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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, 2022
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 November 4, 2022, 47,222,987 shares of Common Stock, no par value per share, were outstanding. 

1

Table of Contents
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.
2

Table of Contents

PART I - FINANCIAL INFORMATION
 

Item 1. Financial Statements (Unaudited)

VERICEL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, amounts in thousands)

 September 30,December 31,
 20222021
ASSETS  
Current assets:  
Cash and cash equivalents$65,216 $68,330 
Short-term investments45,724 35,068 
Accounts receivable (net of allowance for doubtful accounts of $115 and $40, respectively)
34,296 37,437 
Inventory16,729 13,381 
Other current assets4,410 4,246 
Total current assets166,375 158,462 
Property and equipment, net15,918 13,308 
Restricted cash 211 
Right-of-use assets42,628 45,720 
Long-term investments21,739 25,687 
Other long-term assets1,357 317 
Total assets$248,017 $243,705 
LIABILITIES AND SHAREHOLDERS’ EQUITY  
Current liabilities:  
Accounts payable$8,113 $9,016 
Accrued expenses13,948 14,045 
Current portion of operating lease liabilities4,902 2,950 
Other current liabilities41 41 
Total current liabilities27,004 26,052 
Operating lease liabilities43,176 47,147 
Other long-term liabilities 44 
Total liabilities70,180 73,243 
COMMITMENTS AND CONTINGENCIES
Shareholders’ equity:  
Common stock, no par value; shares authorized — 75,000; shares issued and outstanding 47,201 and 46,880, respectively
584,900 553,902 
Accumulated other comprehensive loss(1,146)(154)
Accumulated deficit(405,917)(383,286)
Total shareholders’ equity177,837 170,462 
Total liabilities and shareholders’ equity$248,017 $243,705 

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

3

Table of Contents
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,
 2022202120222021
Product sales, net$38,326 $33,718 $111,004 $106,025 
Other revenue225 788 667 2,568 
Total revenue38,551 34,506 111,671 108,593 
Cost of product sales13,318 12,408 40,132 36,600 
Gross profit25,233 22,098 71,539 71,993 
Research and development5,046 4,284 14,698 12,363 
Selling, general and administrative26,975 22,775 79,984 71,625 
Total operating expenses32,021 27,059 94,682 83,988 
Loss from operations(6,788)(4,961)(23,143)(11,995)
Other income (expense):   
Interest income342 44 578 163 
Interest expense(105)(1)(143)(3)
Other income (expense)(5)(13)98 44 
Total other income232 30 533 204 
Loss before income taxes(6,556)(4,931)(22,610)(11,791)
Income tax expense21  21 215 
Net loss$(6,577)$(4,931)$(22,631)$(12,006)
Net loss per common share:
Basic$(0.14)$(0.11)$(0.48)$(0.26)
Diluted$(0.14)$(0.11)$(0.48)$(0.26)
Weighted-average common shares outstanding:
Basic47,182 46,669 47,096 46,355 
Diluted47,182 46,669 47,096 46,355 

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

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VERICEL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited, amounts in thousands)

 Three Months Ended September 30,Nine Months Ended September 30,
 2022202120222021
Net loss$(6,577)$(4,931)$(22,631)$(12,006)
Other comprehensive loss:
Unrealized loss on investments(291) (992)(37)
Comprehensive loss$(6,868)$(4,931)$(23,623)$(12,043)

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

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VERICEL CORPORATION 
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited, amounts in thousands)

