UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORMForm 10-Q
(Mark One)
 
x☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED:  September 30, 20172022
or
OR
o☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file numberFile Number 001-35280
 
VERICEL CORPORATION
(Exact name of registrant as specified in its charter)
Michigan
94-3096597
Michigan94-3096597
(State or other jurisdiction of(I.R.S. employer
incorporation or organization)identification no.(I.R.S. Employer Identification No.)
64 Sidney Street
Cambridge, MA 02139
(Address of principal executive offices, including zip code)
 
64 Sidney Street
Cambridge, MA 02139
(Address of principal executive offices, including zip code) 

Registrant’s telephone number, including area code) (800) 556-0311code: (617) 588-5555

(Former name, former address and former fiscal year, if changed since last report)
 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes - x No - o


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer - o
☒
Accelerated filer - x
☐
Non-accelerated filer - o
☐
Smaller reporting company - o
☐
(Do not check if a smaller reporting company)
Emerging growth company - o
☐
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 - o☐ No - x

Indicate the number
As of November 4, 2022, 47,222,987 shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.Common Stock, no par value per share, were outstanding. 


COMMON STOCK, NO PAR VALUE34,907,789
(Class)Outstanding at November 3, 2017

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):
3
3
4
5
6
58
610
Item 2.
1524
Item 3.
2129
Item 4.
2130
PART II — OTHER INFORMATION
Item 1.
2230
Item 1A.
2230
Item 1B.2.
22
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
2232
Item 6.3.
2232
Item 4.
32
Item 5.
32
Item 6.
33
2333
2534
2
i


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, respectively584,900 553,902 
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 
  September 30, December 31,
  2017 2016
ASSETS  
  
Current assets:  
  
Cash $15,466
 $22,978
Accounts receivable (net of allowance for doubtful accounts of $226 and $225, respectively) 15,430
 17,093
Inventory 4,049
 3,488
Other current assets 1,366
 1,164
Total current assets 36,311
 44,723
Property and equipment, net 3,967
 3,875
Total assets $40,278
 $48,598
LIABILITIES AND SHAREHOLDERS’ EQUITY  
  
Current liabilities:  
  
Accounts payable $5,972
 $6,535
Accrued expenses 4,514
 4,523
Current portion of term loan credit agreement (net of deferred costs of $110) 2,557
 779
Warrant liabilities 1,269
 757
Other 216
 259
Total current liabilities 14,528
 12,853
Revolving and term loan credit agreement (net of deferred costs of $211 and $293, respectively) 7,400
 9,318
Long term deferred rent 1,613
 1,687
Other long term debt —
 32
Total liabilities 23,541
 23,890
COMMITMENTS AND CONTINGENCIES (Note 13) 

 

Shareholders’ equity:  
  
Series B-2 voting convertible preferred stock, no par value: shares authorized and reserved — 39, shares issued and outstanding — 0 and 12, respectively —
 38,389
Common stock, no par value; shares authorized — 75,000; shares issued and outstanding — 34,852 and 31,595, respectively 377,711
 329,720
Warrants 190
 190
Accumulated deficit (361,164) (343,591)
Total shareholders’ equity 16,737
 24,708
Total liabilities and shareholders’ equity $40,278
 $48,598

The accompanying Notesnotes to Condensed Consolidated Financial Statementscondensed consolidated financial statements are an integral part of these statements.




3

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 
  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Product sales, net $14,260
 $10,929
 $40,574
 $37,860
Cost of product sales 7,186
 6,856
 21,965
 20,716
Gross profit 7,074
 4,073
 18,609
 17,144
Research and development 2,919
 3,443
 9,357
 11,037
Selling, general and administrative 8,186
 7,010
 25,427
 19,463
Total operating expenses 11,105
 10,453
 34,784
 30,500
Loss from operations (4,031) (6,380) (16,175) (13,356)
Other income (expense):  
  
 0
  
(Increase) decrease in fair value of warrants (1,060) (203) (512) 99
Foreign currency translation loss (6) (6) (20) (17)
Interest income 2
 —
 6
 7
Interest expense (317) (86) (878) (92)
Other income (expense) 5
 —
 6
 (10)
Total other income (expense) (1,376) (295) (1,398) (13)
Net loss $(5,407) $(6,675) $(17,573) $(13,369)
         
Net loss per share attributable to common shareholders (Basic and Diluted) (see note 12) $(0.16) $(0.38) $(0.54) $(0.84)
Weighted average number of common shares outstanding (Basic and Diluted) 33,667
 22,744
 32,783
 22,678

The accompanying Notesnotes to Condensed Consolidated Financial Statementscondensed consolidated financial statements are an integral part of these statements.




4

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.

5
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 


6
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.


7

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 issuance3,040 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 

8
  Nine Months Ended September 30,
  2017 2016
Operating activities:  
  
Net loss $(17,573) (13,369)
Adjustments to reconcile net loss to net cash used for operating activities:  
  
Depreciation and amortization 1,186
 1,393
Stock compensation expense 2,053
 1,973
Change in fair value of warrants 512
 (99)
Inventory provision 232
 98
Foreign currency translation loss 20
 17
Changes in operating assets and liabilities:  
  
Inventory (793) (2,325)
Accounts receivable 1,663
 3,048
Other current assets (202) (278)
Accounts payable (1,068) (2,173)
Accrued expenses (9) (205)
Tenant improvement reimbursement 89
 898
Deferred rent expense 2
 438
Other assets and liabilities, net (129) —
Net cash used for operating activities (14,017) (10,584)
Investing activities:  
  
Expenditures for property, plant and equipment (792) (1,314)
Net cash used in investing activities (792) (1,314)
Financing activities:  
  
Net proceeds from issuance of common stock 7,549
 469
Deferred financing costs —
 (244)
Borrowings under revolving credit agreement and term loan —
 8,400
Repayments of short-term debt —
 (2,400)
Payments on long-term debt (252) (28)
Net cash provided by financing activities 7,297
 6,197
Net decrease in cash (7,512) (5,701)
Cash at beginning of period 22,978
 14,581
Cash at end of period $15,466
 $8,880
     
Supplemental cash flow information (non-cash):  
  
Additions to equipment in process included in accounts payable $486
 $36
Conversion of preferred stock into common stock
 $38,389
 —
Warrants issued in connection with debt arrangement $—
 $190
Supplementary cash flows information:    
Interest paid, net of interest capitalized $691
 $73
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 Notesnotes to Condensed Consolidated Financial Statementscondensed consolidated financial statements are an integral part of these statements.

9


VERICEL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED SEPTEMBER 30, 2017 (UNAUDITED)
1.1. Organization

Vericel Corporation, a Michigan corporation (the(together with its consolidated subsidiaries referred to herein as the Company, Vericel, we, us or our)Vericel), was incorporated in March 1989 and began employee-based operations in 1991. On May 30, 2014, Vericel completed the acquisition of certain assets and assumed certain liabilities of Sanofi, a French société anonyme (Sanofi), including all of the outstanding equity interests of Genzyme Biosurgery ApS (Genzyme Denmark or the Danish subsidiary) (now known as Vericel Denmark ApS), a wholly-owned subsidiary of Sanofi, and over 250 patent applications of Sanofi and certain of its subsidiaries for purposes of acquiring the portion of the cell therapy and regenerative medicine business (the CTRM Business), which researches, develops, manufactures, markets and sells the Carticel®, MACI®, and Epicel® products. The Company is a fully integrated,fully-integrated, commercial-stage biopharmaceutical company dedicated to the identification, development and commercialization of innovative therapies that enable the body to repair and regenerate damaged tissues and organs to restore normal structure and function. Vericel has marketed products and developmental stage product candidates, and the Company’s goal is to become thea 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 regenerative medicine by developing, manufacturingEpicel® (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 marketing best-in-class therapies forpediatric patients with significant unmet medical needs.

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 patient-specific, expanded 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
10
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, 2017,2022, the Company hashad an accumulated deficit of $361.2$405.9 million and had a net loss of $5.4$22.6 million during the quarternine months ended September 30, 2017.2022. The Company had cash and cash equivalents of $15.5$65.2 million and investments of $67.5 million as of September 30, 2017.2022. The Company expects that cash from the sales of its products and existing cash, together with its term loancash equivalents, investments, and revolving line of credit agreement with Silicon Valley Bank (SVB) and MidCap Financial Services (MidCap) (the SVB-MidCap facility),available borrowing capacity will be sufficient to support the Company's Company’s current operations through at least twelve12 months followingfrom the filingissuance of this Form 10-Q.  In connection withthese condensed consolidated financial statements. The effects of the SVB-MidCap facility, 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 must remainto experience a reduction in compliance with minimum monthly net revenue covenants (determined in accordance with U.S. GAAP), measured on a trailing twelve month basis. SVBbusiness and MidCap also have the ability to call debt based on material adverse change clauses which are subjectively determinable andresulting revenue. This, consequently, may result in a subjective acceleration clause. Ifirrecoverable losses of customers and significantly impact the Company's cash requirements exceed its current expectations, or if it is not in compliance with the monthly net revenue covenants or the subjective acceleration clauses are triggered under the SVB-MidCap facility, then SVB may call the debt resulting inCompany’s long-term liquidity, potentially requiring the Company immediately needing additional funds.  As of September 30, 2017, the Company wasto engage in compliance with the minimum revenue covenant set forthlayoffs, furloughs and/or reductions in the Second Loan Modification Agreement between the Company, SVB and MidCap.salaries. The Company also may seekneed to access additional funding through debt or equity financings including the at-the-market sales agreement in place with Cowen and Company, LLC.  However,capital; however, the Company may not be able to obtain additional financing on acceptable terms or at all.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'sCompany’s shareholders.  If the Company needs additional funds and is unable to obtain funding on a timely basis, the Company may need to significantly curtail its operations including its research and development programs in an effort to provide sufficient funds to continue its operations, which could adversely affect its business prospects.


2.Basis of Presentation
2. Basis of Presentation

The condensedaccompanying condensed consolidated financial statements included herein of Vericel are unaudited and have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (SEC)(“SEC”). The preparation of condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles in the United States of America (U.S. GAAP)(“GAAP”) requires management to make estimates, judgments, and assumptions that may affect the reported amounts of assets, liabilities, equity, revenuesrevenue 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 forand 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 threeCOVID-19 pandemic and nine months endedthe 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, 2017, are2022, the Company has not necessarily indicativerecorded impairments to investments, inventory, other current assets or long-lived assets as a result of the results to be expected for the full year or for any other period. COVID-19 pandemic.

The September 30, 2017 condensed consolidated balance sheet data wasas of December 31, 2021 has been derived from the Company’s audited consolidated financial statements at that date, but does not include all disclosuresthe information and notes required by U.S. GAAP.
GAAP for complete financial statements. These condensedcondensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in ourthe Company’s Annual Report on Form 10-K for the year ended December 31, 2016,2021, as filed with the SEC on March 13, 2017 (Annual Report)February 24, 2022 (“Annual Report”).



3.Recent Accounting Pronouncements
Revenue Recognition

In May 2014,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) issued authoritative guidance requiring entities to apply a new model for recognizing revenue from contracts with customers. The guidance will supersede the current revenue recognition guidance and require entities to evaluate their revenue recognition arrangements using a five step model to determine when a customer obtains control of a transferred good or service. The guidance is currently effective for annual reporting periods beginning after December 15, 2017 and may be adopted using a full or modified retrospective application. The Company does not expect a material impact to its consolidated financial statements following its initial evaluation of its revenue arrangements under the issued guidance. The Company will implement the guidance under the modified retrospective approach.

Accounting for Leases

The FASB issued guidance to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities(“FASB”). Based on the balance sheet and disclosing key information about leasing arrangements. In accordance withassessment, the updated guidance, lesseesASU’s were determined to be either not applicable or are requiredexpected to recognize the assets and liabilities arising from operating leases on the balance sheet. The guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within 2018. The Company is currently reviewing the potential impact of adopting the new guidance.

