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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, 2023
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 2, 2023, 47,724,543 shares of Common Stock, no par value per share, were outstanding. 

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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):
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II — OTHER INFORMATION
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
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PART I - FINANCIAL INFORMATION
 

Item 1. Financial Statements (Unaudited)

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

 September 30,December 31,
 20232022
ASSETS  
Current assets:  
Cash and cash equivalents$60,473 $51,067 
Restricted cash23,088  
Short-term investments44,870 68,471 
Accounts receivable (net of allowance for doubtful accounts of $44 and $47, respectively)
39,729 46,539 
Inventory12,621 15,986 
Other current assets5,430 4,803 
Total current assets186,211 186,866 
Property and equipment, net30,216 15,837 
Intangible assets, net7,031 7,500 
Right-of-use assets73,294 41,535 
Long-term investments20,231 19,962 
Other long-term assets1,142 1,303 
Total assets$318,125 $273,003 
LIABILITIES AND SHAREHOLDERS’ EQUITY  
Current liabilities:  
Accounts payable$15,051 $16,930 
Accrued expenses13,628 16,190 
Current portion of operating lease liabilities7,267 4,302 
Other current liabilities 41 
Total current liabilities35,946 37,463 
Operating lease liabilities77,734 43,268 
Other long-term liabilities65  
Total liabilities113,745 80,731 
COMMITMENTS AND CONTINGENCIES (Note 12)
Shareholders’ equity:  
Common stock, no par value; shares authorized — 75,000; shares issued and outstanding — 47,684 and 47,253, respectively
621,013 593,245 
Accumulated other comprehensive loss(463)(978)
Accumulated deficit(416,170)(399,995)
Total shareholders’ equity204,380 192,272 
Total liabilities and shareholders’ equity$318,125 $273,003 

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 OPERATIONS
(Unaudited, amounts in thousands, except per share amounts)
 
 Three Months Ended September 30,Nine Months Ended September 30,
 2023202220232022
Product sales, net$45,581 $38,326 $132,520 $111,004 
Other revenue 225  667 
Total revenue45,581 38,551 132,520 111,671 
Cost of product sales14,973 13,318 45,451 40,132 
Gross profit30,608 25,233 87,069 71,539 
Research and development5,676 5,046 16,141 14,698 
Selling, general and administrative29,989 26,975 90,123 79,984 
Total operating expenses35,665 32,021 106,264 94,682 
Loss from operations(5,057)(6,788)(19,195)(23,143)
Other income (expense):   
Interest income1,262 342 3,196 578 
Interest expense(150)(105)(444)(143)
Other (expense) income(1)(5)(18)98 
Total other income1,111 232 2,734 533 
Loss before income taxes(3,946)(6,556)(16,461)(22,610)
Income tax (benefit) expense(286)21 (286)21 
Net loss$(3,660)$(6,577)$(16,175)$(22,631)
Net loss per common share:
Basic and diluted$(0.08)$(0.14)$(0.34)$(0.48)
Weighted-average common shares outstanding:
Basic and diluted47,649 47,182 47,537 47,096 

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,
 2023202220232022
Net loss$(3,660)$(6,577)$(16,175)$(22,631)
Other comprehensive loss:
Unrealized gain (loss) on investments158 (291)515 (992)
Comprehensive loss$(3,502)$(6,868)$(15,660)$(23,623)

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 Gain (Loss)Accumulated DeficitTotal Shareholders’ Equity
SharesAmount
BALANCE, DECEMBER 31, 202247,253 $593,245 $(978)$(399,995)$192,272 
Net loss— — — (7,495)(7,495)
Stock-based compensation expense— 8,731 — — 8,731 
Stock option exercises132 2,009 — — 2,009 
Shares issued under the Employee Stock Purchase Plan11 216 — — 216 
Issuance of stock for restricted stock unit vesting183 — — — — 
Restricted stock withheld for employee tax remittance(72)(2,097)— — (2,097)
Unrealized gain on investments— — 342 — 342 
BALANCE, MARCH 31, 202347,507 $602,104 $(636)$(407,490)$193,978 
Net loss— — — (5,020)(5,020)
Stock-based compensation expense— 8,761 — — 8,761 
Stock option exercises68 889 — — 889 
Shares issued under the Employee Stock Purchase Plan18 384 — — 384 
Issuance of stock for restricted stock unit vesting26 — — — — 
Restricted stock withheld for employee tax remittance(3)(79)— — (79)
Unrealized gain on investments— — 15 — 15 
BALANCE, JUNE 30, 202347,616 $612,059 $(621)$(412,510)$198,928 
Net loss— — — (3,660)(3,660)
Stock-based compensation expense— 7,924 — — 7,924 
Stock option exercises50 787 — — 787 
Shares issued under the Employee Stock Purchase Plan13 329 — — 329 
Issuance of stock for restricted stock unit vesting8 — — — — 
Restricted stock withheld for employee tax remittance(3)(86)— — (86)
Unrealized gain on investments— — 158 — 158 
BALANCE, SEPTEMBER 30, 202347,684 $621,013 $(463)$(416,170)$204,380 


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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 exercises125 1,155 — — 1,155 
Shares issued under the Employee Stock Purchase Plan9 310 — — 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 