Common StockAccumulated Other Comprehensive LossAccumulated DeficitTotal Shareholders’ Equity
SharesAmount
BALANCE, DECEMBER 31, 202146,880 $553,902 $(154)$(383,286)$170,462 
Net loss— — — (7,091)(7,091)
Stock-based compensation expense— 9,531 — — 9,531 
Stock option exercises1251,155 — — 1,155 
Shares issued under the Employee Stock Purchase Plan9310 — — 310 
Issuance of stock for restricted stock unit vesting108 — — — — 
Restricted stock withheld for employee tax remittance(41)(1,423)— — (1,423)
Unrealized loss on investments— — (459)— (459)
BALANCE, MARCH 31, 202247,081 $563,475 $(613)$(390,377)$172,485 
Net loss— — — (8,963)(8,963)
Stock-based compensation expense— 10,808 — — 10,808 
Stock option exercises32 428 — — 428 
Shares issued under the Employee Stock Purchase Plan10 318 — — 318 
Issuance of stock for restricted stock unit vesting19 — — — — 
Restricted stock withheld for employee tax remittance(1)(18)— — (18)
Unrealized loss on investments— — (242)— (242)
BALANCE, JUNE 30, 202247,141 $575,011 $(855)$(399,340)$174,816 
Net loss— — — (6,577)(6,577)
Stock-based compensation expense— 9,104 — — 9,104 
Stock option exercises41 498 — — 498 
Shares issued under the Employee Stock Purchase Plan15 331 — — 331 
Issuance of stock for restricted stock unit vesting6 — — — — 
Restricted stock withheld for employee tax remittance(2)(44)— — (44)
Unrealized loss on investments— — (291)— (291)
BALANCE, SEPTEMBER 30, 202247,201 $584,900 $(1,146)$(405,917)$177,837 


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Common StockAccumulated Other Comprehensive Income (Loss)Accumulated DeficitTotal Shareholders’ Equity
SharesAmount
BALANCE, DECEMBER 31, 202045,804 $510,061 $14 $(375,815)$134,260 
Net loss— — — (3,289)(3,289)
Stock-based compensation expense— 7,019 — — 7,019 
Stock option exercises359 3,532 — — 3,532 
Shares issued under the Employee Stock Purchase Plan14 249 — — 249 
Issuance of stock for restricted stock unit vesting76 — — — — 
Restricted stock withheld for employee tax remittance(28)(1,501)— — (1,501)
Unrealized loss on investments— — (61)— (61)
BALANCE, MARCH 31, 202146,225 $519,360 $(47)$(379,104)$140,209 
Net loss— — — (3,786)(3,786)
Stock-based compensation expense— 10,866 — — 10,866 
Stock option exercises330 3,531 — — 3,531 
Shares issued under the Employee Stock Purchase Plan13 309 — — 309 
Issuance of stock for restricted stock unit vesting12 — — — — 
Restricted stock withheld for employee tax remittance(1)(61)— — (61)
Unrealized gain on investments— — 24 — 24 
BALANCE, JUNE 30, 202146,579 $534,005 $(23)$(382,890)$151,092 
Net loss— — — (4,931)(4,931)
Stock-based compensation expense— 8,596 — — 8,596 
Stock option exercises176 1,676 — — 1,676 
Shares issued under the Employee Stock Purchase Plan9 404 — — 404 
Issuance of stock for restricted stock unit vesting4 — — — — 
Restricted stock withheld for employee tax remittance(1)(57)— — (57)
BALANCE, SEPTEMBER 30, 202146,767 $544,624 $(23)$(387,821)$156,780 

The accompanying notes to 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)

 Nine Months Ended September 30,
 20222021
Operating activities:  
Net loss$(22,631)$(12,006)
Adjustments to reconcile net loss to net cash flows from operating activities:  
Depreciation and amortization expense2,942 2,185 
Stock-based compensation expense29,443 26,481 
Amortization of premiums and discounts on marketable securities305 737 
Amortization of debt issuance costs36  
Non-cash lease cost3,120 3,420 
Other21 17 
Changes in operating assets and liabilities:  
Inventory(3,348)(3,703)
Accounts receivable3,141 5,594 
Other current assets(164)(793)
Accounts payable(37)(672)
Accrued expenses(97)(361)
Operating lease liabilities(2,019)(2,410)
Net cash provided by operating activities10,712 18,489 
Investing activities:  
Purchases of investments(43,950)(49,375)
Sales and maturities of investments35,944 50,913 
Expenditures for property and equipment(6,471)(6,924)
Net cash used in investing activities(14,477)(5,386)
Financing activities:  
Net proceeds from common stock issuance 3,040 9,701 
Debt issuance costs(1,076) 
Payments on employee’s behalf for taxes related to vesting of restricted stock unit awards(1,485)(1,619)
Other(39)(252)
Net cash provided by financing activities440 7,830 
Net (decrease) increase in cash, cash equivalents, and restricted cash(3,325)20,933 
Cash, cash equivalents, and restricted cash at beginning of period68,541 33,831 
Cash, cash equivalents, and restricted cash at end of period$65,216 $54,764 