Share-based Payment Accounting

The FASB issued guidance to simplify the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new standard became effective and was implemented for the Company beginning January 1, 2017. Consistent with prior periods, the Company will continue to estimate forfeitures and therefore, the guidance did not have anminimal impact on the Company's condensed consolidated financial statements.


11
4.
3. Revenue

Revenue Recognition and Net Product Sales


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

MACI Biopsy Kits

MACI biopsy kits are sold directly to the customerhospitals and ambulatory surgical centers based on contracted amounts. Revenue fromrates 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 customers is recognized in accordance with ASC 605, Revenue Recognition and SAB Topic 104, Revenue Recognition, when (i) persuasive evidenceCompany, which can later be used to manufacture a MACI implant. The ordering of an arrangement exists, (ii) the goods are shipped or delivered and implanted, depending on shipping terms, (iii) title and risk of loss pass to the customer and (iv) collectability is reasonably assured. Shipping and handling costs are included as a component of revenue.
 Prior to July 1, 2016,kit does not obligate the Company sold Carticel to a distributor and followed ASC 605, Revenue Recognition and SAB Topic 104 Revenue Recognition to record revenue. This distributor purchased and took title to Carticel upon shipmentmanufacture an implant nor does the receipt of the product and assumed credit and collection risk related to the end customers. The distributor worked with the payers on behalf of patients and surgeons to ensure medical coverage and to obtain reimbursement for Carticel implantation procedures. The Company retained responsibility for shipment of the product to the surgical suite. Revenue was recorded for Carticel upon occurrence of the surgery, net of provisions for rebates and cash discounts. Such rebates and discounts were $0.5 million for the nine months ended September 30, 2016. There were no rebates or cash discounts for the three months ended September 30, 2016. These rebates and prompt payment cash discounts were establishedcartilage tissue by the Company atfrom the timecustomer following biopsy. The customer’s order of an implant is separate from the process of ordering the biopsy kit. Therefore, the sale based on actual experience adjustedof 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 reflect known changesdistribute MACI in the factors that impact such reserves. Adjustments to these reserves have historically not been significant.
On June 30, 2016,a manner in which the Company reducedretains the scope of the agreement with its exclusive distributor by terminating their services for a significant portion of its Carticel sales. On July 1, 2016, the Company transitioned to a direct sales model for Carticel and MACI after launch whereby the Company retained credit and collection risk from the patient as the end customer. The Company utilizedpays both specialty pharmacies a new provider, Dohmen Life Science Services, LLC (DLSS),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 services but this provider did not purchaseprogram to manage patient cases and take title to Carticel or MACI. On May 15, 2017,ensure complete and correct billing information is provided to the Companyinsurers and DLSS mutually terminated the agreement effective June 30, 2017.hospitals. In addition, the Company utilized Vital Carealso sells MACI directly to DMS Pharmaceutical Group, Inc. and its franchisees as(“DMS”) for patients treated at military treatment facilities. The sales directly to DMS are made at a second provider to expand the available network of contracted third-party payers for Carticel and MACI. Under this direct sales model, the patient bears the ultimate financial responsibility for the purchase of Carticel or MACI and as such the Company recognized revenue in accordance with ASC 954-605, Health Care Entities - Revenue Recognition. The third party payer (insurance company, government, etc.) pays all or some of the product price on the patient’s behalf.rate.




Under the direct sales model, the Company recognized product revenues from sales of Carticel and MACI upon implantation at which time the claim is billable to patient’s insurance provider on behalf of the patient and is billed by either DLSS or Vital Care. The Company assumed counterparty risk for the third party reimbursement payment from the payer and from the patient co-pay. Prior authorization orand 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'sCompany 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 product revenues are calculated by estimatingof 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 paymentscollections for insurance, hospital or patient paymentsthese transactions using the portfolio approach. The Company records a reduction to revenue at the time it invoices and recognizes revenue.To support this direct sales model,of sale for its estimate of the Company utilized DLSS to provide administrative services associatedamount 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 case management and reimbursement support and to provide billing and collection services.ASC 326, Financial Instruments - Credit Losses. The Company utilized Vital Careassesses 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 provide similar billingthe accounts receivables as of September 30, 2022. The total allowance for uncollectible consideration as of September 30, 2022 and collection servicesDecember 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 a subset of insurance payers and patients.

In April 2017, the Company was notified of a contractual dispute between Vital Care and a third-party payer and as a result, during the threenine months ended March 31, 2017,September 30, 2022.

Changes in estimates of the Company increased its estimated revenue allowances, reducing revenue by $2.1 million related to 2016 sales and $0.7 million related to 2017 sales to reflect the lower reimbursement that would be obtained if the claimstransaction price are ultimately required to be treated as out-of-network. During the three months ended June 30, 2017, the dispute was resolved and the negotiated reimbursement resulted in the Company’s ability to reduce its estimated sales allowances by $1.4 million which resulted in additionalrecorded through revenue in the second quarterperiod in which such change occurs. Changes in estimates related to sales which originatedprior periods are shown in the Revenue by Product and Customer table below and relate primarily to changes in 2016. As a resultthe initial expected reimbursement or collection expectation upon completion of the continuing evaluationbilling claims process for MACI implants that occurred in a prior year.

Epicel

The Company sells Epicel directly to hospitals and assessmentburn 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 these expected payments, our estimates for expected payments could change.a skin biopsy, and Vericel

12
On May 15, 2017,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 Orsini Pharmaceutical Services, Inc. (Orsini)BARDA, or take title to appoint Orsini asthe product procured by BARDA. The Company recognizes revenue based on a specialty pharmacy distributorpercentage of MACIgross profits for sales of NexoBrid to patients' physicians and other healthcare providers. The initial termBARDA upon delivery, at which time BARDA is in control of the distribution agreement will end on May 15, 2019 withproduct.

Revenue by Product and Customer

The following table and descriptions below show the option of two additional two-year terms. The Company ships the product directly to the surgical suite. Orsini purchases and takes title to MACI upon shipment of the product atproducts from which point the Company recognizes revenue. Orsini assumes credit and collection risk related to the end customers. In 2017, there are no material chargebacks, rebates or other typesgenerated 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).

13

Concentration of Credit Risk


On May 15, 2017, the Company and DLSS mutually terminated their agreement effective June 30, 2017. On May 15, 2017, the Company entered into a distribution agreement with Orsini as a specialty pharmacy distributor of MACI and has engaged a third party services provider to provide the patient support program previously provided by DLSS and to manage patient cases for MACI. The Company’s receivables risk is now more concentrated, and the concentration of credit risk also shifted for the Company.

Revenue from one customer, the MACI distributor in the U.S., represented approximately 55% and 25% during the three and nine months ended September 30, 2017, respectively.  Accounts receivable from the same customer accounted for 48% of the outstanding accounts receivable as of September 30, 2017. For the three and nine months ended September 30, 2016, the Company's largest customer represented 67% and 46% of2022, there were no customers with a total revenue respectively. The next largest customer represented approximatelyconcentration greater than 10% and 13% of revenue for the three and nine ended September 30, 2017, respectively, and 8% and 13% of total revenue during. For the three and nine months ended September 30, 2016,2021, the Company’s total revenue concentration from an Epicel customer was 9% and 11%, respectively. No other customer accounted for more than 10% of revenue orFor the Company’s total accounts receivable in 2017 orbalances, there were no customers as of September 30, 2022 or December 31, 2016.2021, with a concentration greater than 10%.


5.Selected Balance Sheet Components
4. Selected Balance Sheet Components

Inventory

Inventory as of September 30, 20172022 and December 31, 2016:2021:

(In thousands)September 30, 2017 December 31, 2016(In thousands)September 30, 2022December 31, 2021
Raw materials$3,727
 $3,214
Raw materials$15,797 $12,676 
Work-in-process279
 257
Work-in-process883 644 
Finished goods43
 17
Finished goods49 61 
Inventory$4,049
 $3,488
Total inventoryTotal inventory$16,729 $13,381 




Property and equipment,Equipment

Property and Equipment, net as of September 30, 20172022 and December 31, 2016: 2021:

(In thousands) September 30, 2017 December 31, 2016(In thousands)September 30, 2022December 31, 2021
Machinery and equipment$3,264
 $3,150
Machinery and equipment$4,697 $4,522 
Furniture, fixtures and office equipment981
 931
Furniture, fixtures and office equipment1,710 1,551 
Computer equipment and software3,485
 3,147
Computer equipment and software8,112 7,769 
Leasehold improvements3,908
 3,332
Leasehold improvements13,674 10,617 
Construction in process608
 408
Construction in process4,943 3,097 
Financing right-of-use leaseFinancing right-of-use lease46 74 
Total property and equipment, gross12,246
 10,968
Total property and equipment, gross33,182 27,630 
Less: Accumulated depreciation(8,279) (7,093)
$3,967
 $3,875
Less accumulated depreciationLess accumulated depreciation(17,264)(14,322)
Total property and equipment, netTotal property and equipment, net$15,918 $13,308 

Depreciation expense for both the three months ended September 30, 2017 and September 30, 2016 was $0.4 million and depreciation expense for both the nine months ended September 30, 20172022 was $1.0 million and September 30, 2016 was $1.2 million.$2.9 million, respectively, and $0.7 million and $2.2 million, respectively, for the same periods in 2021.

Accrued expensesExpenses

Accrued Expenses as of September 30, 20172022 and December 31, 2016:2021 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 


14
(In thousands)September 30, 2017 December 31, 2016
Bonus related compensation$1,608
 $2,433
Employee related accruals2,021
 1,668
Clinical trial related accruals379
 422
Other506
 —
 $4,514
 $4,523
5. Leases
6.Stock Purchase Warrants

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 historicallya 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 warrantsa letter of credit collateralized by cash deposits of approximately $6.0 million. Subsequent to purchase sharesthe 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 
15


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 in connection with certain of its common stock offerings and in September 2016 the Company issued warrants in connection with the updated debt agreement (September 2016 Warrants) discussed in note 7.  The warrants issued in August 2013 (August 2013 Warrants) include anti-dilution price protection provisions that could require cash settlement of the warrants and accordingly require the warrants to be recorded as liabilities of the Company at the estimated fair value aton the date of issuance, with changes in estimated fair value recorded as income or expense (non-cash) ingrant. The 2022 Plan replaced the Company’s statement of operations in each subsequent period. The September 2016 Warrants meet1992 Stock Option Plan, the requirements for equity classification. The following table describes2001 Stock Option Plan, the outstanding warrants:
  August 2013
Warrants		 September 2016 Warrants
Exercise price $4.80 $2.48
Expiration date August 16, 2018 September 9, 2022
Total shares issuable on exercise 724,950 117,074

On September 9, 2016,Amended and Restated 2004 Equity Incentive Plan, the Company issued 117,074 warrants to two holders in conjunction with2009 Second Amended and Restated Omnibus Incentive Plan, the loan agreement described in note 7. The initial valuation2017 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 September 2016 Warrants was recorded as debt2022 Plan. However, the expiration or forfeiture of options previously granted under the Prior Plans will increase the number of shares available for issuance costsunder the 2022 Plan.

Stock Compensation Expense

Non-cash stock-based compensation expense (service-based stock options, restricted stock units and is being amortized over the remaining life of the loan agreement to interest expense. The September 2016 Warrants are treated as equity instruments recorded at fair value with no subsequent remeasurement. Pursuant to the warrants, the holders may exercise their warrants for an aggregate of 117,074 shares of the Company’s common stock.