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,
 20232022
Operating activities:  
Net loss$(16,175)$(22,631)
Adjustments to reconcile net loss to net cash flows from operating activities:  
Depreciation and amortization expense3,483 2,942 
Stock-based compensation expense25,416 29,443 
Amortization of premiums and discounts on marketable securities(788)305 
Amortization of debt issuance costs161 36 
Non-cash lease costs4,291 3,120 
Other18 21 
Changes in operating assets and liabilities:  
Inventory3,365 (3,348)
Accounts receivable6,810 3,141 
Other current assets(627)(164)
Accounts payable360 (37)
Accrued expenses(2,562)(97)
Operating lease liabilities1,408 (2,019)
Other non-current assets and liabilities, net65  
Net cash provided by operating activities25,225 10,712 
Investing activities:  
Purchases of investments(36,254)(43,950)
Sales and maturities of investments60,890 35,944 
Expenditures for property and equipment(12,178)(6,471)
Purchases of intangible assets(7,500) 
Net cash provided by (used in) investing activities4,958 (14,477)
Financing activities:  
Net proceeds from common stock issuance 4,614 3,040 
Debt issuance costs (1,076)
Payments on employee’s behalf for taxes related to vesting of restricted stock unit awards(2,262)(1,485)
Other(41)(39)
Net cash provided by financing activities2,311 440 
Net increase (decrease) in cash, cash equivalents, and restricted cash32,494 (3,325)
Cash, cash equivalents, and restricted cash at beginning of period51,067 68,541 
Cash, cash equivalents, and restricted cash at end of period$83,561 $65,216 

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


Nine Months Ended September 30,
20232022
Supplemental disclosure of cash flow information:
Non-cash information:
Right-of-use asset and lease liability recognized$36,022 $137 
Additions to property and equipment included in accounts payable5,568 482 

Nine Months Ended September 30,
20232022
Reconciliation to amounts within the condensed consolidated balance sheets:
Cash and cash equivalents$60,473 $65,216 
Restricted cash23,088  
Total cash, cash equivalents, and restricted cash at end of period$83,561 $65,216 


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 three commercial-stage products in the U.S., MACI®, Epicel® and NexoBrid®.

MACI (autologous cultured chondrocytes on porcine collagen membrane) is an autologous cellularized scaffold product indicated for the repair of symptomatic, single or multiple full-thickness cartilage defects of the knee with or without bone involvement in adults. Epicel (cultured epidermal autografts) is a permanent skin replacement for the treatment of adult and pediatric patients with deep-dermal or full-thickness burns comprising greater than or equal to 30 percent of total body surface area (“TBSA”). The Company also holds an exclusive license from MediWound Ltd. (“MediWound”) to commercialize NexoBrid (anacaulase-bcdb) (“NexoBrid”) in North America. On December 28, 2022, the U.S. Food and Drug Administration (“FDA”) approved a Biologics License Application (“BLA”) for NexoBrid, granting a license for commercial use in the U.S. On September 20, 2023, the Company announced the U.S. commercial availability of NexoBrid and, subsequently, has commenced commercial sales of the product. NexoBrid is a topically-administered biological product containing proteolytic enzymes and is indicated for the removal of eschar in adults with deep partial-thickness and/or full thickness 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 and specialty biologics 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 FDA regulations and approval requirements, as well as the ability to grow the Company’s business through appropriate commercial strategies.

COVID-19

On May 11, 2023, the U.S. Department of Health and Human Services announced the expiration of the federal Public Health Emergency for COVID-19. At this juncture, the pandemic’s effects on the Company’s business and results of operations have largely moderated and we have seen a return to more normal operations. Should a resurgence of COVID-19 occur, or new virus variants emerge, it could result in additional disruptions that could impact the Company’s business and operations in the future, including U.S. hospital or surgical center staffing shortages, periodic cancellation or delay of elective MACI surgical procedures, intermittent restrictions on the ability of Company personnel to travel and access customers for selling, marketing, training, 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 its 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 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 condensed consolidated financial statements.

The War in Israel and Gaza

In May 2019, the Company entered into exclusive license and supply agreements with MediWound, under which MediWound manufactures and supplies NexoBrid to the U.S. market on a unit price basis. MediWound develops and manufactures NexoBrid, in part, at its facilities in Yavne, Israel.


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The Company continues to monitor the ongoing conflict in Israel and is in close communication with MediWound leadership. MediWound’s NexoBrid manufacturing operations are continuing and, as of the date of this disclosure, MediWound does not anticipate a disruption to its ongoing supply of commercial NexoBrid to the United States. To the extent the war between Israel and Hamas intensifies or expands to include additional countries or militant groups in the region and MediWound’s facilities in Israel are damaged or destroyed, travel to and from Israel is halted or inhibited, or significant key MediWound operational personnel are called to military service, MediWound’s ability to continue to supply NexoBrid to the U.S. market could be disrupted.

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, 2023, the Company had an accumulated deficit of $416.2 million and had a net loss of $16.2 million during the nine months ended September 30, 2023. The Company had cash and cash equivalents of $60.5 million and investments of $65.1 million as of September 30, 2023. 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. If revenues decline for a sustained period, the Company may need to access additional capital; however, the Company may not be able to obtain additional financing on acceptable terms or at all. The terms of any additional financing may adversely affect the holdings or the rights of the Company’s shareholders.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash, cash equivalents and investments in marketable debt securities. The Company may maintain deposits in financial institutions in excess of the insurance coverage offered by the Federal Deposit Insurance Corporation, the loss of which could have a negative effect on our operations and liquidity. The Company believes that it is not exposed to significant credit risk as its deposits, including cash and cash equivalents, are held at multiple high credit quality financial institutions. The Company has not experienced any losses on these deposits; however no assurances can be provided that there will not be losses experienced in the future. The Company believes that the market risk arising from its holdings of these financial instruments is mitigated based on the fact that many of these securities are either government-backed or of high credit rating.

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 (“U.S. 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 condensed consolidated balance sheet as of December 31, 2022 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, 2022, as filed with the SEC on February 23, 2023 (“Annual Report”).

Recent Accounting Pronouncements

No new accounting standards were adopted during the nine months ended September 30, 2023. The Company considers the applicability and impact of any recent Accounting Standards Updates (“ASUs”) issued by the Financial Accounting Standards Board (“FASB”). Based on the assessment, the ASUs 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 Product Sales, Net

The Company recognizes product revenue from sales of MACI biopsy kits, MACI implants, Epicel grafts and NexoBrid 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 each specialty pharmacy a fee in each instance when it dispenses MACI for use in treating a patient. Both Orsini and AllCare perform collection activities to collect payment from customers. In addition, the Company sells MACI directly to hospitals pursuant to an agreed upon purchase order and to a distributor, DMS Pharmaceutical Group, Inc. (“DMS”) at a contracted rate for the treatment of patients at military facilities throughout the U.S. The Company engages a third party to provide services in connection with a patient support program to manage patient cases and to ensure that complete and correct billing information is provided to the insurers and hospitals.