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VERICEL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited, amounts in thousands)


Nine Months Ended September 30,
20222021
Supplemental disclosure of cash flow information:
Non-cash information:
Right-of-use asset and lease liability recognized$137 $45 
Additions to property and equipment included in accounts payable482 85 
Restricted stock held for employee tax remittance included in accounts payable 57 

As of September 30,
20222021
Reconciliation of amounts within the condensed consolidated balance sheets:
Cash and cash equivalents$65,216 $54,553 
Restricted cash 211 
Total cash, cash equivalents, and restricted cash at end of period$65,216 $54,764 


The accompanying notes to 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 U.S., 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®, a registration-stage biological orphan product designed 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.

The Company is subject to risks common to companies in the life sciences industry including, but not limited to, development by the Company or its competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, commercialization of existing and new products, and compliance with U.S. Food and Drug Administration (“FDA”) regulations and approval requirements, as well as the ability to grow the Company’s business through appropriate commercial strategies.

COVID-19

In March 2020, the World Health Organization declared the spread of a novel strain of coronavirus (“COVID-19”) to be a pandemic. This pandemic has contributed to an economic downturn on a global scale, as well as significant volatility in the financial markets. Since the pandemic’s inception, there has been significant volatility in our results of operations on a quarterly basis due to the widespread and periodic cancellation or delay of elective MACI surgical procedures throughout the U.S., staffing shortages and our ability to access customers.

At the outset of the pandemic, the Company put in place a comprehensive workplace protection plan, which instituted protective measures in response to the spread of the COVID-19 virus. Vericel’s workplace protection plan has closely followed guidance issued by the Centers for Disease Control and Prevention (“CDC”) and has complied with applicable federal and state law. To date, Vericel has been successful in sustaining its operations and providing MACI and Epicel to patients in need. The Company continues to review its policies and procedures regularly, including its workplace protection plan, as the pandemic evolves and the Company may take additional actions to the extent required.

The Company continues to manufacture MACI and Epicel and is maintaining a significant safety stock of all key raw materials. Vericel does not expect that current global supply chain interruptions will impact its ongoing manufacturing operations. Additionally, although the Company has not experienced material shipping delays, 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 adversely impact the Company’s business. Currently, the Company is not aware of COVID-19 related impacts on its distributors, operations or third-party service providers’ ability to manage patient cases.

The Company believes that a resurgence of COVID-19 because of emerging variants or other factors could result in additional disruptions that could impact our business and operations in the future, including intermittent restrictions on the ability of the Company’s personnel to travel and access customers for selling, marketing, training and case support and product development feedback, delays in approvals by regulatory bodies, delays in product development efforts, and additional government requirements or other incremental mitigation efforts that may further impact the Company’s capacity to manufacture, sell and support the use of our products.

The War in Ukraine

The ongoing war between Russia and Ukraine and the related sanctions and other penalties imposed by countries across the globe against Russia are continuing to create substantial uncertainty in the global economy and have contributed to heightened inflation and supply chain disruptions. While the Company does not have operations in Russia or Ukraine and does not have
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exposure to distributors, or third-party service providers in Russia or Ukraine, it is unable to predict the ultimate impact that these actions will have on the global economy or on its financial condition, results of operations, and cash flows as of the date of these unaudited condensed consolidated financial statements.

Liquidity

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 September 30, 2022, the Company had an accumulated deficit of $405.9 million and had a net loss of $22.6 million during the nine months ended September 30, 2022. The Company had cash and cash equivalents of $65.2 million and investments of $67.5 million as of September 30, 2022. The Company expects that cash from the sales of its products and existing cash, cash equivalents, investments, and available borrowing capacity will be sufficient to support the Company’s current operations through at least 12 months from the issuance of these condensed consolidated financial statements. The effects of the COVID-19 pandemic continue to evolve, however. To the extent the U.S. experiences a worsening in COVID-19 infections or additional virus variants emerge that result in more serious disease or limit the effectiveness of existing vaccines, subsequent healthcare measures – to include the postponement or cessation of elective and other surgical procedures – may cause the Company to experience a reduction in business and resulting revenue. This, consequently, may result in irrecoverable losses of customers and significantly impact the Company’s long-term liquidity, potentially requiring the Company to engage in layoffs, furloughs and/or reductions in salaries. The Company also may need to access additional capital; however, the Company may not be able to obtain additional 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 additional financing may adversely affect the holdings or the rights of the Company’s shareholders.