The fair value of the warrants described in the table above is measured using the Black-Scholes valuation model.  Inherent in the Black-Scholes valuation model are assumptions related to expected stock-price volatility, expected life, risk-free interest rate and dividend yield. The Company estimates the volatility of its commonemployee stock based on historical volatility that matches the expected remaining life of the warrants. The risk-free interest ratepurchase plan) is based on the U.S. Treasury zero-coupon yield curve on the grant date for a maturity similar to the expected remaining life of the warrants. The expected life of the warrants is assumed to be equivalent to their remaining contractual term. The dividend rate is based on the historical rate, which the Company anticipates to remain at zero. See further detail in note 9 of the condensed consolidated financial statements.


The assumptions used by the Company are summarized in the following tables: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 
August 2013 Warrants September 30, 2017 December 31, 2016
Closing stock price $6.00
 $3.00
Expected dividend rate —% —%
Expected stock price volatility 50.6% 97.9%
Risk-free interest rate 1.3% 1.0%
Expected life (years) 0.88
 1.62


Service-Based Stock Options
September 2016 Warrants September 9, 2016
Closing stock price $2.20
Expected dividend rate —%
Expected stock price volatility 89.8%
Risk-free interest rate 1.4%
Expected life (years) 6.00
7.Debt
On March 8, 2016, the Company entered into a $15.0 million debt financing with SVB which on September 9, 2016, was replaced by an expanded term loan and revolving line of credit agreement with SVB and MidCap, which together initially provided access to up to $20 million. The updated debt financing consists of a $4.0 million term loan which was drawn at the closing, a $4.0 million term loan which was drawn upon in November 2016, a $2.0 million term loan which is no longer available as it was not drawn upon by April 12, 2017 and up to $10.0 million of a revolving line of credit. The term loans are interest only (indexed to Wall Street Journal (WSJ) Prime plus 5.00%) until September 1, 2017 followed by 36 equal monthly payments of principal plus interest maturing September 9, 2020. The revolving line of credit is limited to a borrowing base calculated using eligible accounts receivable and maturing September 9, 2020 with an interest rate indexed to WSJ Prime plus 1.25%. The Company is subject to various financial and nonfinancial covenants including but not limited to monthly minimum net revenue covenants (determined in accordance with U.S. GAAP), measured on a trailing twelve month basis. SVB and MidCap have the ability to call debt based on material adverse change clauses which are subjectively determinable and result in a subjective acceleration clause. The Company has not been informed of any material adverse changes that have occurred. SVB and MidCap have a shared first priority perfected security interest in all assets of the Company other than intellectual property. As of September 30, 2017, there was an outstanding balance of $7.8 million under the term loan and $2.5 million under the revolving line of credit (net of total deferred costs of $0.3 million). The weighted average interest rate on the outstanding term and revolving credit loans as of September 30, 2017 was 7.8%. On December 30, 2016, the Company entered into an amendment to the SVB-MidCap facility to amend certain financial covenants and to modify the final payment of the term loan advance. The Company further amended the SVB-MidCap facility on May 9, 2017 to update the monthly net revenue requirement covenants, measured on a trailing twelve month basis. The amendment decreased the monthly 12 month trailing minimum revenue covenant and revised the December 31, 2017 minimum revenue covenant to $51.7 million. As of September 30, 2017, the Company was in compliance with the minimum revenue covenant. As of September 30, 2017, there was $3.3 millionremaining capacity under the revolving line of credit.

8.Stock-based Compensation
Stock Option and Equity Incentive Plans

The Company can issue nonqualified and incentive stock options as well as other equity awards pursuant to its Second Amended and Restated 2009 Omnibus Incentive Plan (Option Plan).  Such awards pursuant to the Option Plan may be granted by the Company’s Board of Directors to certain of the Company’s employees, directors and consultants.

During the three and nine months ended September 30, 2017,2022, the Company granted 127,200 and 1,677,760, respectively, service-based options to purchase common stock.stock of 42,890 and 1,206,539, respectively, and 189,882 and 1,663,954, respectively, for the same periods in 2021. The options were granted with exercise prices equal to the fair market value of the Company’s stock at the grant date, and other than those granted to non-employee directors, vest over four years, under a graded-vesting methodology, following the date of grant, and expire after ten years. The Company issues new shares upon the exercise of stock options. The weighted averageweighted-average grant-date fair value of service-based options granted under the Option Plan during the three and nine month periods ended September 30, 2017 was $2.53 and $1.99, respectively and, $1.77 and $2.15, respectively for the same periods in 2016.


Non-cash stock-based compensation expense included in cost of goods sold, research and development expenses and selling, general and administrative expenses is summarized in the following table: 
  Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2017 2016 2017 2016
Cost of goods sold $119
 $117
 $316
 $330
Research and development 177
 133
 $391
 $392
Selling, general and administrative 459
 404
 1,346
 1,251
Total non-cash stock-based compensation expense $755
 $654
 $2,053
 $1,973

The fair value of each service-based stock option grant for the reported periods is estimated on the date of the grant using the Black-Scholes option-pricing model using the weighted average assumptions noted in the following table.
  Nine Months Ended September 30,
Service-Based Stock Options 2017 2016
Expected dividend rate —% —%
Expected stock price volatility 80.1 – 88.2%
 78.7 – 92.2%
Risk-free interest rate 1.8 – 2.3%
 1.1 – 1.8%
Expected life (years) 5.5 – 6.3
 5.5 – 6.3

The following table summarizes the activity for service-based stock options for the indicated periods:
Service-Based Stock Options Options 
Weighted
Average
Exercise Price
 
Weighted Average
Remaining
Contractual Term
(Years)
 
Aggregate
Intrinsic Value
Outstanding at December 31, 2016 3,355,692
 $4.66
 8.2 $610
Granted 1,677,760
 $2.82
    
Exercised (165,678) $3.12
   $362
Expired (100,131) $16.31
    
Forfeited (190,766) $3.35
    
Outstanding at September 30, 2017 4,576,877
 $3.84
 8.2 $13,336
Exercisable at September 30, 2017 1,870,011
 $5.18
 7.5 $4,988
As of September 30, 2017 there was approximately $3.4 million of total unrecognized compensation cost related to non-vested service-based stock options granted under the Option Plan.  That cost is expected to be recognized over a weighted-average period of 3.0 years.
The total fair value of options vested during the three and nine months ended September 30, 20172022 was $0.6 million$15.58 and $1.8 million,$20.55 per option, respectively, and $0.6 million$35.65 and $1.6 million,$33.03, respectively, for the same periods in 2016.2021.


EmployeeRestricted Stock Purchase PlanUnits


Employees are able to purchase stock underDuring the Vericel Corporation Employee Stock Purchase Plan (ESPP), which was implemented effective October 1, 2015. Participation in this plan is available to substantially all employees. Compensation expense is recorded based on the fair market value of the purchase options at the grant date, which corresponds to the first day of each purchase periodthree and is amortized over the purchase period. On October 2, 2017, employees purchased 40,683 shares resulting in proceeds from the sale of common stock of $0.1 million under the ESPP. The total share-based compensation expense for the ESPP for the nine months ended September 30, 20172022, 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 approximately $0.1 million.$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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9.Fair Value Measurements
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; and
•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 waswere no movement between level 1transfers into or out of Level 3 from December 31, 2021 to level 2 or between level 2 to level 3. 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, 2017 December 31, 2016
    Fair value measurement category   Fair value measurement category
(In thousands) Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
Liabilities:  
  
  
  
  
  
  
  
Warrant liabilities $1,269
 $—
 $1,269
 $—
 $757
 $—
 $757
 $—
 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 — 20,931 — 18,229 — 18,229 — 
Corporate notes49,845 — 49,845 — 50,524 — 50,524 — 
U.S. government agency bonds2,977 — 2,977 — — — — — 
$95,429 $21,676 $73,753 $— $70,011 $1,258 $68,753 $— 


The following table summarizes the change in the estimated fair value(a) Approximately $6.3 million and $8.0 million of the Company’s warrant liabilities: 
Warrant Liabilities (In thousands) 
Balance at December 31, 2016$757
Increase in fair value512
Balance at September 30, 2017$1,269
Revolvingcommercial paper had an original maturity of 90 days or less and Term Loan Credit Agreements
Atwas recorded as a cash equivalent as of September 30, 20172022 and December 31, 2016, we had a total of $10.0 million and $10.1 million, respectively, outstanding under our revolving and term loan credit agreements, which are variable rate loans. 2021.

The fair valuevalues of these loans approximates book valuethe 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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9. Revolving Credit Agreement

On July 29, 2022, the borrowing rates currentlyCompany, 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 for variable rate loans obtained from third party lending institutions. These fair values represent Level 2 under the three-tier hierarchy described above.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.


10.Shareholders' Equity
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.
At-the-Market Sales
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, 2022, 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).



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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)2022202120222021
Net loss$(6,577)$(4,931)$(22,631)$(12,006)
   
Basic weighted-average common shares outstanding47,182 46,669 47,096 46,355 
Effect of dilutive stock options and restricted stock units— — — — 
Diluted weighted-average common shares outstanding47,182 46,669 47,096 46,355 
Basic loss per common share$(0.14)$(0.11)$(0.48)$(0.26)
Diluted loss per common share$(0.14)$(0.11)$(0.48)$(0.26)
Anti-dilutive shares excluded from diluted net loss per common share:
Stock options6,536 5,852 6,536 5,852 
Restricted stock units633 412 633 412 

11. NexoBrid License and Supply Agreements

On October 10, 2016,May 6, 2019, the Company entered into our at-the-market sales agreementexclusive license and supply agreements with Cowen (ATM Agreement), pursuantMediWound to whichcommercialize NexoBrid and any improvements to NexoBrid in North America. NexoBrid is a topically-administered biological product that enzymatically removes nonviable burn tissue, or eschar, in patients with deep partial and full-thickness thermal burns. On June 29, 2021, the Company may sell sharesannounced that MediWound had received a complete response letter (“CRL”) from the U.S. Food & Drug Administration (“FDA”) with respect to a biologics license application (“BLA”), which MediWound had previously submitted to the FDA seeking marketing approval for the product in the U.S. As part of our common stock through Cowen,the CRL, the FDA communicated to MediWound that it had completed its review of the BLA, as sales agent,amended, and had determined that it could not approve the BLA in registered transactions from our shelf registration statement filedits then form. The Company has continued to work with MediWound, BARDA and the FDA to address the issues identified in June 2015,the CRL. On July 1, 2022, the Company and MediWound submitted a BLA resubmission to the FDA to address and respond to the issues identified by the FDA in the CRL. Subsequently, the FDA informed the Company that it has accepted the resubmission for aggregate proceedsreview and has established a Prescription Drug User Fee Act (“PDUFA”) date for completing that review of January 1, 2023.

Pursuant to the terms of the license agreement, if the BLA is approved, MediWound will transfer the BLA to Vericel and Vericel will market NexoBrid in the U.S. Both MediWound and Vericel, under the supervision of a Central Steering Committee comprised of members of both companies will continue to guide 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.

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. The Company is also obligated to pay MediWound $7.5 million, which is contingent upon U.S. regulatory approval of the BLA for NexoBrid and up to $25.0$125.0 million, which is contingent upon meeting certain sales milestones. The first sales milestone of $7.5 million would be triggered when annual net sales of NexoBrid or improvements to it in North America exceed $75.0 million. Shares of common stock sold under the ATM are to be sold at market prices.  The Company will pay up to 3% of the gross proceeds to Cowen as a commission. A total of 2,222,240 shares of common stock have been sold under the ATM Agreement of which 1,864,384 were sold in 2017 for proceeds of $6.7 million (net of $0.3 million in commission and issuance costs) and asAs of September 30, 2017 had remaining capacity of approximately $17.2 million. We currently intend2022, the 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 usemid-teen percentages, subject to customary reductions.

Pursuant to the net proceeds for research, development, manufacturing, and general and administrative expenses, and for other general corporate purposes.