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 that 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 through its specialty pharmacies, 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 accounts receivable 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, 2023. The total allowance for uncollectible consideration as of September 30, 2023 and December 31, 2022 was $4.9 million and $6.1 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, 2023.

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 period.

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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.

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, beginning in 2020 the U.S. Biomedical Advanced Research and Development Authority (“BARDA”) procured quantities of NexoBrid from MediWound, for use as a medical countermeasure in the event of a mass casualty emergency in the U.S. involving thermal burns. The initial, quarterly, procurement of NexoBrid by BARDA under its agreement with MediWound completed during the third quarter of 2022. The Company recognized revenue based on a percentage of gross profits for sales of NexoBrid to BARDA upon delivery, at which time BARDA was in control of the product. As of September 30, 2023, the Company did not hold a direct contract or distribution agreement with BARDA, or take title to the product procured by BARDA.

On May 9, 2023, MediWound announced BARDA’s award of additional funding under the parties’ existing agreement, $3.0 million of which will support the replacement of NexoBrid, previously procured for emergency response preparedness, which has since expired. Pursuant to the terms of the Company’s license agreement with MediWound, the Company would recognize revenue based on a percentage of gross profits, minus a percentage of net sales, on any sales of NexoBrid directly to BARDA upon delivery, pursuant to this additional award.

Additionally, on December 28, 2022, the FDA approved a BLA for NexoBrid, granting a license for commercial use in the U.S. NexoBrid is a topically-administered biological product containing proteolytic enzymes and is indicated for the removal of eschar in adults with deep partial-thickness and/or full thickness thermal burns. On September 20, 2023, the Company announced the U.S. commercial availability of NexoBrid and, subsequently, has commenced commercial sales of the product.

The Company sells NexoBrid to specialty distributors. These customers subsequently resell NexoBrid to hospitals and burn centers. Product revenue is recorded net of reserves for specialty distributor fees, prompt payment discounts and allowances for returns, as applicable. The Company recognizes product revenue from sales of NexoBrid when the specialty distributors take control of the product, which typically occurs upon delivery to the specialty distributors.

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Revenue by Product and Customer

The following table and descriptions below show the products from which the Company generated its revenue for the periods indicated:
 Three Months Ended September 30,Nine Months Ended September 30,
Revenue by product (in thousands) 2023202220232022
MACI implants and kits
Implants based on contracted rate sold through a specialty pharmacy (a)
$22,598 $19,377 $68,220 $50,718 
Implants subject to third party reimbursement sold through a specialty pharmacy (b)
5,030 4,207 13,526 12,015 
Implants sold direct based on contracted rates (c)
5,797 6,457 19,932 17,846 
Implants sold direct subject to third-party reimbursement (d)
1,432 898 2,974 2,331 
Biopsy kits - direct bill457 498 1,517 1,565 
Change in estimates related to prior periods (e)
2,275 (428)1,945 1,142 
Total MACI implants and kits37,589 31,009 108,114 85,617 
Epicel
Direct bill (hospital)7,394 7,317 23,808 25,387 
NexoBrid (f)
598 225 598 667 
Total revenue$45,581 $38,551 $132,520 $111,671 
(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 and AllCare whereby such specialty pharmacy does not have a direct contract with the underlying payer, and are subject to third-party reimbursement. 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 expectations 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 commercial revenue for the three and nine months ended September 30, 2023. 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, in the three and nine months ended September 30, 2022 (see Note 11).

4. Selected Balance Sheet Components

Inventory

Inventory consisted of the following:
(In thousands)September 30, 2023December 31, 2022
Raw materials$11,436 $15,101 
Work-in-process967 832 
Finished goods218 53 
Total inventory$12,621 $15,986 
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Property and Equipment

Property and Equipment, net consisted of the following:

(In thousands)September 30, 2023December 31, 2022
Machinery and equipment$5,562 $5,041 
Furniture, fixtures and office equipment1,710 1,710 
Computer equipment and software8,365 8,224 
Leasehold improvements14,901 13,689 
Construction in process20,883 5,438 
Financing right-of-use lease9 37 
Total property and equipment, gross51,430 34,139 
Less accumulated depreciation(21,214)(18,302)
Total property and equipment, net$30,216 $15,837 

Depreciation expense for the three and nine months ended September 30, 2023 was $1.0 million and $3.0 million, respectively, and $1.0 million and $2.9 million, respectively, for the same periods in 2022.

Intangible Assets

Intangible assets, net consisted of the following:

September 30, 2023December 31, 2022
(In thousands)Useful Life (in years)Amortization MethodCostAccumulated AmortizationNetCostAccumulated AmortizationNet
NexoBrid license12Straight-line$7,500 $(469)$7,031 $7,500 $ $7,500 

Amortization expense for the three and nine months ended September 30, 2023 was $0.2 million and $0.5 million, respectively.

Future amortization expense of intangible assets as of September 30, 2023 is estimated to be as follows:

(In thousands)Amount
Remainder of 2023$156 
2024625 
2025625 
2026625 
2027625 
Thereafter4,375 
Total$7,031 

Accrued Expenses

Accrued Expenses consisted of the following:
(In thousands)September 30, 2023December 31, 2022
Bonus-related compensation$6,622 $7,132 
Employee-related accruals2,629 3,101 
Insurance reimbursement-related liabilities3,949 5,030 
Other accrued expenses428 927 
Total accrued expenses$13,628 $16,190 

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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, and other computer-related equipment.

With respect to the Ann Arbor facility, in March 2023, the Company entered into an amendment to that lease extending its term until April 30, 2025. Monthly contractual payments are expected to range from $17,000 to $18,000.