2. Basis of Presentation

The accompanying condensed consolidated financial statements of Vericel 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 the Company’s 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 the COVID-19 pandemic and the actions taken to continue to contain or treat COVID-19, as well as the economic impact on its customers. The Company has made estimates of the impact of the COVID-19 pandemic within these financial statements and there may be changes to those estimates in future periods. Actual results may differ from these estimates. As of September 30, 2022, the Company has not recorded impairments to investments, inventory, other current assets or long-lived assets as a result of the COVID-19 pandemic.

The condensed consolidated balance sheet as of December 31, 2021 has been derived from the audited consolidated financial statements at that date, but does not include all the information and notes required by U.S. GAAP for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on February 24, 2022 (“Annual Report”).

Recent Accounting Pronouncements

No new accounting standards were adopted during the nine months ended September 30, 2022. The Company considers the applicability and impact of any recent Accounting Standards Update (“ASU”) issued by the Financial Accounting Standards Board (“FASB”). Based on the assessment, the ASU’s were determined to be either not applicable or are expected to have minimal impact on the Company's condensed consolidated financial statements.

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3. 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 by the Company from the customer following biopsy. 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 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 Group, Inc.(“DMS”) for patients treated at military treatment facilities. 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 past payer precedents. 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 calculated through the use of forecasts that are based on current and historical economic and financial information. This loss percentage was applied to the accounts receivables as of September 30, 2022. The total allowance for uncollectible consideration as of September 30, 2022 and December 31, 2021 was $6.3 million and $7.0 million, respectively. Changes to the estimate of the amount of consideration that will not be collected could have a material impact on the revenue recognized. A 50 basis points change to the estimated uncollectible percentage could result in an approximately $0.3 million decrease or increase in the revenue recognized for the nine months ended September 30, 2022.

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 periods are shown in the Revenue by Product and Customer table below and relate primarily to changes in the initial expected reimbursement or collection expectation upon completion of the billing claims process for MACI implants that occurred in a prior year.

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
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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.

NexoBrid

The Company entered into exclusive license and supply agreements with MediWound in May 2019, pursuant to which MediWound will manufacture and supply NexoBrid on a unit price basis, which may be increased pursuant to the terms of the agreements. Additionally, since 2020 the U.S. Biomedical Advanced Research and Development Authority (“BARDA”) has been procuring NexoBrid from MediWound for use as a medial countermeasure in the event of a mass casualty emergency in the U.S. involving thermal burns. That quarterly procurement of NexoBrid by BARDA under its agreement with MediWound completed during the third quarter of 2022, although BARDA holds an option to procure additional quantities of NexoBrid for emergency response preparedness in the future. As of September 30, 2022, the Company did not hold a direct contract or distribution agreement with BARDA, or take title to the product procured by BARDA. 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.

Revenue by Product and Customer

The following table and descriptions below show the products from which the Company generated its revenue:
 Three Months Ended September 30,Nine Months Ended September 30,
Revenue by product (in thousands) 2022202120222021
MACI implants and kits
Implants based on contracted rates sold through a specialty pharmacy (a)
$19,377 $15,149 $50,718 $46,547 
Implants subject to third-party reimbursement sold through a specialty pharmacy (b)
4,207 3,463 12,015 11,357 
Implants sold direct based on contracted rates (c)
6,457 3,895 17,846 12,876 
Implants sold direct subject to third-party reimbursement (d)
898 644 2,331 1,901 
Biopsy kits - direct bill498 577 1,565 1,647 
Change in estimates related to prior periods (e)
(428)153 1,142 (125)
Total MACI implants and kits31,009 23,881 85,617 74,203 
Epicel
Direct bill (hospital)7,317 9,837 25,387 31,822 
NexoBrid revenue (f)
225 788 667 2,568 
Total revenue$38,551 $34,506 $111,671 $108,593 
(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 publicly available rates, fee schedules or past payer precedents.
(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 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 and relate to changes to the initial expected reimbursement or collection expectation upon completion of the billing claims process. The change in estimates is a result of additional information, changes in collection expectations 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 (see note 11).

