1.4 million for the same period in 2020. During the three months ended March 31, 2021 and 2020, 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 March 31, 2021 and December 31, 2020 are as follows:

(In thousands)						Classification						March 31, 2021						December 31, 2020
Assets
Operating						Right-of-use assets						$	48,943					$	50,105
Finance						Property and equipment, net						102						111
												$	49,045					$	50,216
Liabilities
Current
Operating						Current portion of operating lease liabilities						$	4,398					$	4,394
Finance						Other liabilities						41						41
												$	4,439					$	4,435
Non-current
Operating						Operating lease liabilities						$	47,968					$	48,789
Finance						Other long-term liabilities						57						76
												$	48,025					$	48,865

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.

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The Amended and Restated 2019 Omnibus Incentive Plan (2019 Plan) was approved on April 29, 2020 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 of the 2019 Plan. 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.

As of March 31, 2021, there were 2,942,648 shares available for future grant under the 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 720,228 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 April 2021, employees purchased 11,776 shares resulting in proceeds from the sale of common stock of $0.3 million under the ESPP for the first quarter of 2021.

Service-Based Stock Options

 

During the three months ended March 31, 2021 and 2020, the Company granted service-based options to purchase common stock of 1,337,955 and 1,186,140, respectively. 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 months ended March 31, 2021 and 2020 was $32.02 and $8.64, respectively.

Restricted Stock Units

During the three months ended March 31, 2021 and 2020, the Company granted 214,113 and 186,136 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 units 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 three months ended March 31, 2021 was $50.81, and $11.24 for the same period in 2020. The aggregate fair value of restricted stock units granted in the three months ended March 31, 2021 and 2020 was $10.9 million and $2.1 million, respectively.

During the three months ended March 31, 2021 and 2020, 47,857 and 22,340 shares, respectively of common stock were issued upon the vesting of restricted stock units. These amounts are net of 28,240 and 13,872 shares, respectively that were withheld for payment of taxes on the behalf of employees. For the three months ended March 31, 2021 and 2020 the total fair value of restricted stock awards vested was $4.1 million and $0.4 million, respectively. The total fair value of restricted stock units withheld for payment of taxes during the three months ended March 31, 2021 and 2020 was $1.5 million and $0.2 million, respectively.

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 product sales, research and development expenses and selling, general and administrative expenses is summarized in the following table: 

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						Three Months Ended March 31,
(in thousands)						2021						2020
Cost of product sales						$	911					$	493
Research and development						863						513
Selling, general and administrative						5,245						2,762
Total non-cash stock-based compensation expense						$	7,019					$	3,768

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 March 31, 2021 and December 31, 2020:

						March 31, 2021
												Gross Unrealized																		Estimated Fair Value
						Amortized Cost						Gains						Losses						Credit Losses
Money market funds						$	15,598					$	—					$	—					$	—					$	15,598
Commercial paper						9,998						—						—						—						9,998
Corporate notes						40,082						—						(47)						—						40,035
U.S. government securities						1,500						—						—						—						1,500
U.S. government agency bonds						1,074						—						—						—						1,074
U.S. asset-backed securities						1,815						—						—						—						1,815
						$	70,067					$	—					$	(47)					$	—					$	70,020
Classified as:
Cash equivalents																														$	18,597
Short-term investments																														25,402
Long-term investments																														26,021
																														$	70,020

						December 31, 2020
												Gross Unrealized																		Estimated Fair Value
(In thousands)						Amortized Cost						Gains						Losses						Credit Losses
Money market funds						$	3,698					$	—					$	—					$	—					$	3,698
Commercial paper						8,993						1						—						—						8,994
Corporate notes						35,917						—						—						(6)						35,911
U.S. government securities						12,828						14						—						—						12,842
U.S. government agency bonds						5,000						1						—						—						5,001
U.S. asset-backed securities						3,534						4						—						—						3,538
						$	69,970					$	20					$	—					$	(6)					$	69,984
Classified as:
Cash equivalents																														$	3,698
Short-term investments																														42,187
Long-term investments																														24,099
																														$	69,984

Investments classified as short-term have maturities of less than one year. Investments classified as long-term are those which: (i) have a maturity of greater than one year, and (ii) the Company does not intend to liquidate within the next twelve months, although these funds are available for use and, therefore, are classified as available-for-sale. The Company’s investment strategy is to buy short-duration marketable securities with a high credit rating. As of March 31, 2021 and December 31, 2020, all marketable securities held by the Company had remaining contractual maturities of three years or less.