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.

In April 2023, in connection with the Burlington Lease, the Company entered into a construction escrow agreement (the “Construction Escrow Agreement”) with the facility’s landlord and an escrow agent. Pursuant to the terms of the Construction Escrow Agreement, in April 2023, the Company began funding, into an escrow account maintained by the escrow agent, a portion of its share of tenant improvement construction costs at the facility, which are designated as restricted cash. At the same time, the facility’s landlord began funding a portion of its tenant improvement allowance through a separate escrow account. To date, the Company has transferred into its escrow account 50% of its required cost amount, or approximately $28.3 million. The Company anticipates funding the remaining 50% of its required cost amount in early 2024.

The term of the Burlington Lease began on June 1, 2023, (the “Commencement Date”), when the Company gained control of and commenced tenant improvement work at the Premises. 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 $24.4 million. The tenant improvement allowance will be used towards the design and construction of the tenant improvements made to the Premises, subject to the terms set forth in the Burlington Lease.

The Company was not involved in the initial construction of the core and shell of the building. On June 1, 2023, the Company gained control of the Premises to begin construction of its tenant improvements. As such, the corresponding right-of-use asset and lease liability of $35.5 million was recorded on the Company’s condensed consolidated balance sheet. As there was not an implicit rate within the lease available, the Company estimated the incremental borrowing rate of 7.7%, based on the rate of interest the Company would have to pay to borrow a similar amount on a collateralized basis over a similar term. The lease term of 13.1 years does not include the lease extension option, as the Company is not reasonably certain to exercise that option.

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 (see Note 8, “Revolving Credit Agreement” for further details), 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, 2023 and 2022, lease expense of less than $0.1 million was recorded related to short-term leases. For the three and nine months ended September 30, 2023, the Company recognized $3.2 million and $7.1 million, respectively, of operating lease expense and $1.7 million and $5.2 million, respectively, for the same period in 2022. For the three and nine months ended September 30, 2023 and 2022, the Company recognized less than $0.1 million of financing lease expense.


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Operating and finance lease assets and liabilities are as follows:

(In thousands)ClassificationSeptember 30, 2023December 31, 2022
Assets
OperatingRight-of-use assets$73,294 $41,535 
FinanceProperty and equipment, net9 37 
Total leased assets$73,303 $41,572 
Liabilities
Current
OperatingCurrent portion of operating lease liabilities$7,267 $4,302 
FinanceOther current liabilities 41 
Non-current
OperatingOperating lease liabilities$77,734 $43,268 
Total leased liabilities$85,001 $47,611 

Future minimum lease payments under non-cancellable leases as of September 30, 2023 are as follows:
(In thousands)Operating Leases
Remainder of 2023$1,789 
202410,743 
202513,677 
202613,969 
202714,351 
Thereafter103,229 
Total lease payments$157,758 
Less: tenant improvement allowances(23,121)
Less: interest(49,636)
Total leased liabilities$85,001 

6. 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:

September 30, 2023
Gross UnrealizedEstimated Fair Value
(In thousands)Amortized CostGainsLossesCredit Losses
Commercial paper$8,612 $ $(4)$ $8,608 
Corporate notes38,036  (367) 37,669 
U.S. government agency bonds18,914  (90) 18,824 
$65,562 $ $(461)$ $65,101 
Classified as:
Short-term investments$44,870 
Long-term investments20,231 
$65,101 

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December 31, 2022
Gross UnrealizedEstimated Fair Value
(In thousands)Amortized CostGainsLossesCredit Losses
Commercial paper$15,707 $ $(101)$ $15,606 
Corporate notes52,159  (831) 51,328 
U.S. government agency bonds21,545  (46) 21,499 
$89,411 $ $(978)$ $88,433 
Classified as:
Short-term investments$68,471 
Long-term investments19,962 
$88,433 

As of September 30, 2023 and December 31, 2022, 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, 2023 and 2022.

7. 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, U.S. government securities, 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, 2022 to September 30, 2023.

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

 September 30, 2023December 31, 2022
  Fair value measurement category Fair value measurement category
(In thousands)TotalLevel 1Level 2Level 3TotalLevel 1Level 2Level 3
Assets:
Money market funds$9,050 $9,050 $ $ $1,262 $1,262 $ $ 
Commercial paper (a)
15,071  15,071  15,606  15,606  
Corporate notes37,669  37,669  51,328  51,328  
U.S. government securities (a)
23,881  23,881      
U.S. government agency bonds (a)
18,824  18,824  27,976  27,976  
$104,495 $9,050 $95,445 $ $96,172 $1,262 $94,910 $ 

(a) Approximately $6.5 million of commercial paper and $23.9 million of U.S. government securities as of September 30, 2023, and approximately $6.5 million of U.S. government agency bonds as of December 31, 2022 had an original maturity of 90 days or less and were recorded as a cash equivalent.

The fair values of the cash equivalents and marketable securities are based on observable market prices. The Company’s accounts receivables, accounts payable and accrued expenses are valued at cost, which approximates fair value.

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8. Revolving Credit Agreement

On July 29, 2022, the Company, as borrower, entered into a $150.0 million five-year senior secured revolving credit agreement by and among the Company, the other loan parties thereto, the lenders party thereto, and JPMorgan Chase Bank, N.A., as the administrative agent (the “Revolving Credit Agreement”). The Revolving Credit Agreement includes a $15.0 million sub-facility for the issuance of letters of credit, of which the Company is utilizing approximately $6.2 million. Amounts available under the Revolving Credit Agreement are for the working capital needs and other general corporate purposes of the Company. The Company incurred and capitalized approximately $1.1 million of debt issuance costs related to the Revolving Credit Agreement.