11.Preferred Stock
Series B Convertible Preferred Stock

On February 10, 2017, the Company sent notice to Eastern Capital Limited (Eastern), an existing holder of sharesterms of the Company’s Series B-1 Non-Voting Convertible Preferred Stock or Series B-2 Voting Convertible Preferred Stock (Preferred Stock), informing Eastern ofsupply agreement with MediWound, MediWound will manufacture NexoBrid for the Company's election to convert all 12,308 of the outstanding shares of Preferred Stock held by Eastern, plus 9,570 shares of Preferred Stock in accumulated but undeclared dividends thereon, into 1,093,892 shares of the Company's common stockCompany on a unit price basis, which may be increased pursuant to the terms of the Amended and Restated Certificate of Designations, Preferences and Rights of Series B-1 Non-Voting Preferred Stock and Series B-2 Voting Preferred Stocksupply 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 Company (Mandatory Conversion).term of the supply agreement. After the Mandatory Conversion on March 9, 2017, no shares of Preferred Stock ofexclusivity period or upon supply failure, the Company remain outstandingwill be permitted to establish an alternate source of supply.

Since 2020, BARDA has been procuring NexoBrid from MediWound for use as of September 30, 2017.




12.Net Loss Per Common Share
Basic earnings (loss) per share is calculated using the two-class method, which is an earnings allocation formula that determines earnings (loss) per share for the holders of the Company’s common shares and holders of the Series B Preferred Stock.  The Series B Preferred Stock shares contain participation rights in undistributed earnings, but do not sharea medical countermeasure in the lossesevent of the Company.  The dividends on the Series B Preferred Stock were treated as a reduction of earnings attributable to common shareholders.

The following reflects the net loss attributable to common shareholders and share data usedmass casualty emergency in the basic and diluted earnings per share computations usingU.S. involving thermal burns. That quarterly procurement of NexoBrid by BARDA under its agreement with MediWound completed during the two class method: third quarter of 2022, although BARDA holds an option to procure additional
20
  Three months ended September 30, Nine months ended September 30,
(Amounts in thousands except per share amounts) 2017 2016 2017 2016
Numerator:  
  
  
  
Net loss $(5,407) $(6,675) $(17,573) $(13,369)
Dividends accumulated on convertible preferred stock —
 (1,931) —
 (5,591)
Net loss attributable to common shareholders $(5,407) $(8,606) $(17,573) $(18,960)
Denominator:  
  
  
  
Denominator for basic and diluted EPS:  
  
  
  
Weighted-average common shares outstanding 33,667
 22,744
 32,783
 22,678
Net loss per share attributable to common shareholders (basic and diluted) $(0.16) $(0.38) $(0.54) $(0.84)
Common equivalent shares are not includedquantities of NexoBrid in the diluted per share calculation where the effectfuture for emergency response preparedness. As a part of their inclusion would be anti-dilutive.  The aggregate number of common equivalent shares (relatedBARDA’s commitment to options, warrants and preferred stock) that have been excluded from the computations of diluted net loss per common share at September 30, 2017 and 2016 were 5.4 million and 6.5 million, respectively.
13. Commitments and Contingencies
The Company leases facilities in Ann Arbor, Michigan and Cambridge, Massachusetts. In March 2016,procure NexoBrid, the Company amended its current leasehas received a percentage of gross profit for sales directly to BARDA. If, in Cambridgethe future, BARDA procures NexoBrid directly from Vericel, the Company will pay a percentage of gross profits to among other provisions, extendMediWound on initial committed amounts and a royalty on any additional BARDA purchases of NexoBrid beyond the terms until February 2022. Under the amendment, the landlord will contribute approximately $2.0 million toward the cost of tenant improvements. The contribution toward the cost of tenant improvements is recorded as deferred rent on the Company's consolidated balance sheet and is amortized to our consolidated statement of operations as reductions to rent expense over the lease term.initial committed amount. As of September 30, 2017,2022, the Company has recorded $1.0 million does not hold a direct contract or distribution agreement with BARDA.


12. Commitments and Contingencies

From time-to-time, the Company could be a party to various legal proceedings arising in the ordinary course of leasehold improvements funded bybusiness. 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 tenant improvement allowance.

Company and could have a material adverse effect on the Company’s results of operations or financial condition. In addition, to theintellectual property leases,disputes often have a risk of injunctive relief which, if imposed against the Company, also leases an offsite warehouse, various vehiclescould materially and computer equipment. The Company's purchase commitments consistadversely affect its financial condition or results of minimum purchase amountsoperations. If a matter is both probable to result in 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 manufacturing.its condensed consolidated financial statements.

As of September 30, 2017, future minimum payments related to leases and other contractual obligations are as follows: 
(In thousands) Total 2017 2018 2019 2020 2021 More than 5 Years
Operating leases $20,378
 $1,317
 $4,806
 $4,473
 $4,475
 $4,546
 $761
Purchase commitments 2,940
 45
 681
 576
 546
 546
 546
Capital leases 43
 11
 32
 

 

 

 

Total $23,361
 $1,373
 $5,519
 $5,049
 $5,021
 $5,092
 $1,307
Rent expense for the three and nine months ended September 30, 2017 was $1.5 million and $4.1 million, respectively, and $1.2 million and $3.6 million, respectively, for the three and nine months ended September 30, 2016.
License Agreement

On May 10, 2017,2022, the Company announced that it has entered into a License Agreement (License Agreement) with Innovative Cellular Therapeutics Co. Ltd, (ICT), a leading cell therapy company and developer of CAR-T cell therapy for cancer treatment,


for the development and distribution of the Vericel product portfoliohad no material ongoing litigation in Greater China, South Korea, Singapore, and other countries in Asia. ICT will acquire an exclusive license to certain patent rights, know-how and intellectual property relating to Carticel, MACI, ixmyelocel-T, and Epicel as well as enter into a warrant purchase agreement. As part of the license and warrant purchase agreements,which the Company will receive an upfront paymentwas a party or any material ongoing regulatory or other proceedings and had no knowledge of $6.0 million, less any applicable taxes, within 60 daysinvestigations by government or regulatory authorities in which the Company is a target that could have a material adverse effect on its current business.

21
Table of the effective date of the License Agreement. The initiation of the technology transfer, the license grants in the License Agreement and the warrant purchase are contingent upon Vericel’s receipt of the upfront payment. Vericel is eligible to receive approximately $8.0 million in development and commercial milestones. ICT has also agreed to pay tiered royalties to Vericel equal to a percentage of net sales of each Licensed Product in the low double digits for the commercial life of the applicable Licensed Product. ICT will be responsible for funding the development of the programs and manufacturing of the products for commercialization in China and the rest of the territory. The funding transfer is subject to approval by the State Administration of Foreign Exchange of the People's Republic of China and has not occurred as of issuance date of the financial statements. As a result, the parties have amended the agreement monthly to provide additional time for ICT to pay and reset certain terms of the warrant. The initiation of the technology transfer, the license grants in the License Agreement and the warrant purchase have not occurred. As partial consideration for an amount included in the upfront payment Vericel will issue to ICT a warrant, exercisable for the number of shares of Vericel’s Common Stock equal to $5.0 million less the withholding tax payable thereon divided by $4.90 currently (formerly $3.05), with a strike price of $0.01 per share.Contents



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

Overview

Vericel Corporation is a leading developer of patient-specific expanded cellfully-integrated, commercial-stage biopharmaceutical company and a leader in advanced therapies for use in the treatment of patients withsports medicine and severe diseases and conditions.burn care markets. We currently havemarket two U.S. Food and Drug Administration (FDA) marketed(“FDA”) approved autologous cell therapy products in the United States.U.S. 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 that was approved by the FDA on December 13, 2016. The first shipment and implantation of MACI occurred on January 31, 2017. At the end of the second quarter, MACI replaced Carticel® (autologous cultured chondrocytes), an autologous chondrocyte implant indicated for the repair of symptomatic cartilage defects of the femoral condyle (medial, lateral or trochlea), caused by acute or repetitive trauma, in patients who have had an inadequate response to a prior arthroscopic or other surgical repair procedure (e.g., debridement, microfracture, drilling/abrasion arthroplasty, or osteochondral allograft/autograft.We also marketadults. Epicel® (cultured epidermal autografts), is a permanent skin replacement Humanitarian Use Device (HUD)(“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)(“TBSA”). Our development stage portfolio includes ixmyelocel-T,We also hold an exclusive license from MediWound for North American rights to NexoBrid®, a patient-specific multicellular therapyregistration-stage biological orphan product designed for eschar removal or debridement of severe thermal burns. In 2020, MediWound submitted to the FDA a biologics license application (“BLA”) seeking the approval of NexoBrid for the treatment of advanced heart failureadult patients suffering from deep partial-thickness and/or full-thickness thermal burns. The FDA accepted the BLA for filing and assigned a Prescription Drug User Fee Act (“PDUFA”) target date of June 29, 2021. Thereafter, on June 29, 2021, MediWound received a complete response letter (“CRL”) from the FDA regarding the BLA through which the FDA communicated to MediWound that it had completed its review of the BLA, as amended, and had determined that it could not approve the BLA in its then form. We have continued to work with MediWound, BARDA and the FDA to address the issues identified in the CRL. On July 1, 2022, Vericel and MediWound submitted a BLA resubmission to the FDA seeking the potential approval of NexoBrid. Subsequently, the FDA informed us that it has accepted the resubmission for review and has established a PDUFA date for completing that review of January 1, 2023.

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 ischemic dilated cardiomyopathy (DCM).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, we put in place a comprehensive workplace protection plan, which instituted protective measures in response to the spread of the COVID-19 virus. Our 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, we have been successful in sustaining our operations and providing MACI and Epicel to patients in need. We continue to review our policies and procedures regularly, including our workplace protection plan, as the pandemic evolves and we may take additional actions to the extent required.

We continue to manufacture MACI and Epicel and are maintaining a significant safety stock of all key raw materials. We do not expect that current global supply chain interruptions will impact our ongoing manufacturing operations. Additionally, although we have 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 our business. Currently, we are not aware of COVID-19 related impacts on our distributors, operations or third-party service providers’ ability to manage patient cases.

We believe 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 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 resulted in 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 unaudited condensed consolidated financial statements.
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Manufacturing

We have a cell-manufacturingcell manufacturing facility in Cambridge, Massachusetts which is used for U.S. manufacturing and distribution of MACI and Epicel, and also was used for manufacturing of MACI for the SUMMIT study conducted for approval in Europe and the U.S. Throughout 2016, we also operated a centralized cell manufacturing facility in Ann Arbor, Michigan. The Ann Arbor facility supported the open label extension portion of the ixCELL-DCM clinical trial conducted in the United States and Canada.Epicel.

Product Portfolio

Our approved and marketed products include two approvedFDA-approved autologous cell therapy products:therapies: MACI, (autologous cultured chondrocytes on a porcine collagen membrane), a third generationthird-generation autologous implant for the repair of symptomatic, full-thickness cartilage defects of the knee in adult patients and Epicel (cultured epidermal autografts), a permanent skin replacement for full thickness burns in adults and pediatrics with greater than or equal to 30% of total body surface area (TBSA) also currently marketed in the U.S. We also own Carticel (autologous cultured chondrocytes), a first-generationcellularized scaffold product for autologous chondrocyte implantation (ACI) which is no longer marketed in the U.S. Our product candidate portfolio included ixmyelocel-T, a patient-specific multicellular therapy for the treatment of advanced heart failure due to DCM. On September 29, 2017, the FDA indicated we would be required to conduct an additional clinical study to support a Biologics License Application (BLA) for ixmyelocel-T.  We have decided we will not conduct any additional clinical studies for ixmyelocel-T unless fully funded by a partner. 