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Concentration of Credit Risk

For the three and nine months ended September 30, 2022, there were no customers with a total revenue concentration greater than 10%. For the three and nine months ended September 30, 2021, the Company’s total revenue concentration from an Epicel customer was 9% and 11%, respectively. For the Company’s total accounts receivable balances, there were no customers as of September 30, 2022 or December 31, 2021, with a concentration greater than 10%.

4. Selected Balance Sheet Components

Inventory

Inventory as of September 30, 2022 and December 31, 2021:

(In thousands)September 30, 2022December 31, 2021
Raw materials$15,797 $12,676 
Work-in-process883 644 
Finished goods49 61 
Total inventory$16,729 $13,381 

Property and Equipment

Property and Equipment, net as of September 30, 2022 and December 31, 2021:

(In thousands)September 30, 2022December 31, 2021
Machinery and equipment$4,697 $4,522 
Furniture, fixtures and office equipment1,710 1,551 
Computer equipment and software8,112 7,769 
Leasehold improvements13,674 10,617 
Construction in process4,943 3,097 
Financing right-of-use lease46 74 
Total property and equipment, gross33,182 27,630 
Less accumulated depreciation(17,264)(14,322)
Total property and equipment, net$15,918 $13,308 

Depreciation expense for the three and nine months ended September 30, 2022 was $1.0 million and $2.9 million, respectively, and $0.7 million and $2.2 million, respectively, for the same periods in 2021.
 
Accrued Expenses

Accrued Expenses as of September 30, 2022 and December 31, 2021 are as follows:

(In thousands)September 30, 2022December 31, 2021
Bonus related compensation$5,472 $6,305 
Employee related accruals2,897 3,616 
Insurance reimbursement-related liabilities5,417 3,973 
Other accrued expenses162 151 
Total accrued expenses$13,948 $14,045 


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5. 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.

On January 28, 2022, the Company entered into a lease agreement (the “Burlington Lease”) to lease approximately 126,000 square feet of to-be-constructed manufacturing, laboratory and office space in Burlington, Massachusetts (the “Premises”). Once constructed, the Premises will serve as the Company’s new corporate headquarters and primary manufacturing facility.

The term of the Burlington Lease is currently expected to begin in 2023, 12 months following the landlord’s commencement of construction of the core and shell of the building in which the Premises are located (the “Commencement Date”). The Company’s obligation to pay rent for the Premises will begin on the earlier of: 13 months from the Commencement Date; or the date on which the Company first occupies the Premises to conduct operations (the “Rent Commencement Date”). The initial term of the Lease is 144 months following the Rent Commencement Date. The Company has a one-time option to extend the term of the Lease for an additional 10 years, exercisable under certain conditions and at a market rate determined in accordance with the Burlington Lease.

The annual base rent of the Burlington Lease is initially $57 per square foot per year, subject to annual increases of 2.5%. Monthly contractual payments are expected to range from $0.6 million to $0.8 million. Additionally, the Company is responsible for reimbursing the landlord for the Company’s share of the Premises’ property taxes and certain other operating expenses. The Burlington Lease also provides for a tenant improvement allowance from the landlord in an amount equal to $200 per square foot of the Premises, or approximately $25.1 million in total, towards the design and construction of certain tenant improvements made to the Premises, subject to the terms set forth in the Burlington Lease.

The Company is not involved in the initial construction of the core and shell of the building and will record the lease liability and right-of-use asset on its condensed consolidated balance sheet when the construction is substantially completed and it obtains control of the Premises, which is currently expected to be on or around the Commencement Date.

In January 2022, in connection with the execution of the Burlington Lease, the Company issued a letter of credit collateralized by cash deposits of approximately $6.0 million. Subsequent to the execution of the Revolving Credit Agreement on July 29, 2022, the letter of credit is issued under the sub-facility limit of the Revolving Credit Agreement. Such letter of credit shall be reduced to approximately $4.2 million and $1.8 million at the conclusion of the third and sixth lease years, respectively, provided certain conditions set forth in the Burlington Lease are satisfied.

For the three and nine months ended September 30, 2022 and 2021, lease expense of less than $0.1 million was recorded related to short-term leases. For the three and nine months ended September 30, 2022, the Company recognized $1.7 million and $5.2 million, respectively, of operating lease expense and $1.8 million and $5.5 million, respectively, for the same periods in 2021. For the three and nine months ended September 30, 2022 and 2021, the Company recognized less than $0.1 million of financing lease expense.