Outstanding borrowings under the Revolving Credit Agreement bear interest, with pricing based from time to time at the Company’s election at (i) the Secured Overnight Financing Rate (“SOFR”) plus 0.10% plus a spread ranging from 1.25% to 2.50% as determined by the Company’s Total Net Leverage Ratio (as defined in the Revolving Credit Agreement) or (ii) the alternative base rate (as defined in the Revolving Credit Agreement) plus a spread ranging from 0.25% to 1.50% as determined by the Company’s Total Net Leverage Ratio. The Revolving Credit Agreement also includes a commitment fee, which ranges from 0.20% to 0.25% as determined by the Company’s Total Net Leverage Ratio.

The Company is permitted to voluntarily prepay borrowings under the Revolving Credit Agreement, in whole or in part, without premium or penalty. On any business day on which the total amount of outstanding Revolving Loans (as defined in the Revolving Credit Agreement) and letters of credit exceeds the total Revolving Commitments (as defined in the Revolving Credit Agreement), the Company must prepay the Revolving Loans in an amount equal to such excess. As of September 30, 2023, there are no outstanding borrowings under the Revolving Credit Agreement.

The Revolving Credit Agreement contains a number of affirmative, negative, reporting and financial covenants, in each case subject to certain exceptions and materiality thresholds. The Revolving Credit Agreement requires the Company to be in quarterly compliance, measured on a trailing four quarter basis, with a financial covenant. The maximum Total Net Leverage Ratio (as defined in the Revolving Credit Agreement is 3.50 to 1.00. The Company may elect to increase the maximum Total Net Leverage Ratio to 4.00 to 1.00 for a period of four consecutive quarters in connection with a Permitted Acquisition (as defined in the Revolving Credit Agreement).

The Revolving Credit Agreement contains usual and customary restrictions on the ability of the Company and its subsidiaries to: (i) incur additional indebtedness (ii) create liens; (iii) consolidate, merge, sell or otherwise dispose of all, or substantially all, of its assets; (iv) sell certain assets; (v) pay dividends on, repurchase or make distributions in respect of capital stock or make other restricted payments; (vi) make certain investments; (vii) repay subordinated indebtedness prior to stated maturity; and (viii) enter into certain transactions with its affiliates.

Obligations under the Revolving Credit Agreement are secured by first priority liens over substantially all of the assets of Vericel Corporation, excluding certain subsidiaries (subject to customary exclusions set forth in the Revolving Credit Agreement and the other transaction documents).

9. 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 (collectively the “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:
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 Three Months Ended September 30,Nine Months Ended September 30,
(in thousands)2023202220232022
Cost of product sales$660 $840 $2,341 $2,992 
Research and development892 1,273 2,862 4,143 
Selling, general and administrative6,372 6,991 20,213 22,308 
Total non-cash stock-based compensation expense$7,924 $9,104 $25,416 $29,443 

Service-Based Stock Options

During the three and nine months ended September 30, 2023, the Company granted service-based options to purchase common stock of 58,500 and 594,217, respectively, and 42,890 and 1,206,539, respectively, for the same periods in 2022. The weighted-average grant-date fair value of service-based options granted during the three and nine months ended September 30, 2023 was $22.36 and $18.80 per option, respectively, and $15.58 and $20.55, respectively, for the same periods in 2022.

Restricted Stock Units

During the three and nine months ended September 30, 2023, the Company granted 23,520 and 552,841 restricted stock units, respectively, and 16,734 and 399,502, respectively, for the same periods in 2022. The weighted-average grant-date fair value of restricted stock units granted during the three and nine months ended September 30, 2023 was $36.51 and $30.24 per unit, respectively, and $27.52 and $34.35, respectively, for the same periods in 2022.

10. Net Loss Per Common Share

A summary of net loss per common share is presented below:
 Three Months Ended September 30,Nine Months Ended September 30,
(Amounts in thousands, except per share amounts)2023202220232022
Net loss$(3,660)$(6,577)$(16,175)$(22,631)
   
Basic weighted-average common shares outstanding47,649 47,182 47,537 47,096 
Effect of dilutive stock options and restricted stock units    
Diluted weighted-average common shares outstanding47,649 47,182 47,537 47,096 
Basic loss per common share$(0.08)$(0.14)$(0.34)$(0.48)
Diluted loss per common share$(0.08)$(0.14)$(0.34)$(0.48)
Anti-dilutive shares excluded from diluted net loss per common share:
Stock options6,859 6,536 6,859 6,536 
Restricted stock units943 633 943 633 

11. NexoBrid License and Supply Agreements

On May 6, 2019, the Company entered into exclusive license and supply agreements with MediWound to commercialize NexoBrid in North America. The FDA subsequently approved a BLA for the product on December 28, 2022. On September 20, 2023, the Company announced the U.S. commercial availability of NexoBrid and, subsequently, has commenced commercial sales of the product. NexoBrid is a topically-administered biological product, which contains proteolytic enzymes and is indicated for the removal of eschar in adults with deep partial-thickness and/or full thickness thermal burns.

Pursuant to the terms of the license agreement, following the FDA approval of NexoBrid, MediWound transferred the BLA to Vericel effective February 20, 2023. Both MediWound and Vericel, 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 (the “Central Steering Committee”). NexoBrid is approved in the European Union (“EU”) and other international markets and has been designated as an orphan biologic in the U.S., EU and other international markets.

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In May 2019, the Company paid MediWound $17.5 million in consideration for the license, which was recorded as research and development expense during 2019. Pursuant to the terms of the license agreement, in February 2023, the Company tendered to MediWound a $7.5 million regulatory milestone payment following the FDA’s BLA approval of NexoBrid on December 28, 2022. The Company recorded the $7.5 million milestone payment for the licensing rights to commercially sell NexoBrid in the U.S., as an intangible asset (see Note 4, “Selected Balance Sheet Components” for further details).