Carticel and MACI
Carticel, a first-generation ACI product for the treatment and repair of cartilage defects in the knee, was the first FDA-approved autologous cartilage repair product.  Carticel is indicated for the repair of symptomatic cartilage defects of the femoral condyle (medial, lateral or trochlea) caused by acute or repetitive trauma, in patients who have had an inadequate response to a prior arthroscopic or other surgical repair procedure such as debridement, microfracture, drilling/abrasion arthroplasty, or osteochondral allograft/autograft.  Carticel received a BLA approval in 1997 and is no longer marketed in the U.S.  It was generally used on patients with larger lesions (greater than 3 cm2). Carticel was replaced at the end of the second quarter of 2017 by MACI, which was approved on December 13, 2016 by the FDA. MACI is a third generation autologous implant for the repair of symptomatic, single or multiple full-thickness cartilage defects of the knee with or without bone involvement in adults. The first shipmentadults; 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 of TBSA. Both products are currently marketed in the U.S. In addition, we have entered into exclusive license and supply agreements with MediWound to commercialize NexoBrid in North America, if approved by the FDA.

MACI

MACI is a third-generation autologous chondrocyte implantation (“ACI”) product indicated for the repair of MACI occurred on January 31, 2017, and we stopped manufacturing and marketing Carticel at the endsymptomatic, single or multiple full-thickness cartilage defects of the second quarterknee with or without bone involvement in 2017.adults.

In the U.S., the orthopedic physicianOur target audience of U.S. physicians is very concentrated, withapproximately 5,000 orthopedic surgeons and is divided into two thirds of our 2016 Carticel business originating from approximately 150 physicians. Our target Carticel and MACI audience issegments: a group of physiciansorthopedic surgeons who self-identify as and/or have thea formal specialty ofas sports medicine physicians. We believephysicians, and a subpopulation of general orthopedic surgeons who perform a high volume of cartilage repair procedures. As of the date of this report, we have 75 MACI sales representatives to enable the sales force to reach our target audience is approximately 500 physicians. At the end of 2016 we expanded our field force from 21 to 28 representatives.audience. Most private payers have a medical policy that allowscovers treatment with Carticel and we are actively workingMACI with the 30 largest commercial payers to ensure reimbursement for MACI. 28 of the top 30 payers for Carticel havehaving a formal medical policy for MACI or ACI in general. For thoseWith respect to private commercial payers whichthat have not yet approved a medical policy for MACI, for medically appropriate cases we can often obtain approval on a case by casecase-by-case basis.For the nine months ended September 30, 2017, net revenues were $27.8 million for Carticel and MACI.



Epicel

Epicel (cultured epidermal autografts) is a permanent skin replacement for full thicknessdeep-dermal or full-thickness burns comprising greater than or equal to 30%30 percent of TBSA. Epicel is regulated by the CBERCenter for Biologics Evaluation and Research (“CBER”) of the FDA under medical device authorities, and is the only FDA-approved autologouscultured epidermal autograft product available for large total surface area burns. Epicel was designated as a HUD in 1998 and an HDE application for the product was submitted in 1999. HUDs are devices that are intended for diseases or conditions that affect fewer than 4,0008,000 individuals annually in the United States.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. Currently, fewer than 100 patients are treated with Epicel in the U.S. each year. For the nine months ended September 30, 2017, net revenues were $12.8 million for Epicel.
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 asso long as the number of devices distributed in any calendar year does not exceed the annual distribution number (ADN)Annual Distribution Number (“ADN”). The ADN is defined as the number of devices reasonably needed to treat a population of 4,0008,000 individuals per year in the United States.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 and to add pediatric labeling.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 massivelarge burns treated with Epicel relative to standard care. Due toBecause 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 isto be 360,400 which is approximately 5030 times larger than the volume of grafts sold in 2016.2021. We currently have a 5-personfifteen person burn field force.force comprised of seven account managers and eight burn clinical specialists, led by two regional directors, a national account development director and one national sales director.


Ixmyelocel-TNexoBrid


Our preapproval stagedevelopment portfolio includes ixmyelocel-T,NexoBrid, a unique patient-specific multicellular therapy derived registration-stage, topically-administered biological product that enzymatically removes nonviable burn tissue, or eschar, in patients with deep partial and full-thickness thermal burns. We have entered into exclusive license and supply agreements with MediWound to commercialize NexoBrid and any improvements to the product in North America, if approved. On June 29, 2021, the Company announced that MediWound had received a CRL
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from an adult patient’s own bone marrowthe FDA with respect to the BLA, which utilizes our proprietary, highly automated and scalable manufacturing system. The patient-specific multicellular therapy was developedMediWound had previously submitted to the FDA seeking marketing approval for the treatmentproduct in the U.S. As part of advanced heart failure duethe CRL, the FDA communicated to DCM.

Ixmyelocel-T has been grantedMediWound that it had completed its review of the BLA, as amended, and had determined that it could not approve the BLA in its then form. We have continued to work with MediWound, BARDA and the FDA to address the issues identified in the CRL. On July 1, 2022, Vericel and MediWound submitted a U.S. Orphan Drug designationBLA resubmission to the FDA to address and respond to the issues identified by the FDA for the treatment of DCM. We completed enrolling and treating patients in our completed Phase 2b ixCELL-DCM study in February, 2015. Patients were followed for 12 months for the primary efficacy endpoint of major cardiac adverse events, or MACE. On March 10, 2016, we announced the trial had met its primary endpoint of reduction in clinical cardiac events and that the incidence of adverse events, including serious adverse events, in patients treated with ixmyelocel-T was comparable to patients in the placebo group.  Patients were then followedCRL. Subsequently, the FDA informed us that is has accepted the resubmission for an additional 12 monthsreview and has established a Prescription Drug User Fee Act (“PDUFA”) date for safety. Because the trial met the primary endpoint, patients who received placebo or were randomized to ixmyelocel-Tcompleting that review of January 1, 2023.

NexoBrid is approved in the double-blind portionEuropean Union (“EU”) and other international markets and has been designated as an orphan biologic in the U.S., EU and other international markets. Pursuant to the terms of our existing license agreement, if the trial but did not receive ixmyelocel-T haveBLA is approved, MediWound will transfer the BLA to us and we will market NexoBrid in the U.S. Both MediWound and Vericel, under the supervision of a Central Steering Committee comprised of members of both companies will continue to guide development of NexoBrid in North America. Under our license agreement with MediWound, since 2020 NexoBrid has been offered the optionmanufactured for BARDA prior to receive ixmyelocel-T. We successfully treated the last patients in February, 2017, and the last follow-up visit will occur approximately one year later. In addition, we have conducted clinical studies for the treatment of critical limb ischemia, and an ixmyelocel-T investigator-initiated clinical study was conducted for the treatment of craniofacial reconstruction.

On September 29, 2017,approval by the FDA indicated we wouldunder an emergency use authorization. Additional quantities of NexoBrid may be requiredmanufactured for BARDA in the future pursuant to conduct an additional clinical study to support a BLA for ixmyelocel-T.  Given the expense required to conduct further development and our focus on growing our existing commercial products and becoming profitable, at this time we have no current plans to initiate or fund a Phase 3 trial on our own but instead are seeking a partner to fund further development.terms of its agreement with MediWound.




Results of Operations

Net LossThe following is a summary of our condensed consolidated results of operations:
 Three Months Ended September 30,Nine Months Ended September 30,
(In thousands)20222021Change $Change %20222021Change $Change %
Total revenue$38,551 $34,506 $4,045 11.7 %$111,671 $108,593 $3,078 2.8 %
Cost of product sales13,318 12,408 910 7.3 %40,132 36,600 3,532 9.7 %
Gross profit25,233 22,098 3,135 14.2 %71,539 71,993 (454)(0.6)%
Research and development5,046 4,284 762 17.8 %14,698 12,363 2,335 18.9 %
Selling, general and administrative26,975 22,775 4,200 18.4 %79,984 71,625 8,359 11.7 %
Total operating expenses32,021 27,059 4,962 18.3 %94,682 83,988 10,694 12.7 %
Loss from operations(6,788)(4,961)(1,827)36.8 %(23,143)(11,995)(11,148)92.9 %
Total other income232 30 202 673.3 %533 204 329 161.3 %
Income tax expense21 — 21 100.0 %21 215 (194)(90.2)%
Net loss$(6,577)$(4,931)$(1,646)33.4 %$(22,631)$(12,006)$(10,625)88.5 %
Our net loss
Comparison of the Periods Ended September 30, 2022 and 2021

Total Revenue

Revenue by product for the three and nine months ended September 30, 2017 totaled $5.4 million2022 and $17.6 million, respectively. Our net loss2021 are as follows:

 Three Months Ended September 30,Nine Months Ended September 30,
Revenue by product (In thousands)20222021Change $Change %20222021Change $Change %
MACI$31,009 $23,881 $7,128 29.8 %$85,617 $74,203 $11,414 15.4 %
Epicel7,317 9,837 (2,520)(25.6)%25,387 31,822 (6,435)(20.2)%
NexoBrid225 788 (563)(71.4)%667 2,568 (1,901)(74.0)%
Total Revenue$38,551 $34,506 $4,045 11.7 %$111,671 $108,593 $3,078 2.8 %

Total revenue increase for the three and nine months ended September 30, 2016 totaled $6.7 million and $13.4 million, respectively.


  Three Months Ended September 30, Nine Months Ended September 30,
 (In thousands) 2017 2016 2017 2016
Total revenues $14,260
 $10,929
 $40,574
 $37,860
Cost of product sales 7,186
 6,856
 21,965
 20,716
Gross profit 7,074
 4,073
 18,609
 17,144
Total operating expenses 11,105
 10,453
 34,784
 30,500
Loss from operations (4,031) (6,380) (16,175) (13,356)
Other income (expense) (1,376) (295) (1,398) (13)
Net loss $(5,407) $(6,675) $(17,573) $(13,369)
Net Revenues
 Net revenues increased for the three months ended September 30, 20172022 compared to the same periodperiods in 2021, was driven by MACI volume and price growth, offset primarily by lower Epicel volume and lower revenue associated with the previous year due primarilydelivery of NexoBrid to an increaseBARDA for emergency response preparedness.

Seasonality. The effects of the ongoing COVID-19 pandemic have disrupted the normal seasonality of our MACI business at times over the past thirty-one months. These effects have included, among others, periodic restrictions on the performance of
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elective surgical procedures throughout the country, the unavailability of physicians and/or changes to their treatment prioritizations, reductions in MACIthe levels of healthcare facility staffing and, Epicel sales units and an increase in average sales price per unit.

Net revenues increased forcertain instances, the nine months ended September 30, 2017 primarily duewillingness or ability of patients to higher Carticel, MACI and Epicel sales units and higher average price per unit. In April 2017, we were informed of a contractual dispute between Vital Care, Inc. (Vital Care)seek treatment and the third-party payer relatedinability of our clinical account specialists to certain insurance reimbursement claims associated withcall on surgeon customers. Over the last five years, ACI (MACI and Carticel prior to replacement) sales volumes from the first through the fourth quarter on average represented 19% (16%-21% range), 22% (16%-25% range), 23% (21%-26% range) and 36% (33%-38% range) respectively, of total annual volumes. MACI surgeries performed in 2016 and 2017. This contractual dispute between Vital Care and the third-party payer was resolved. The negotiated reimbursement and related change in estimate, for sales that were originally recorded in 2016, resulted in a decrease of $0.6 million to revenue for the nine months ended September 30, 2017.

  Three Months Ended September 30, Nine Months Ended September 30,
Revenue by product (in thousands) 2017 2016 2017 2016
Carticel and MACI $9,909
 $8,319
 $27,821
 $26,117
Epicel 4,351
 2,610
 12,753
 11,743
  $14,260
 $10,929
 $40,574
 $37,860
Seasonality. Carticel revenue was subject to seasonal fluctuations withorders are normally stronger sales occurring in the fourth quarter and second quarter due to a number ofseveral factors including the satisfaction by patients of insurance copaydeductible limits and the time of year patients prefer to start rehabilitation,rehabilitation. Because of the effects of the COVID-19 pandemic, the MACI business seasonality in 2021 and 2020 did not follow our historical patterns, and while 2022 thus far has seen a return to more normal MACI ordering patterns, seasonality in 2022 could again be impacted by COVID-19 related factors. Due to the low incidence and variable occurrence of severe burns, Epicel revenue is expectedhas inherent variability from quarter-to-quarter and does not exhibit significant seasonality.