Operating and finance lease assets and liabilities are as follows:

(In thousands)ClassificationSeptember 30, 2022December 31, 2021
Assets
OperatingRight-of-use assets$42,628 $45,720 
FinanceProperty and equipment, net46 73 
Total leased assets$42,674 $45,793 
Liabilities
Current
OperatingCurrent portion of operating lease liabilities$4,902 $2,950 
FinanceOther current liabilities41 41 
Non-current
OperatingOperating lease liabilities43,176 47,147 
FinanceOther long-term liabilities 44 
Total leased liabilities$48,119 $50,182 
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6. Stock-Based Compensation

The Vericel Corporation 2022 Omnibus Incentive Plan (“2022 Plan”) was approved on April 27, 2022, 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 2022 Plan shall not be less than the fair market value of the Company’s common stock on the date of grant. The 2022 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, the 2017 Omnibus Incentive Plan, and the Amended and Restated 2019 Omnibus Incentive Plan (“Prior Plans”), and no new grants have been granted under the Prior Plans after approval of the 2022 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 2022 Plan.

Stock Compensation Expense

Non-cash stock-based compensation expense (service-based stock options, restricted stock units and employee stock purchase plan) is summarized in the following table:
 Three Months Ended September 30,Nine Months Ended September 30,
(in thousands)2022202120222021
Cost of product sales$840 $1,114 $2,992 $3,313 
Research and development1,273 1,126 4,143 3,222 
Selling, general and administrative6,991 6,356 22,308 19,946 
Total non-cash stock-based compensation expense$9,104 $8,596 $29,443 $26,481 

Service-Based Stock Options

During the three and nine months ended September 30, 2022, the Company granted service-based options to purchase common stock of 42,890 and 1,206,539, respectively, and 189,882 and 1,663,954, respectively, for the same periods in 2021. The weighted-average grant-date fair value of service-based options granted during the three and nine months ended September 30, 2022 was $15.58 and $20.55 per option, respectively, and $35.65 and $33.03, respectively, for the same periods in 2021.

Restricted Stock Units

During the three and nine months ended September 30, 2022, the Company granted 16,734 and 399,502 restricted stock units, respectively, and 22,310 and 263,364, respectively, for the same periods in 2021. The weighted-average grant-date fair value of restricted stock units granted during the three and nine months ended September 30, 2022 was $27.52 and $34.35 per unit, respectively, and $54.35 and $52.19, respectively, for the same periods in 2021.

7. 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, 2022 and December 31, 2021:

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September 30, 2022
Gross UnrealizedEstimated Fair Value
(In thousands)Amortized CostGainsLossesCredit Losses
Commercial paper$14,736 $ $(95)$ $14,641 
Corporate notes50,893  (1,048) 49,845 
U.S. government agency bonds2,979  (3) $2,977 
$68,608 $ $(1,146)$ $67,463 
Classified as:
Short-term investments$45,724 
Long-term investments21,739 
$67,463 
December 31, 2021
Gross UnrealizedEstimated Fair Value
(In thousands)Amortized CostGainsLossesCredit Losses
Commercial paper$10,243 $ $(12)$ $10,231 
Corporate notes50,666  (142) 50,524 
$60,909 $ $(154)$ $60,755 
Classified as:
Short-term investments$35,068 
Long-term investments25,687 
$60,755 

As of September 30, 2022 and December 31, 2021, all marketable securities held by the Company had remaining contractual maturities of three years or less. There have been no impairments of the Company’s assets measured and carried at fair value during the three and nine months ended September 30, 2022 and 2021.

8. 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).

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, and U.S. government agency bonds 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. There were no transfers into or out of Level 3 from December 31, 2021 to September 30, 2022.

The following table summarizes the valuation of the Company’s financial instruments that are measured at fair value on a recurring basis:

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 September 30, 2022December 31, 2021
  Fair Value Measurement Category Fair Value Measurement Category
(In thousands)TotalLevel 1Level 2Level 3TotalLevel 1Level 2Level 3
Assets:
Money market funds$21,676 $21,676 $ $ $1,258 $1,258 $ $ 
Commercial paper (a)
20,931