The Company commenced commercial sales of NexoBrid in the U.S. in September 2023. The Company is obligated to pay MediWound up to $125.0 million, which is contingent upon meeting certain sales milestones. The first sales milestone payment of $7.5 million would be triggered when annual net sales of NexoBrid or improvements to it in North America exceed $75.0 million. As of September 30, 2023, the sales milestone payments are not yet probable and therefore, not recorded as 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. Pursuant to the terms of the Company’s supply agreement with MediWound, MediWound is manufacturing and will continue to manufacture NexoBrid for the Company on a unit price basis, which may be increased pursuant to the terms of the supply agreement. 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. Under the supply agreement, the Company possesses the option to extend the initial term of the agreement by an additional 24 months, which it did in May 2022. Under the supply agreement, the Company is permitted to establish an alternate source of supply in certain circumstances, including the event of a supply failure.

Additionally, beginning in 2020 BARDA procured quantities of NexoBrid from MediWound for use as a medical countermeasure in the event of a mass casualty emergency in the U.S. involving thermal burns. The initial, quarterly, procurement of NexoBrid by BARDA under its agreement with MediWound completed during the third quarter of 2022. As a part of BARDA’s commitment to procure NexoBrid, the Company has received a percentage of gross profit for sales directly to BARDA. As of September 30, 2023, the Company did not hold a direct contract or distribution agreement with BARDA, or take title to the product procured by BARDA.

On May 9, 2023, MediWound announced BARDA’s award of additional funding under the parties’ existing agreement, $3.0 million of which will support the replacement of NexoBrid, previously procured for emergency response preparedness, which has since expired. Pursuant to the terms of the Company’s license agreement with MediWound, the Company will recognize revenue based on a percentage of gross profits, minus a percentage of net sales, on any sales of NexoBrid directly to BARDA, upon delivery, pursuant to this additional award.

12. Commitments and Contingencies

From time to time, the Company could be a party to various legal proceedings arising in the ordinary course of business. The costs and outcome of litigation, regulatory, investigatory or other proceedings cannot be predicted with certainty, and some lawsuits, claims, actions or proceedings may be disposed of unfavorably to the Company and could have a material adverse effect on the Company’s results of operations or financial condition. In addition, intellectual property disputes often have a risk of injunctive relief which, if imposed against the Company, could materially and adversely affect its financial condition or results of operations. If a matter is both probable to result in a material liability and the amount of loss can be reasonably estimated, the Company estimates and discloses the possible material loss or range of loss. If such loss is not probable or cannot be reasonably estimated, a liability is not recorded in its condensed consolidated financial statements.

As of September 30, 2023, the Company has no material ongoing litigation in which the Company was a party or any material ongoing regulatory or other proceedings and had no knowledge of any investigations by government or regulatory authorities in which the Company is a target that could have a material adverse effect on its current business.

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

Overview

Vericel Corporation is a fully-integrated, commercial-stage biopharmaceutical company and a leader in advanced therapies for the sports medicine and severe burn care markets. We currently market two U.S. Food and Drug Administration (“FDA”) approved autologous cell therapy products and one FDA-approved specialty biologic product in the U.S. 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. (“MediWound”) for North American rights to NexoBrid® (anacaulase-bcdb). On December 28, 2022, the FDA approved a Biologics License Application (“BLA”) for NexoBrid, a topically-administered biological product containing proteolytic enzymes, which is now indicated for the removal of eschar in adults with deep partial-thickness and/or full thickness thermal burns. Following NexoBrid’s approval, we began cross-functional commercial launch activities for the product, including education, training and engagement activities and the deployment of additional NexoBrid account managers. On September 20, 2023, the Company announced the U.S. commercial availability of NexoBrid and, subsequently, has commenced commercial sales of the product.

COVID-19

On May 11, 2023, the U.S. Department of Health and Human Services announced the expiration of the federal Public Health Emergency for COVID-19. At this juncture, the pandemic’s effects on our business and results of operations have largely moderated and we have seen a return to more normal operations. Should a resurgence of COVID-19 occur, or new virus variants emerge, it could result in additional disruptions that could impact our business and operations in the future, including U.S. hospital or surgical center staffing shortages, periodic cancellation or delay of elective MACI surgical procedures, intermittent restrictions on the ability of our personnel to travel and access customers for selling, marketing, training, 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 our 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 we do not have operations in Russia or Ukraine and do not have exposure to distributors, or third-party service providers in Russia or Ukraine, we are unable to predict the ultimate impact that these actions will have on the global economy or on our financial condition, results of operations, and cash flows as of the date of these condensed consolidated financial statements.

The War in Israel and Gaza

In May 2019, we entered into exclusive license and supply agreements with MediWound, under which MediWound manufactures and supplies NexoBrid to the U.S. market on a unit price basis. NexoBrid contains an active pharmaceutical ingredient of concentrate of proteolytic enzymes enriched in bromelain. For its part, MediWound has entered into an agreement with Challenge Bioproducts Corporation, Ltd. (“CBC”), through which CBC supplies Bromelain SP, a material derived from pineapple stems, and which is manufactured by CBC at its facility in Taiwan. Once produced, MediWound uses Bromelain SP in the development and manufacture of NexoBrid at its facilities in Yavne, Israel.

We continue to monitor the ongoing conflict in Israel and are in close communication with MediWound leadership. MediWound’s NexoBrid manufacturing operations are continuing and, as of the date of this disclosure, MediWound does not anticipate a disruption to its ongoing supply of commercial NexoBrid to the United States. To the extent the war between Israel and Hamas intensifies or expands to include additional countries or militant groups in the region and MediWound’s facilities in Israel are damaged or destroyed, travel to and from Israel is halted or inhibited, or significant key MediWound operational personnel are called to military service, MediWound’s ability to continue to supply NexoBrid to the U.S. market could be disrupted. For further detail, see the risk factor titled “We rely on MediWound for the manufacture, production, and supply of NexoBrid, and our business, financial condition, and results of operations could be materially adversely affected to the extent the manufacture, production, and supply of NexoBrid is disrupted or delayed” included in the Company’s Annual Report on 10-K for the year ended December 31, 2022, as filed with the SEC on February 23, 2023.
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Manufacturing

We have a cell manufacturing facility in Cambridge, Massachusetts, which is used for U.S. manufacturing and distribution of MACI and Epicel. The manufacturing process for NexoBrid is conducted by MediWound, primarily at manufacturing locations in Israel. Certain raw materials utilized in NexoBrid’s manufacture, including the supply of the active ingredient bromelain, are obtained from Taiwan.