Gross Profit

Gross profit increased for the three months ended September 30, 2022 compared to the same period in 2021, driven by higher MACI volume and price growth, offset by lower Epicel labor utilization, raw material price increases and higher external storage and manufacturing facility costs.

Gross profit was similar for the nine months ended September 30, 2022 compared to the same period in 2021, as lower Epicel labor utilization, raw material price increases and higher external storage and manufacturing facility costs offset higher MACI volume.

Research and Development Expenses

The following table summarizes research and development expenses, which include license fees, 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)20222021Change $Change %20222021Change $Change %
MACI$3,000 $2,572 $428 16.6 %$8,961 $6,993 $1,968 28.1 %
Epicel1,166 992 174 17.5 %3,624 3,157 467 14.8 %
NexoBrid880 720 160 22.2 %2,113 2,213 (100)(4.5)%
Total research and development expenses$5,046 $4,284 $762 17.8 %$14,698 $12,363 $2,335 18.9 %
Research and development expenses for the three months ended September 30, 2022 were $5.0 million, compared to $4.3 million for the same period in 2021. Research and development costs continue to be subjectcentered around process development, and regulatory and medical affairs for MACI and Epicel. The increase is primarily due to these seasonal fluctuations as well. Overincreased headcount and stock-based compensation expense.

Research and development expenses for the last five years,nine months ended September 30, 2022 were $14.7 million, compared to $12.4 million for the percentagesame period in 2021. The increase is primarily due to an increase of annual sales by quarter has ranged as follows: first quarter, 20%$0.9 million in stock-based compensation expense, additional spend on the design of instruments to 24%; second quarter, 24% to 26%; third quarter, 20% to 23%; and fourth quarter, 28% to 33%. During 2016, the percentage of annual sales by quarter was as follows: 24%be used in the first quarter; 24% in the second quarter; 20% in the third quarter; and 32% in the fourth quarter. Epicel revenue is also subject to seasonal fluctuations mostly associatedconnection with the usepotential arthroscopic delivery of heating elements duringMACI to the colderknee, if approved by the FDA, and increased headcount, partially offset by reimbursement of expenses related to the BLA resubmission.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months with stronger sales occurringended September 30, 2022 were $27.0 million compared to $22.8 million for the same period in the winter months of the first2021. The increase in selling, general and fourth quarters, and weaker sales occurring in the hot summer months of the third quarter. However, in any single year, this trend can be absentadministrative expenses was primarily due to an increase of $0.6 million in stock-based compensation expenses, increased headcount, an increase in travel and in-person events including more physician engagement and educational programs in addition to higher depreciation related to the extreme variability inherent with Epicel’s low patient volume of fewer than 100 patients per year. Overnew
office space in Cambridge, Massachusetts.

Selling, general and administrative expenses for the last five years, the percentage of annual sales by quarter has ranged as follows: first quarter, 22%nine months ended September 30, 2022 were $80.0 million compared to 35%; second quarter, 22% to 28%; third quarter, 17% to 24%; and fourth quarter, 23% to 30%. The variability between$71.6 million for the same quartersperiod in consecutive years has been as high as 11%2021. The increase in selling, general and administrative expenses was primarily due to an increase of $2.4 million in stock-based compensation expenses, increased headcount, an increase in travel and in-person events including more physician engagement and educational programs in addition to higher depreciation related to the annual volume. While the number of patients treated per year remains low, we expect these large swingsnew office space in revenue in some quarters to continue. These seasonal trends have caused and will likely continue to cause, fluctuations in our quarterly results, including fluctuations in sequential revenue growth rates.
Gross Profit and Gross Profit RatioCambridge, Massachusetts.
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  Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2017 2016 2017 2016
Gross profit $7,074
 $4,073
 $18,609
 $17,144
Gross profit % 50% 37% 46% 45%
Total Other Income (Expense)


Gross profit ratio increasedThe change in other income (expense) for the three and nine months ended September 30, 20172022, compared to the same periodperiods in 20162021 was due primarily to an increasefluctuations in Carticelthe rates of return on our investments in various marketable debt securities and MACI sales described above.interest expense related to our Revolving Credit Agreement.



Income Tax Expense
Research and Development Costs

  Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2017 2016 2017 2016
Research and development costs $2,919
 $3,443
 9,357
 11,037

Research and development costs forFor the three months ended September 30, 2017 were $2.92022, less than $0.02 million versus $3.4 millionincome tax expense was recorded and no expense for income taxes was recognized for the same period a year ago, primarily due to a reduction in the ixCELL-DCM clinical trial expenses. Because the trial met the primary endpoint, patients who received placebo or were randomized to ixmyelocel-T in the double-blind portion of the trial but did not receive ixmyelocel-T were offered the option to receive ixmyelocel-T beginning in 2016. We successfully treated the last patients in February 2017 and lower expenses were incurred in the current period. MACI research and development costs increased related to activity incurred as a result of the FDA approval received in December 2016.

Research and development costs2021. Less than $0.02 million income tax expense was recorded for the nine months ended September 30, 2017 were $9.42022, compared to $0.2 million versus $11.0 million recorded for the same period a year ago. As described above, the trial expenses for the ixCELL-DCM clinical trial decreased as the trial completed treatment of the patients who received the placebo. Carticel-related expenses decreased as a result of the approved MACI product in December 2016. Additional costs were incurred related to MACI upon the approval.

  Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2017 2016 2017 2016
Dilated Cardiomyopathy $909
 $1,875
 $4,050
 $5,732
MACI 1,385
 636
 3,309
 1,916
Carticel 45
 462
 369
 1,828
Epicel 580
 470
 1,629
 1,561
Total research and development costs $2,919
 $3,443
 $9,357
 $11,037
Selling, General and Administrative Costs
  Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2017 2016 2017 2016
Selling, general and administrative costs $8,186
 $7,010
 $25,427
 $19,463
Selling, general and administrative costs for the threenine months ended September 30, 2017 were $8.2 million compared to $7.0 million for2021, respectively.

Stock-Based Compensation Expense

Non-cash stock-based compensation expense is summarized in the same period a year ago.  following table: 

 Three Months Ended September 30,Nine Months Ended September 30,
(In thousands)20222021Change $Change %20222021Change $Change %
Cost of product sales$840 $1,114 $(274)(24.6)%$2,992 $3,313 $(321)(9.7)%
Research and development1,273 1,126 147 13.1 %4,143 3,222 921 28.6 %
Selling, general and administrative6,991 6,356 635 10.0 %22,308 19,946 2,362 11.8 %
Total non-cash stock-based compensation expense$9,104 $8,596 $508 5.9 %$29,443 $26,481 $2,962 11.2 %

The increase in selling, general and administrative costs for the three months ended September 30, 2017 is due primarily to an increase in personnel and employee costs of $0.9 million related to an increase in the MACI sales force.

Selling, general and administrative costs for the nine months ended September 30, 2017 were $25.4 million compared to $19.5 million for the same period a year ago. The increase in selling, general and administrative costs in 2017 is driven by an increase in personnel costs of $1.6 million primarily related to an increase in the MACI sales force, consulting and agency fees of $3.0 million related to the launch of MACI and costs associated with our reimbursement and patient support services for MACI of $0.9 million.

Other Income (Expense)
  Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2017 2016 2017 2016
Decrease in fair value of warrants $(1,060) $(203) $(512) $99
Foreign currency translation (loss) (6) (6) (20) (17)
Other income (expense) 5
 —
 6
 (10)
Net interest (expense) income (315) (86) (872) (85)
Total other income (expense) $(1,376) $(295) $(1,398) $(13)
The change in other income andstock-based compensation expense for the three and nine months ended September 30, 20172022 compared to 2016 is due primarily to interest expense on the outstanding revolving credit agreement and term loans, the changesame periods in warrant value as a result of the fluctuations in our stock price and the reduction in the time to maturity. Fluctuations in the fair value of the warrants in


future periods could result in significant non-cash adjustments to the condensed consolidated financial statements; however, any income or expense recorded will not impact our cash, operating expenses or cash flow.
Stock Compensation
Non-cash stock-based compensation expense included in cost of goods sold, research and development expenses and selling, general and administrative expenses is summarized in the following table: 
  Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2017 2016 2017 2016
Cost of goods sold $119
 $117
 $316
 $330
Research and development 177
 133
 $391
 $392
Selling, general and administrative 459
 404
 1,346
 1,251
Total non-cash stock-based compensation expense $755
 $654
 $2,053
 $1,973
The changes in stock-based compensation expense are2021, was due primarily to fluctuations in stock prices which impact the fair value of the options grantedand restricted stock units awarded and the expense recognized in 2017 compared to 2016.the period.


Liquidity and Capital Resources

We are currently focused on utilizingCash Flows

The following table summarizes our technology to identify, developsources and commercialize innovative therapies that enable the body to repair and regenerate damaged tissues and organs to restore normal structure and function.  Since the acquisition in 2014uses of cash for each of the CTRM Businessperiods presented:

Nine Months Ended September 30,
(In thousands)20222021
Net cash provided by operating activities$10,712 $18,489 
Net cash used in investing activities(14,477)(5,386)
Net cash provided by financing activities440 7,830 
Net (decrease) increase in cash, cash equivalents, and restricted cash$(3,325)$20,933 

Net Cash Provided by Operating Activities

Our cash and cash equivalents totaled $65.2 million, short-term investments totaled $45.7 million and long-term investments totaled $21.7 million as of Sanofi,September 30, 2022. The $10.7 million of cash provided by operations during the nine months ended September 30, 2022 was primarily the result of non-cash charges of $29.4 million related to stock-based compensation expense, $3.1 million of operating lease amortization and $2.9 million in depreciation and amortization expense, offset by a net loss of $22.6 million and a net decrease of $2.5 million related to movements in our working capital accounts. The overall decrease in cash from our working capital accounts was primarily driven by an increase in inventory due to increased production needs and payments on operating leases offset by a decrease in accounts receivable due to cash collections.

Our cash, cash equivalents and restricted cash totaled $54.8 million, short-term investments totaled $43.7 million and long-term investments totaled $20.2 million as of September 30, 2021. The $18.5 million of cash provided by operations during the nine months ended September 30, 2021, was primarily the result of non-cash charges of $26.5 million related to stock
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compensation expense, $3.4 million of operating lease amortization, and $2.2 million in depreciation and amortization expense, offset by a net loss of $12.0 million, and a net decrease of $2.3 million related to movement in our working capital accounts. The overall decrease in cash from our working capital accounts was primarily driven by a decrease in accounts receivable due to cash collections, an increase in inventory due to increased production needs, and payments on operating leases.

Net Cash Used In Investing Activities

Net cash used in investing activities during the nine months ended September 30, 2022 was the result of $44.0 million in investment purchases and $6.5 million of property and equipment purchases primarily for manufacturing upgrades and leasehold improvements, offset by $35.9 million of investment sales and maturities.

Net cash used in investing activities during the nine months ended September 30, 2021 was the result of Carticel$49.4 million in investments purchases and Epicel therapies have constituted nearly allequipment purchases of $6.9 million, primarily for manufacturing upgrades and leasehold improvements, offset by $50.9 million of investment sales and maturities.

Net Cash Provided by Financing Activities

Net cash provided by financing activities during the nine months ended September 30, 2022 was the result of net proceeds from the exercise of stock options and the employee stock purchase plan of $3.0 million, offset by payments of employee withholding taxes related to the vesting of restricted stock units of $1.5 million and payments of debt issuance costs of $1.1 million.

Net cash provided by financing activities during the nine months ended September 30, 2021 was primarily the result of net proceeds from the exercise of stock options of $9.7 million, partially offset by the payment of employee withholding taxes related to the vesting of restricted stock units of $1.6 million.