Unrealized gains are included as a component of accumulated other comprehensive income in the condensed consolidated balance sheets and statements of stockholders’ equity and a component of total comprehensive income (loss) in the condensed consolidated statements of comprehensive loss, until realized. Unrealized losses are evaluated for impairment under ASC 326, Financial Instruments - Credit Losses, to determine if the impairment is credit-related or non credit-related. Credit-related impairment is recognized as an allowance on the balance sheet with a corresponding adjustment to earnings, and non credit-

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related impairment is recognized in other comprehensive income (loss), net of taxes. There were no material realized losses on marketable securities during the three months ended March 31, 2021. There have been no impairments of the Company’s assets measured and carried at fair value during the three months ended March 31, 2021 or March 31, 2020, respectively.

9. Fair Value Measurements

 

The Company’s fair value measurements are classified and disclosed in one of the following three categories:

 

•Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

•Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability;

•Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

 

There was no movement between Level 1 and Level 2 or between Level 2 and Level 3 from December 31, 2020 to March 31, 2021. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The commercial paper, corporate notes, U.S. government securities, U.S. government agency bonds and U.S. asset-backed securities are classified as Level 2 as they were valued based upon quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets. The following table summarizes the valuation of the Company’s financial instruments that are measured at fair value on a recurring basis:

						March 31, 2021																								December 31, 2020
												Fair value measurement category																								Fair value measurement category
(In thousands)						Total						Level 1						Level 2						Level 3						Total						Level 1						Level 2						Level 3
Assets:
Money market funds						$	15,598					$	15,598					$	—					$	—					$	3,698					$	3,698					$	—					$	—
Commercial paper						9,998						—						9,998						—						8,994						—						8,994						—
Corporate notes						40,035						—						40,035						—						35,911												35,911						—
U.S. government securities						1,500						—						1,500						—						12,842												12,842						—
U.S. government agency bonds						1,074						—						1,074						—						5,001												5,001						—
U.S. asset-backed securities						1,815						—						1,815						—						3,538												3,538						—
						$	70,020					$	15,598					$	54,422					$	—					$	69,984					$	3,698					$	66,286					$	—

The fair values of the cash equivalents and marketable securities are based on observable market prices.

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10.  Net Loss Per Common Share

The following reflects the net loss attributable to common shareholders and share data used in the basic and diluted earnings per share computations using the two class method:

						Three Months Ended March 31,
(Amounts in thousands, except per share amounts)						2021						2020
Numerator:
Net loss						$	(3,289)					$	(4,705)
Denominator:
Weighted-average common shares outstanding (basic and diluted)						45,984						44,924
Net loss per share attributable to common shareholders (basic and diluted)						$	(0.07)					$	(0.10)
Anti-dilutive shares excluded from the calculation of diluted earnings per share(a) (amounts in millions):
Stock options						6.2						6.2
Restricted stock units						0.4						0.3
(a) Common equivalent shares are not included in the diluted per share calculation where the effect of their inclusion would be anti-dilutive.

11. NexoBrid License and Supply Agreements

On May 6, 2019, the Company entered into exclusive license and supply agreements with MediWound to commercialize NexoBrid and any improvements to NexoBrid in North America. NexoBrid is a topically-administered biological product that enzymatically removes nonviable burn tissue, or eschar, in patients with deep partial and full-thickness thermal burns. On June 30, 2020, the Company announced MediWound's submission of a biologics license application (BLA) to the U.S. Food and Drug Administration (FDA) seeking the approval of NexoBrid. Subsequently, on September 16, 2020, the Company announced that the FDA has accepted the BLA for review and has assigned a Prescription Drug User Fee Act (PDUFA) target date of June 29, 2021. Pursuant to the terms of the license agreement, if the BLA is approved, MediWound will transfer the BLA to the Company and the Company will market NexoBrid in the U.S. Both MediWound and the Company, under the supervision of a Central Steering Committee comprised of members of both companies will continue to guide the development of NexoBrid in North America. 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.

In May 2019, the Company paid MediWound $17.5 million in consideration for the license. The $17.5 million upfront payment was recorded to research and development expense during 2019, as the license was considered in process research and development. The Company is also obligated to pay MediWound $7.5 million, which is contingent upon U.S. regulatory approval of the BLA for NexoBrid and up to $125 million contingent upon meeting certain sales milestones, subsequent to approval. The first sales milestone of $7.5 million would be triggered when annual net sales of NexoBrid or improvements to it in North America exceed $75 million. As of March 31, 2021, the milestone payments were not yet probable and therefore, not considered a liability. The Company also will pay MediWound tiered royalties on net sales ranging from mid-high single-digit to mid-teen percentages, subject to customary reductions, following approval. The Company also entered into a supply agreement with MediWound under which MediWound will manufacture NexoBrid for the Company on a unit price basis which may be increased based on a published index. MediWound is obligated to supply the Company with NexoBrid for sale in North America on an exclusive basis for the first five years of the term of the supply agreement. After the exclusivity period or upon supply failure, the Company will be permitted to establish an alternate source of supply.

BARDA has committed to procure NexoBrid directly from MediWound under an emergency use authorization, and under such commitment the Company will receive a percentage of gross profit for sales directly to BARDA. If BARDA procures NexoBrid directly from the Company, the Company will pay a percentage of gross profits to MediWound on initial committed amounts and a royalty on any additional BARDA purchases of NexoBrid beyond the initial committed amount. As of March 31, 2021, the Company did not hold a direct contract or distribution agreement with BARDA. During 2020, BARDA accepted the first shipments of NexoBrid for emergency use preparedness per the agreement between BARDA and

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MediWound. During the three months ended March 31, 2021, the Company recognized $0.9 million of revenue. No revenue related to the procurement by BARDA was recognized for three months ended March 31, 2020.

12. Commitments and Contingencies

 

The Company's purchase commitments consist of minimum purchase amounts of materials used in the Company's cell manufacturing process to manufacture its marketed cell therapy products. In addition, the Company also pays for usage of an offsite warehouse space. In February 2021, the terms of the operating agreement were extended through March 31, 2027. The Company records rent expense related to this agreement on a straight-line basis over the remaining term.

Future minimum payments related to the Company's contractual obligations are as follows:

												Payments Due by Period
Contractual Obligations (in thousands)						Total						April 1, 2021 to December 31, 2021						2022						2023						2024						2025						More than 5 Years
Purchase commitments						$	9,504					$	8,853					$	651					$	—					$	—					$	—					$	—
Warehouse Operating Agreement						4,302						677						896						642						642						642						803
Total						$	13,806					$	9,530					$	1,547					$	642					$	642					$	642					$	803

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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® 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® 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. In 2020, MediWound submitted to the FDA a BLA seeking the approval of NexoBrid for eschar removal (debridement) in adults with deep partial-thickness and/or full-thickness thermal burns. The FDA subsequently accepted the BLA for filing and has assigned a Prescription Drug User Fee Act (PDUFA) target date of June 29, 2021. See "Risk Factors - NexoBrid’s approval in the United States for the treatment of severe burns may be delayed, and it may not be approved for use in the United States and other North American markets."

COVID-19

The pandemic caused by the spread of a novel strain of coronavirus (COVID-19) has created 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 many state, local and national governments – including those in Massachusetts and Michigan, where our operations are located – have responded at times by issuing, extending and supplementing orders requiring quarantines, restrictions on travel, and the mandatory closure of certain non-essential businesses, among other actions. In the U.S., the status and application of these orders have varied on a state-by-state basis since the early days of the pandemic. Many of the restrictions have been periodically updated as infection rates in the U.S. have risen and fallen, as new virus “variants” have emerged, and as world health leaders learn more about the virus, its transmission pathway and who is most at risk. Because Vericel is deemed an essential business, the Company has been exempted from government orders requiring the closure of workplaces and the cessation of business operations.

Notwithstanding being an essential business, the Company’s business and operations were, at times, adversely impacted by the effects of COVID-19 during 2020. At the urging of the American College of Surgeons and the United States Surgeon General, hospitals, health systems and surgeons minimized, postponed, or canceled electively scheduled surgeries during the initial wave of the pandemic in the spring of 2020. 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 the Company experienced a significant increase in cancellations of scheduled MACI procedures as well as a slowdown in new MACI orders during March and April of 2020. The widespread suspension of surgical procedures impacted the Company’s business and operations during the first and second quarters of 2020. The level and degree of restriction on elective surgeries, on the ability of patients to seek treatment and on U.S. business operations generally fluctuated throughout 2020 as COVID-19 infection rates rose and fell during the summer months and into the autumn. By the first quarter of 2021, the pandemic’s effects on the Company’s MACI business had largely dissipated. Although hospitals are now better prepared for a subsequent surge in COVID-19 patients and COVID-19 vaccines have been approved and are being widely distributed in the United States, 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 were to rise again, or if new COVID-19 variants emerge which render current vaccine treatments ineffective.

Because Epicel is used almost exclusively in an emergent setting by burn centers and surgeons throughout the country, Epicel revenue and procedure volumes have been less affected by the pandemic. Nevertheless, large burns and burn admissions can be affected by restrictions on human activity resulting from more severe government lockdown orders. Epicel procedure volumes did experience a slow-down during the second quarter of 2020, however, the reduction was less pronounced than that observed with MACI. Further reductions could be observed in the future, based on the degree of restrictions imposed.

At the outset of the pandemic, 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 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

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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 pandemic evolves and may take additional actions to the extent required. Depending on the pandemic’s trajectory in the coming months, we may take additional actions to the extent required, or we may ease certain protective measures to the extent available data and state and local rules permit.

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 six (6) days and established shipping shelf life of three (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 48 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.

We believe it is possible that we could experience variable impacts on our business, should there be a 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 levels, including the availability of COVID-19 vaccines, shelter-in-place orders, social distancing measures, travel bans and restrictions, and business and government shutdowns, may again 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 revenue of our products in 2021 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, following regulatory approval. As previously mentioned, MediWound has submitted a BLA to the FDA seeking commercial approval of NexoBrid. On September 16, 2020, we announced that the FDA accepted the BLA for review and has assigned a PDUFA target date of June 29, 2021.

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 the date of this report, we currently have 76 MACI sales representatives to enable the sales force to reach our target audience. 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 that 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 months ended March 31, 2021 and 2020, net revenue for MACI was $23.8 million and $20.3 million, respectively.

 

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Epicel

 

Epicel is a permanent skin replacement for deep dermal or full-thickness burns greater than or equal to 30% of 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 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 seven (7) account managers and four (4) burn clinical specialists, overseen by a senior sales director. During the three months ended March 31, 2021 and 2020, net revenue for Epicel was $9.8 million and $6.4 million, respectively.

NexoBrid

Our portfolio also includes NexoBrid, a registration-stage, topically-administered biological product that enzymatically removes nonviable burn tissue, or eschar, in patients with deep partial and full-thickness thermal burns. On June 30, 2020, we announced MediWound's submission of a BLA to the FDA seeking the approval of NexoBrid. Subsequently, on September 16, 2020, we announced that the FDA accepted the BLA for review and assigned a PDUFA target date of June 29, 2021. See "Risk Factors - NexoBrid’s approval in the United States for the treatment of severe burns may be delayed, and it may not be approved for use in the United States and other North American markets." 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, if the BLA is approved, MediWound will transfer the BLA to Vericel and Vericel will market NexoBrid in the U.S. Both MediWound and Vericel, under the supervision of a Central Steering Committee comprised of members of both companies will continue to guide development of NexoBrid in North America. Under our license agreement with MediWound, NexoBrid is being manufactured for BARDA prior to approval by the FDA under an emergency use authorization. During the three months ended March 31, 2021, net revenue of $0.9 million associated with delivery of NexoBrid to BARDA was recorded. No revenue related to the procurement of BARDA was recognized for three months ended March 31, 2020.

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Results of Operations

 

Net Loss

 

Our net loss for the three months ended March 31, 2021 and 2020 totaled $3.3 million and $4.7 million, respectively.

						Three Months Ended March 31,
(In thousands)						2021						2020
Net revenue						$	34,568					$	26,678
Cost of product sales						11,583						9,922