On July 1, 2023, we renewed our long-term supply agreement with Matricel GmbH (“Matricel”) for the supply of ACI-Maix collagen membranes used in the manufacture of MACI (the “Matricel Supply Agreement”). In the event Matricel is unable to supply the membranes, we may license the technology and procure the membranes from another source. The Matricel Supply Agreement provides that Matricel shall supply the ACI-Maix membranes exclusively to us during the term of the agreement. The Matricel Supply Agreement is effective until December 31, 2030, with an option to extend its term for three additional years to December 31, 2033. Thereafter, the Matricel Supply Agreement may be renewed for additional three-year periods.

Product Portfolio

Our marketed products include two FDA-approved autologous cell therapies: MACI, a third-generation 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; and Epicel, 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 TBSA. Both autologous cell therapy products are currently manufactured and marketed in the U.S. Our product portfolio also includes a FDA-approved specialty biologic, NexoBrid, which is a topically-administered biological orphan product containing proteolytic enzymes that is indicated for eschar removal in adults with deep partial-thickness and/or full-thickness burns. We have entered into exclusive license and supply agreements with MediWound to commercialize NexoBrid in North America.

MACI

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

Our target audiences are orthopedic surgeons who self-identify and/or have formal specialty training in sports medicine, and a subpopulation of general orthopedic surgeons who perform a high volume of cartilage repair procedures involving the knee. As of the date of this report, we employ approximately 75 MACI sales representatives to enable the sales force to reach our target audience. The team is divided into geographic regions, each managed by a Regional Manager and led by a Vice President of National MACI Sales. 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. With respect to private commercial payers that have not yet approved a medical policy for MACI, we often obtain approval on a case-by-case basis.

MACI is currently implanted into the patient’s cartilage defect through an open surgical procedure. We are currently evaluating the potential for the arthroscopic delivery of MACI to the cartilage defect – a procedure in which a surgeon can evaluate, prepare and treat the cartilage defect under direct arthroscopic visualization using specialized instruments delivered through a number of smaller incisions or portals. The arthroscopic delivery of MACI could increase the ease of MACI’s use for physicians and reduce both the length of the procedure as well as procedure-induced trauma, ultimately resulting in a reduction of a patient’s post-operative pain and accelerating a patient’s recovery. We have designed and are currently developing novel and specialized instruments to be used in and help facilitate such a procedure. We have recently discussed with the FDA a non-clinical regulatory strategy to support the potential inclusion of arthroscopic delivery in MACI’s approved labeling. Specifically, following a Type C meeting with the FDA, we submitted a protocol for a MACI arthroscopic delivery human factors validation study, which we conducted and completed during the third quarter of 2023. We expect the FDA to review a prior approval supplement seeking to add instructions for arthroscopic delivery of MACI to the product’s approved labeling in the near future, and we anticipate the commercial launch of the MACI arthroscopic delivery program during the first half of 2024.

We also are evaluating the feasibility and potential market opportunity involved in delivering MACI treatment to patients suffering from cartilage damage in the ankle. We believe that this potential lifecycle enhancement and indication expansion for MACI will require conducting an additional randomized clinical trial concerning the product’s use in the ankle. Earlier this year, we conducted pre-IND interactions with the FDA concerning our clinical development program for MACI to treat cartilage injuries in the ankle, and based on feedback from the FDA, our team is actively working to finalize our non-clinical testing and propose a clinical development plan/protocol to FDA for review.
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Epicel

Epicel is a permanent skin replacement for deep-dermal or full-thickness burns comprising greater than or equal to 30 percent TBSA. Epicel is regulated by the Center for Biologics Evaluation and Research (“CBER”) of the FDA under medical device authorities, and is the only FDA-approved cultured epidermal autograft product available for large total surface area burns in both adult and pediatric patients. Epicel was designated as a HUD in 1998 and a Humanitarian Device Exemption (“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 large 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 to be 360,400 which is approximately 40 times larger than the volume of grafts sold in 2022. As of the date of this report, our burn care field force consists of individual sales and clinical representatives that regularly engage with our target audience. The team is divided into geographic regions, each managed by a Regional Manager and led by a Vice President of National Burn Care Sales.

NexoBrid

Our portfolio of commercial-stage products now includes NexoBrid (anacaulase-bcdb), a topically-administered biological product containing proteolytic enzymes. The FDA approved NexoBrid on December 28, 2022, and the product is indicated for the removal of eschar in adults with deep partial-thickness and/or full thickness thermal burns. Following NexoBrid’s approval we immediately began cross-functional commercial launch activities for the product, including education, training, and engagement activities. We began U.S. commercial sales of NexoBrid in September 2023.

NexoBrid is approved in the European Union (“EU”) and other international markets and has been designated as an orphan biologic in the U.S., EU and other international markets. NexoBrid has the potential to change the standard of care for eschar removal with respect to hospitalized burn patients and treat a significant addressable market in the U.S. With respect to NexoBrid, of the approximately 40,000 people that are hospitalized in the U.S. each year for burn-related injuries, the majority, over 30,000, have thermal burns and will likely require some level of eschar removal. NexoBrid’s FDA approval expands our burn care franchise’s total addressable market, which will permit us to treat a significantly larger segment of hospitalized burn patients than with Epicel alone. The expansion of our target addressable market supports a broader commercial footprint, and we believe that this may help drive both increased NexoBrid use as well as increased Epicel awareness throughout the burn care space. With NexoBrid’s approval, our cross-functional commercial launch activities for the product are underway, including education, training, and engagement activities.