Liquidity

Since our product sales revenues.  With the approval of MACI and replacement of Carticel with MACI, we expect the salesacquisition of MACI and Epicel therapies will constitute nearly allin 2014, our primary focus has been to invest in our existing commercial business with the goal of our product sales revenues. Additionally, we are focusing significant resources to grow our commercial business.

growing revenue. We have raised significant funds in order to complete our product development programs and complete clinical trials needed to market and commercialize our products.products, including NexoBrid. To date, we have financed our operations primarily through cash received through Epicel and MACI sales, debt and public and private sales of our equity securities including the net proceeds of approximately $18.0securities. We generated $10.7 million we received from our December 2016 public offering and the availability of funds under the SVB-Mid-Cap Facility. While we believe that, based on our currentin operating cash on hand, we are in a position to sustain operations through at least November 2018, if actual results differ from our projections, we may need to access additional capital.

On October 10, 2016 we entered into an at-the-market sales agreement (ATM Agreement) with Cowen and Company, LLC (Cowen) as sales agent to sell, from time to time, our common stock, no par value per share (ATM Shares), having an aggregate sale price of up to $25.0 million, through an “at the market offering” program (ATM Offering). The ATM Shares will be issued pursuant to our shelf registration statement on Form S-3 (File No. 333-205336). We filed a prospectus supplement, dated October 10, 2016, with the Securities and Exchange Commission in connection with the offer and sale of the ATM Shares sold under the ATM Agreement. We are obliged to pay 3% of the gross proceeds to Cowen as a commission. As of September 30, 2017, approximately $17.2 million of net capacity remained under the ATM Agreement.

Our cash totaled $15.5 million as of September 30, 2017. During the nine months ended September 30, 2017, the cash used for operations was $14.0 million.  This use of funds was fueled largely by our operating loss of $17.6 million reduced by noncash charges including $2.1 million of stock compensation expense, $1.2 million of depreciation expense and $0.5 million due to the change in fair value of warrants.

The change in cash used for investing activities is the result of material property plant and equipment purchases of $0.8 million for manufacturing upgrades and leasehold improvements through September 30, 2017.
The change in cash provided from financing activities is the result of the ATM activityflows during the nine months ended September 30, 2017 which did not occur during2022, and we may finance our operations through the nine months ended September 30, 2016. In 2016, we had netsales of equity securities, revolver borrowings of $6.0 million under our term loan and revolving credit agreements and no additional borrowings in 2017.or other debt financings.


On March 8, 2016, we entered into a $15.0 million debt financing with SVB which we replaced on September 9, 2016 with an expanded term loan and revolving line of credit agreement with SVB and MidCap Financial Services, or MidCap, which initially provide access to up to $20 million. The updated debt financing consists of a $4.0 million term loan which was drawn at the closing, a $4.0 million term loan which was drawn upon in November 2016, a $2.0 million term loan which is no longer available


as it was not drawn on by April 12, 2017 and up to $10.0 million of a revolving line of credit. The term loans are interest only (indexed to Wall Street Journal (WSJ) Prime plus 5.00%) until September 1, 2017 followed by 36 equal monthly payments of principal plus interest maturing September 9, 2020. Per the initial terms of the agreement, the revolving credit is limited to a borrowing base calculated using eligible accounts receivable which was further reduced in the amendment described below and maturing September 9, 2020 with an interest rate indexed to WSJ Prime plus 1.25%. We are subject to various financial and nonfinancial covenants including but not limited to a monthly minimum net revenue covenant (determined in accordance with U.S. GAAP), measured on a trailing twelve month basis. The December 31, 2017 minimum revenue covenant is set at $51.7 million. SVB and MidCap also have the ability to call debt based on material adverse change clauses which are subjectively determinable and result in a subjective acceleration clause. The Company does not believe any material adverse changes have occurred. While we believe the acceleration of the due date may be reasonably possible, it is not probable and therefore, the debt is classified in current and non-current liabilities. SVB and MidCap have a shared first priority perfected security interest in all of our assets other than intellectual property. As of September 30, 2017, there was an outstanding balance of $7.8 million under the term loan and $2.5 million under the revolving line of credit.

On December 30, 2016, we entered into an amendment to the SVB-MidCap facility to amend certain financial covenants and to modify the final payment of the term loan advance. We further amended the SVB-MidCap facility on May 9, 2017 to update the monthly net revenue requirement covenants, measured on a trailing twelve month basis. The amendment decreased the 12 month trailing minimum revenue covenant as of June 30, 2017 and revised the December 31, 2017 minimum revenue covenant to $51.7 million. As of September 30, 2017, we were in compliance with the minimum revenue covenant. The amount of eligible account receivables used to calculate the availability under the revolving line of credit is no longer reduced by the $3.0 million per the terms of an amendment, as our revenue met minimum revenue targets for two (2) consecutive quarters. As of September 30, 2017, there was $3.3 millionremaining capacity under the revolving line of credit. The distribution agreement with Orsini discussed in note 4 and the concentration of credit limitations in the calculation of eligible account receivables could further reduce our ability to borrow under the revolving line of credit.

While we believe that based on our current cash on hand, we are in a positioncash equivalents, investments, and available borrowing capacity will be sufficient to sustainsupport our current operations through at least November 2018, if actual results differ12 months from our projections or we pursue other strategic opportunities, we may needthe issuance of these condensed consolidated financial statements. However, the continuing effects of the ongoing COVID-19 pandemic continue to access additional capital.  In addition, if our revenues do not meet the existing threshold set forth in the debt covenants,evolve and we are unable to renegotiate those thresholds, SVB could call the debt immediately. Such events could result in the need for additional funds.  However, we may not be able to obtain financing on acceptable terms or at all.   The terms of any financing may adversely affect the holdings or the rights of our shareholders.  If we need additional funds and we are unable to obtain funding on a timely basis, we may need to significantly curtail our operations including our research and development programs in an effort to provide sufficient funds to continue our operations, which could adversely affectimpact our business prospects.  Actualand operations. Our actual cash requirements may differ from projections and will depend on many factors, including continued scientific progress in ourany future impacts of the COVID-19 pandemic, the level and pace of future research and development programs,efforts, the scope and results of ongoing and potential clinical trials, the time and costs involved in obtaining regulatory approvals, the costs involved in filing, prosecuting and enforcing patents, the need for additional manufacturing capacity, competing technological and market developments, costs ofassociated with possible acquisitionacquisitions or development of complementary business activities, and the cost of product launch andto market acceptance of those products and commercialization of newly approvedour products.


Off-Balance Sheet Arrangements
AtAs of September 30, 2017,2022, we were not party to any off-balance sheet arrangements.


Sources of Capital

On August 27, 2021, we entered into a Sales Agreement with SVB Leerink LLC, as sales agent (“SVB Leerink”), pursuant to which we may offer and sell up to $200.0 million of shares of our common stock, no par value per share (“ATM Shares”). The ATM Shares to be offered and sold under the Sales Agreement will be issued and sold pursuant to an automatically effective shelf registration statement on Form S-3ASR (File No. 333-259119) filed by us on August 27, 2021, which expires three years from the filing date. We also filed a prospectus supplement relating to the offering and sale of the ATM Shares on August 27, 2021. We are not obligated to make any sales of ATM Shares, and SVB Leerink is not required to sell any specific number or dollar amount of the ATM Shares under the Sales Agreement. As of September 30, 2022, we have sold no shares pursuant to the Sales Agreement.

On July 29, 2022, we 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
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(the “Revolving Credit Agreement”). We have no immediate plans to borrow under the Revolving Credit Agreement, but we may use the facility for working capital needs and other general corporate purposes. As of September 30, 2022, there are no outstanding borrowings under the Revolving Credit Agreement, and we are in compliance with all applicable covenant requirements. See Note 9, “Revolving Credit Agreement” in the accompanying condensed consolidated financial statements for further details.


Contractual Obligations and Commitments

The disclosure of our contractual obligations and commitments is set forth in the heading “Management’s Discussion and Analysis of Financial Conditions and Results of Operations - Contractual Obligations” in our Annual Report on Form 10-K for the year ended December 31, 2021. There have been no material changes, outside of the ordinary course of business, to our contractual obligations and commitments since December 31, 2021, except as discussed in Note 5, “Leases” and Note 9, “Revolving Credit Agreement” in the accompanying condensed consolidated financial statements.


Critical Accounting Policies

OurThe discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, arewhich have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP).U.S. GAAP. The preparation of these condensed consolidated financial statements requires the application of appropriate technical accounting rules and guidance, as well as the use of estimates. The application of these policies necessarily involves judgments regarding future events. Theseus to make estimates and judgments inthat affect our reported assets, liabilities, revenues, expenses, and of themselves, couldrelated disclosures. Actual results may differ materially impact the condensed consolidated financial statementsfrom these estimates under different assumptions and disclosures based on varying assumptions. The accounting policies discussed in our Form 10-K for the fiscal year ended December 31, 2016 are considered by management to be the most important to an understanding of the consolidated financial statements because of their significance to the portrayal of our financial condition and results of operations. conditions.

There have been no material changes to that information disclosedour critical accounting policies and estimates in our Annual Report during the nine months ended September 30, 2017.2022. For further information, refer to our summary of significant accounting policies and estimates in our Annual Report on Form 10-K filed for the year ended December 31, 2021.



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Cautionary Note Regarding Forward-Looking Statements

This report, including the documents that we incorporateincorporated by reference herein, contains forward-lookingcertain statements that describe our management’s beliefs concerning future business conditions, plans and prospects, growth opportunities and the outlook for our business based upon information currently available. Such statements are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the (“Exchange


Act) Act”). AnyWherever possible, we have identified these forward-looking statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and may be forward-looking.  These statements are often, but are not always, made through the use ofby words or phrases such as “will,” “may,” “anticipates,” “believes,” “intends,” “estimates,” “expects,” “plans,” “projects,” “trends,” “opportunity,” “comfortable,” “current,” “intention,” “position,” “assume,” “potential,” “outlook,” “remain,” “continue,” “maintain,” “sustain,” “seek,” “target,” “achieve,” “continuing,” “ongoing,” “expects,” “management believes,” “we believe,” “we intend” and similar words or phrases, or future or conditional verbs such as “will,” “would,” “should,” “could,” “may,” or similar expressions. Accordingly, theseThese forward-looking statements involve estimates,are based upon assumptions our management believes are reasonable. Such forward-looking statements are subject to risks and uncertainties which could cause our actual results, performance and achievements to differ materially from those expressed in, them.  The factors describedor implied by, these statements, including, among others, the risks and uncertainties listed in our Annual Report among others, could have a material adverse effect upon our business, results of operations and financial conditions.under “Part I, Item 1A Risk Factors.”

Because the factors referredour forward-looking statements are based on estimates and assumptions that are subject to in the preceding paragraph could causesignificant business, economic and competitive uncertainties, many of which are beyond our control or are subject to change, actual results could be materially different and any or outcomes to differ materially from those expressed in anyall of our forward-looking statements we make, you should not place undue reliance on any such forward-looking statements.  Further, any forward-looking statement speaksmay turn out to be wrong. Forward-looking statements speak only as of the date on which it is made and can be affected by assumptions we undertake no obligation to update any forward-looking statementmight make or statements to reflect eventsby known or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.unknown risks and uncertainties. Many factors mentioned in our discussion in our Annual Report will be important in determining future results. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition,Consequently, we cannot assess the impactassure you that our expectations or forecasts expressed in such forward-looking statements will be achieved. Except as required by law, we undertake no obligation to publicly update any of each factor on our businessforward-looking or the extent to which any factor,other statements, whether as a result of new information, future events, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.otherwise. These forward-looking statements include statements regarding:

•manufacturing and facility capabilities;
•potential strategic collaborations with others;
•future capital needs and financing sources;
•adequacy of existing capital to support operations for a specified time;
•our liquidity and our ability to satisfy obligations of our Revolving Credit Agreement as they become due;
•our ability to comply with the financial and other covenants in our Revolving Credit Agreement;
•our exposure to risk as a result of potential changes in interest rates;
•reimbursement for our products;
•the timing of the FDA’s review of the NexoBrid BLA resubmission;
•expectations regarding approval by the FDA of the NexoBrid BLA resubmission;
•product development and marketing plans;
•regulatory filing plans;
•features and successes of our cellular therapies;
•manufacturing and facility capabilities;
•clinical trial plans, including publication thereof;
•the effects of the ongoing COVID-19 pandemic on our business, including economic slowdowns or recessions, impacts to our operations or to the healthcare industry generally, which could reduce demand for our products;
•anticipated inflationary pressures and our responses thereto as well as other unfavorable global and regional economic conditions, geopolitical events, and military conflicts, such as repercussions from the ongoing war in Ukraine;
•anticipation of future losses;
•replacement of manufacturing sources;
•commercialization plans; or
•revenue expectations and operating results.



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Item 3. Quantitative and Qualitative Disclosures About Market Risk

As of September 30, 2017, we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates or credit conditions on our securities portfolio. For additional information regarding ourquantitative and qualitative disclosures about market risk, refer tosee Part II, Item 7A. Quantitative“Quantitative and Qualitative Disclosures About Market Risk, in” of our Annual Report on Form 10-K for the year ended December 31, 2016.2021. Our exposures to market risk have not changed materially since December 31, 2021, except as discussed below.

Interest Rate Risk

Revolving Credit Agreement

We are subject to interest rate risks in connection with our Revolving Credit Agreement, which is variable rate indebtedness. As of September 30, 2022, there were no borrowings outstanding under the Revolving Credit Agreement. To the extent that we have outstanding borrowings under the Revolving Credit Agreement, we may increase our exposure to risk from interest rate fluctuations which may have a negative impact on our earnings and cash flows.

Item 4. Controls and Procedures


Evaluation of Disclosure Controls and Procedures


Management of the Company, with the participation of its Chief Executive Officer and Chief Financial Officer (its Certifying Officers), evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on the evaluation as of September 30, 2022, the Company’s Certifying Officers concluded that the Company’s disclosure controls and procedures were effective.

The Company has established disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities and Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the SEC’sCommission’s rules and forms, and that such information is accumulated and communicated to management of the Company, with the participation of its Chief Executive Officer and Chief Financial Officer (its “Certifying Officers”),Certifying Officers, as appropriate, to allow timely decisions regarding required disclosure.

Management of the Company, with the participation of its Certifying Officers, evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in Rules l3a-15(e) and l5d-15(e) under the Exchange Act. Based on the evaluation as of September 30, 2017, our Certifying Officers concluded that the Company’s disclosure controls and procedures were effective.


Changes in Internal Control over Financial Reporting


There have beenDuring the three months ended September 30, 2022, there were no material changes made in our internal control over financial reporting during(as such term is defined in Rules 13a-15(f) and 15d-15(f) of the quarter ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.Exchange Act).




PART II —- OTHER INFORMATION

Item 1. Legal Proceedings

From time to time we receive threats or may be subject to litigation matters incidental to our business.  However, weWe are not currently anot party to any material pending legal proceedings.proceedings, although from time-to-time we may become involved in disputes in connection with the operation of our business.


Item 1A. Risk Factors

There have been no material changesFactors that could cause the Company’s actual results to differ materially from the risk factors previously disclosedthose in the Company'sthis Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 and the risk factors found in Part I, Item 1A, "Risk Factors,"are any of the Company's Annual Report on Form 10-K for the year ended December 31, 2016. The risks described in theour Annual Report on Form 10-K and Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 are not the only risks the Company faces. Additional risks and uncertainties not currently known or currently deemed to be immaterial also may materially and adversely affect the Company’s business, financial condition, results of operations or cash flows.

Item 1B.  Unresolved Staff Comments
On August 11, 2017, we received a comment letter from the staff of the SEC with respect to our Form 10-K for the fiscal year ended December 31, 2016. We responded to the SEC's comments on September 11, 2017, and received one follow-up comment from2021 filed with the SEC on October 4, 2017,February 24, 2022. Any of these factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations. As of the date of this Quarterly Report on Form 10-Q, there have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, except as follows.

Our Revolving Credit Agreement contains covenant restrictions that may limit our ability to operate our business.

The terms of our Revolving Credit Agreement, contain, and any of our other future debt agreements may contain, covenant restrictions that limit our ability to: (i) incur additional indebtedness (ii) create liens; (iii) consolidate, merge, sell or otherwise dispose of all, or substantially all, of our 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 our affiliates. As a result of these covenants, our ability to respond to changes in business and economic conditions and engage in beneficial transactions, including to obtain additional
30
financing as needed, may be restricted. Furthermore, our failure to comply with our debt covenants could result in a default under our Revolving Credit Agreement, which could permit the holders to accelerate our obligation to repay any borrowings.

We may incur substantial indebtedness.

On July 29, 2022, we entered into a $150.0 million five-year senior secured Revolving Credit Agreement. As of September 30, 2022, we had no outstanding borrowings under the Revolving Credit Agreement. We may be exposed to the impact of interest rate changes primarily through our borrowing activities. Subject to the limits contained in the Revolving Credit Agreement, we may incur substantial additional debt from time-to-time for general corporate purposes, including, without limitation, acquisitions and capital expenditures, and such other uses as permitted under the Revolving Credit Agreement. If we do so, the risks related to our debt could intensify. Specifically, our debt could have important consequences to our investors, including the following:

•making it more difficult for us to satisfy our obligations under the Revolving Credit Agreement; and if we fail to comply with these requirements, an event of default could result;
•limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions, or other general corporate requirements;
•requiring a substantial portion of our cash flows to be dedicated to debt service payments instead of other purposes, thereby reducing the amount of cash flows available for working capital, capital expenditures, acquisitions and other general corporate purposes;
•increasing our vulnerability to general adverse economic and industry conditions;
•exposing us to the risk of increased interest rates as borrowings under our Revolving Credit Agreement are subject to floating interest rates based on SOFR, which could increase the cost of servicing our financial instruments and could materially reduce our profitability and cash flows;
•limiting our flexibility in planning for and reacting to changes in the industry in which we compete;
•placing us at a disadvantage compared to other, less leveraged competitors; and
•increasing our cost of borrowing.

We are currently operating in a period of economic uncertainty and capital markets disruption, which has been significantly impacted by geopolitical instability, an ongoing war between Russia and Ukraine, and record inflation. Our business, financial condition and results of operations could be materially adversely affected by any negative impact on the global economy and capital markets resulting from the war in Ukraine, geopolitical tensions, or record inflation.

U.S. and global markets are experiencing volatility and disruption following the escalation of geopolitical tensions and the start of the military conflict between Russia and Ukraine. In February 2022, a full-scale military invasion of Ukraine by Russian troops began. Although the length and impact of the ongoing military conflict is highly unpredictable, the war in Ukraine has led to market disruptions, including significant volatility in commodity prices, credit and capital markets, as well as supply chain interruptions, which has contributed to record inflation globally. We are continuing to monitor inflation, the situation in Ukraine and global capital markets and assessing the potential impact on our business.

Although, to date, our business has not been materially impacted by the ongoing military conflict between Russian and Ukraine, geopolitical tensions, or record inflation, it is impossible to predict the extent to which our operations will be impacted in the short and long term, or the ways in which such matters may impact our business. The extent and duration of the war in Ukraine, geopolitical tensions, record inflation and resulting market disruptions are impossible to predict but could be substantial. Any such disruptions may also magnify the impact of other risks described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

NexoBrid’s approval in the U.S. for the treatment of severe burns may be further delayed, or it may not be approved by the FDA for use in the U.S. at all.

On June 29, 2021, we announced that MediWound had received a CRL from the FDA with respect to a BLA that MediWound had previously submitted to the FDA seeking marketing approval for NexoBrid in the U.S. As part of the CRL, the FDA communicated to MediWound that it had completed its review of the BLA, as amended, and had determined that it could not approve the BLA in its then form. The FDA identified issues related to the chemistry, manufacturing and controls, or CMC section of the BLA and had requested that MediWound provide additional CMC information. The FDA also stated that inspections of manufacturing facilities in Israel and Taiwan are required before the BLA can be approved, but that it was unable to conduct the required inspections during the original review cycle due to COVID-19-related travel restrictions. In addition, the CRL referenced observations that were made during GCP inspections related to the Phase 3 pivotal DETECT study and
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requested that MediWound address questions regarding the applicable accounting policies used for revenue recognitionimpact of the observations on the study’s efficacy findings. The FDA also requested that MediWound provide a safety update as part of a BLA resubmission.

We have continued to work with MediWound, BARDA and product sales. On October 18, 2017, wethe FDA to address the issues identified in the CRL, and on July 1, 2022, Vericel and MediWound submitted our responsea BLA resubmission to the SEC regarding this comment. AsFDA to address and respond to the issues identified by the FDA in the CRL. Subsequently, the FDA informed us that it has accepted the resubmission for review and has established a PDUFA date for completing that review of November 7, 2017January 1, 2023. We cannot predict the likelihood that the FDA will ultimately approve the NexoBrid BLA. In addition, if approval to market NexoBrid is sought in Mexico or Canada, we are still waitingcannot predict how long regulatory authorities in those countries will take to provide NexoBrid with marketing authorization in their jurisdictions or whether such authorizations will be granted at all. A significant delay or a failure to receive regulatory approval for NexoBrid in the U.S. may have a response from the SEC to clear the unresolved comment.material adverse impact on our business prospects.


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The Company did not repurchase anyNot applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

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Item 6. Exhibits
The Exhibits listed in the Exhibit Index immediately following the Signature, are filed as a part of this Quarterly Report on Form 10-Q.




EXHIBIT INDEX
 
Exhibit No.Description
10.13.1

10.23.2
3.3

10.33.4


10.4**3.5
10.12†
10.5**31.1*
Amendment No. 2 to License Agreement between Vericel Corporation and Innovative Cellular Therapeutics CO., LTD., dated September 5, 2017.
10.6**
Amendment No. 1 to Side Letter between Vericel Corporation and Innovative Cellular Therapeutics CO., LTD., dated August 3, 1017.

10.7**
Amendment No. 2 to Side Letter between Vericel Corporation and Innovative Cellular Therapeutics CO., LTD., dated September 5, 2017.

10.8†**
First Amendment to Distribution Agreement between Orsini Pharmaceutical Services, Inc. and the Company, dated August 10, 2017.

31.1**
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2**
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**
Certification ofand Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 20022002.
101.INS**
Inline XBRL Instance Document
101.SCH**
Inline XBRL Taxonomy Extension Schema Document
101.CAL**
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB**
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE**
Inline XBRL Taxonomy Extension Presentation Linkbase Document
101 DEF**101.DEF*
Inline XBRL Taxonomy Extension Definition Linkbase Document
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

** Filed herewith.

† Certain schedules and similar attachments to this exhibit have been omitted pursuant to Item 601(a)(5) and/or Item 601(b)(10)(iv), as applicable, of Regulation S-K. The Company agrees to furnish an unredacted, supplemental copy (including any omitted schedule or attachment) to the SEC upon request. Redactions and omissions are designated with brackets containing asterisks.

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† Confidential treatment has been requested as to certain portions thereto, which portions are omitted and will be filed separately with the Securities and Exchange Commission.



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
Date: November 7, 20179, 2022
 
VERICEL CORPORATION
/s/ DOMINICK C. COLANGELO
Dominick C. Colangelo
President and Chief Executive Officer
(Principal Executive Officer)
/s/ GERARD MICHELJOSEPH A. MARA
Gerard MichelJoseph A. Mara
Chief Financial Officer and Vice President, Corporate Development
(Principal Financial Officer)




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