In May 2019, we entered into exclusive license and supply agreements with MediWound to commercialize NexoBrid in North America. The manufacturing process for NexoBrid is conducted by MediWound, primarily at manufacturing locations in Israel. Certain raw materials utilized in NexoBrid’s manufacture, including the supply of the active ingredient bromelain are obtained from Taiwan.

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Results of Operations

The following is a summary of our condensed consolidated results of operations:
 Three Months Ended September 30,Nine Months Ended September 30,
(In thousands)20232022Change $Change %20232022Change $Change %
Total revenue$45,581 $38,551 $7,030 18.2 %$132,520 $111,671 $20,849 18.7 %
Cost of product sales14,973 13,318 1,655 12.4 %45,451 40,132 5,319 13.3 %
Gross profit30,608 25,233 5,375 21.3 %87,069 71,539 15,530 21.7 %
Research and development5,676 5,046 630 12.5 %16,141 14,698 1,443 9.8 %
Selling, general and administrative29,989 26,975 3,014 11.2 %90,123 79,984 10,139 12.7 %
Total operating expenses35,665 32,021 3,644 11.4 %106,264 94,682 11,582 12.2 %
Loss from operations(5,057)(6,788)1,731 (25.5)%(19,195)(23,143)3,948 (17.1)%
Total other income1,111 232 879 378.9 %2,734 533 2,201 412.9 %
Income tax (benefit) expense(286)21 (307)(1461.9)%(286)21 (307)(1461.9)%
Net loss$(3,660)$(6,577)$2,917 (44.4)%$(16,175)$(22,631)$6,456 (28.5)%

Comparison of the Periods Ended September 30, 2023 and 2022

Total Revenue

Revenue by product is as follows:

 Three Months Ended September 30,Nine Months Ended September 30,
(In thousands)20232022Change $Change %20232022Change $Change %
MACI$37,589 $31,009 $6,580 21.2 %$108,114 $85,617 $22,497 26.3 %
Epicel7,394 7,317 77 1.1 %23,808 25,387 (1,579)(6.2)%
NexoBrid598 225 373 165.8 %598 667 (69)(10.3)%
Total revenue$45,581 $38,551 $7,030 18.2 %$132,520 $111,671 $20,849 18.7 %

Total revenue increase for the three months ended September 30, 2023 compared to the same period in 2022, was driven primarily by higher MACI price and the commercial launch of NexoBrid after its commercial availability on September 20, 2023. In the three months ended September 30, 2022, NexoBrid revenue was associated with the delivery of NexoBrid to BARDA for emergency response preparedness.

Total revenue increase for the nine months ended September 30, 2023 compared to the same period in 2022, was driven primarily by MACI volume and price growth. Additionally, for the nine months ended September 30, 2023, NexoBrid revenue is related to the commercial launch of NexoBrid after its commercial availability on September 20, 2023 compared to revenue associated with the delivery of NexoBrid to BARDA for emergency response preparedness during the nine months ended September 30, 2022.

Seasonality. As a result of the uncertainty and other impacts of the COVID-19 pandemic and the resulting shifts of timing in some revenue, our historically observable seasonality of revenues has been impacted or obscured in 2022 and 2023 and potentially beyond. At this juncture the pandemic’s effects on our business and results of operations have largely moderated, although there continues to be a level of uncertainty whether MACI seasonality will return to pre-pandemic patterns. In the last five years through 2022, MACI sales volumes from the first through the fourth quarter on average represented 20% (18%-21% range), 21% (16%-24% range), 24% (21%-26% range) and 35% (33%-38% range) respectively, of total annual volumes. Historically, MACI orders are normally stronger in the fourth quarter due to several factors including the satisfaction by patients of insurance deductible limits and the time of year patients prefer to start rehabilitation. Due to the low incidence and variable occurrence of severe burns, Epicel revenue has inherent variability from quarter-to-quarter and does not exhibit significant seasonality.

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Gross Profit

Gross profit increase for the three and nine months ended September 30, 2023, compared to the same periods in 2022, was driven by higher revenue, which more than offset higher employee costs, raw material price increases, NexoBrid related amortization and costs and higher external storage and manufacturing facility costs.

Research and Development Expenses

The following table summarizes research and development expenses, which include materials, professional fees and an allocation of employee-related salary and fringe benefit costs for our research and development projects:

 Three Months Ended September 30,Nine Months Ended September 30,
(In thousands)20232022Change $Change %20232022Change $Change %
MACI$4,020 $3,000 $1,020 34.0 %$10,412 $8,961 $1,451 16.2 %
Epicel890 1,166 (276)(23.7)%2,975 3,624 (649)(17.9)%
NexoBrid766 880 (114)(13.0)%2,754 2,113 641 30.3 %
Total research and development expenses$5,676 $5,046 $630 12.5 %$16,141 $14,698 $1,443 9.8 %

Research and development expenses increased for the three and nine months ended September 30, 2023 compared to the same periods in 2022, primarily due to lower reimbursement of expenses from MediWound related to NexoBrid BLA resubmission that occurred in the first half of 2022 and increased MACI arthroscopic development program costs in 2023.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended September 30, 2023 were $30.0 million, compared to $27.0 million for the same period in 2022. The increase in selling, general and administrative expenses was primarily due to higher headcount and employee expenses, additional travel and in-person events across the commercial organization, and lease expense associated with the Burlington Lease.

Selling, general and administrative expenses for the nine months ended September 30, 2023 were $90.1 million, compared to $80.0 million for the same period in 2022. The increase in selling, general and administrative expenses was primarily due to higher headcount and employee expenses, additional travel and in-person events across the commercial organization, and lease expense associated with the Burlington Lease.

Total Other Income 

The change in other income for the three and nine months ended September 30, 2023, compared to the same periods in 2022 was due primarily to fluctuations in the rates of return on our investments in various marketable debt securities slightly offset by interest expense related to our Revolving Credit Agreement.

Stock-based Compensation Expense

Non-cash stock-based compensation expense is summarized in the following table: