SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FOR THE QUARTERLY PERIOD ENDED: June 30, ~~2018~~2019

Commission file number 001-35280

VERICEL ~~CORPORATION~~CORPORATION

(Exact name of registrant as specified in its charter)



Michigan		94-3096597
(State or other jurisdiction of		(I.R.S. employer
incorporation or organization)		identification no.)

64 Sidney Street
Cambridge	MA	02139
(Address of principal executive offices, including zip code)

(Registrant’s telephone number, including area code) ~~(800)~~ (800) 556-0311

(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 each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, no par value	VCEL	NASDAQ

Indicate by check mark whether the registrant 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 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	☒
Non-accelerated filer	☐	Smaller reporting company	☒
		~~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 of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.



COMMON STOCK, NO PAR VALUE		~~42,726,455~~44,136,896
(Class)		Outstanding at ~~August 3, 2018~~July 31, 2019

QUARTERLY REPORT ON FORM 10-Q

PART I - FINANCIAL INFORMATION

Item 1.Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, amounts in thousands)

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

VERICEL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, amounts in thousands except per share amounts)


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017			2019			2018			2019			2018
Product sales, net	$	19,011		$	16,953		$	37,038		$	26,314		$	26,151		$	19,011		$	47,961		$	37,038
Cost of product sales	7,727			7,670			15,393			14,779			9,022			7,727			17,662			15,393
Gross profit	11,284			9,283			21,645			11,535			17,129			11,284			30,299			21,645
Research and development	3,739			2,971			7,468			6,438			21,070			3,739			24,078			7,468
Selling, general and administrative	11,791			8,833			22,745			17,241			16,259			11,791			29,779			22,745
Total operating expenses	15,530			11,804			30,213			23,679			37,329			15,530			53,857			30,213
Loss from operations	(4,246		)	(2,521		)	(8,568		)	(12,144		)	(20,200		)	(4,246		)	(23,558		)	(8,568		)
Other income (expense):							0
(Increase) decrease in fair value of warrants	(37		)	441			(2,944		)	548
Foreign currency translation loss	(5		)	(13		)	(49		)	(14		)
Increase in fair value of warrants													—			(37		)	—			(2,944		)
Interest income	83			3			83			4			428			83			908			83
Interest expense	(448		)	(299		)	(880		)	(561		)	(2		)	(448		)	(4		)	(880		)
Other income	2			1			48			1
Other income (expense)													(18		)	(3		)	18			(1		)
Total other income (expense)	(405		)	133			(3,742		)	(22		)	408			(405		)	922			(3,742		)
Net loss	$	(4,651	)	$	(2,388	)	$	(12,310	)	$	(12,166	)	$	(19,792	)	$	(4,651	)	$	(22,636	)	$	(12,310	)

Net loss per share attributable to common shareholders (Basic and Diluted)	$	(0.12	)	$	(0.07	)	$	(0.33	)	$	(0.38	)
Net loss per share (Basic and Diluted)													$	(0.45	)	$	(0.12	)	$	(0.52	)	$	(0.33	)
Weighted average number of common shares outstanding (Basic and Diluted)	38,349			32,765			37,251			32,333			43,956			38,349			43,841			37,251

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

VERICEL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited, amounts in thousands)



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Net loss	$	(19,792	)	$	(4,651	)	$	(22,636	)	$	(12,310	)
Other comprehensive loss:
Unrealized gain on investments	35			—			38			—
Comprehensive loss	$	(19,757	)	$	(4,651	)	$	(22,598	)	$	(12,310	)

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

VERICEL CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

(Unaudited, amounts in thousands)



	Common Stock			Warrants Amounts		Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total Shareholders’ Equity
	Shares	Amount		Warrants Amounts		Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total Shareholders’ Equity
BALANCE, DECEMBER 31, 2018	43,578	$	471,180	$	104	$	(39	)	$	(369,014	)	$	102,231
Net loss									(2,844		)	(2,844		)
Compensation expense related to stock options and restricted stock units, net of forfeitures		2,628										2,628
Stock option exercises	228	780										780
Shares issued under the Employee Stock Purchase Plan	19	218										218
Change in unrealized gain(loss) on investments						42						42
BALANCE, MARCH 31, 2019	43,825	$	474,806	$	104	$	3		$	(371,858	)	$	103,055
Net loss									(19,792		)	(19,792		)
Compensation expense related to stock options and restricted stock units, net of forfeitures		4,183										4,183
Stock option exercises	227	850										850
Shares issued under the Employee Stock Purchase Plan	14	211										211
Change in unrealized gain (loss) on investments						35						35
BALANCE, JUNE 30, 2019	44,066	$	480,050	$	104	$	38		$	(391,650	)	$	88,542



	Common Stock			Warrants Amounts			Accumulated Other Comprehensive Income		Accumulated Deficit			Total Shareholders’ Equity
	Shares	Amount		Warrants Amounts			Accumulated Other Comprehensive Income		Accumulated Deficit			Total Shareholders’ Equity
BALANCE, DECEMBER 31, 2017	35,861	$	383,020	$	397		$	—	$	(360,877	)	$	22,540
Net loss									(7,659		)	(7,659		)
Compensation expense related to stock options granted, net of forfeitures		1,348										1,348
stock option exercises	253	851										851
Shares issued under the Employee Stock Purchase Plan	28	127										127
Exercise of warrants resulting in the issuance of common stock	360	1,727										1,727
Net change in warrant valuation of exercised warrants		2,001										2,001
BALANCE, MARCH 31, 2018	36,502	$	389,074	$	397		$	—	$	(368,536	)	$	20,935
Net loss									(4,651		)	(4,651		)
Compensation expense related to stock options granted, net of forfeitures		2,465										2,465
Issuance of common stock, net of issuance costs	5,750	70,090										70,090
Stock option exercises	306	964										964
Shares issued under the Employee Stock Purchase Plan	31	148										148
Exercise of warrants resulting in the issuance of common stock	95	333		(95		)						238
Net change in warrant valuation of exercised warrants		409										409
BALANCE, JUNE 30, 2018	42,684	$	463,483	$	302		$	—	$	(373,187	)	$	90,598

VERICEL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, amounts in thousands)


	Six Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2019			2018
Operating activities:
Net loss	$	(12,310	)	(12,166		)	$	(22,636	)	$	(12,310	)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization	813			784
Depreciation and amortization expense							698			813
Stock compensation expense	3,807			1,298			6,810			3,807
Change in fair value of warrants	2,944			(548		)	—			2,944
Inventory provision	(234		)	160
Loss on sales of fixed assets	23			—
Loss on sale of fixed assets							—			23
Foreign currency translation loss	49			13			13			49
Changes in operating assets and liabilities:
Amortization of premiums and discounts on marketable securities							(408		)	—
Non-cash lease cost							1,139			—
Change in operating assets and liabilities:
Inventory	302			173			(1,230		)	68
Deferred rent	(17		)	51
Accounts receivable	771			2,364			2,370			771
Other current assets	254			48
Prepaid and other current assets							680			254
Accounts payable	(1,049		)	(404		)	(2,238		)	(1,049		)
Accrued expenses	(462		)	(388		)	(2,229		)	(462		)
Operating lease liabilities							(1,007		)	—
Other assets and liabilities, net	73			(161		)	(187		)	56
Net cash used for operating activities	(5,036		)	(8,776		)
Net cash used in operating activities							(18,225		)	(5,036		)
Investing activities:
Purchases of short-term investments							(32,402		)	—
Maturities of short-term investments							45,477			—
Expenditures for property, plant and equipment	(979		)	(273		)	(1,224		)	(979		)
Net cash used in investing activities	(979		)	(273		)
Net cash provided by (used in) investing activities							11,851			(979		)
Financing activities:
Net proceeds from equity offering	70,090			—			—			70,090
Net proceeds from issuance of common stock due to stock option exercises	2,096			132
Net proceeds from common stock issuance due to stock option exercises							2,059			2,096
Proceeds from exercise of warrants	1,965			—			—			1,965
Other	(29		)	(20		)	(9		)	(29		)
Net cash provided by financing activities	74,122			112			2,050			74,122
Net increase (decrease) in cash and cash equivalents	68,107			(8,937		)	(4,324		)	68,107
Cash and cash equivalents at beginning of period	26,862			22,978			18,286			26,862
Cash and cash equivalents at end of period	$	94,969		$	14,041		$	13,962		$	94,969

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE QUARTER ENDED JUNE 30, ~~2018~~2019 (UNAUDITED)


1.	Organization

Vericel Corporation, a Michigan corporation ~~(the~~(together with its consolidated subsidiaries referred to herein as the Company, Vericel, we, us or our), was incorporated in March 1989 and began employee-based operations in 1991. 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 a portfolio of patents and 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),~~ related to the MACI^®, ~~Carticel~~Epicel^® and ~~Epicel~~Carticel^® products. The Company is a fully integrated, commercial-stage biopharmaceutical company and currently markets MACI^® and Epicel^® in the U.S. and holds exclusive rights to commercialize NexoBrid^®in all countries of North America. The Company is a leader in advanced cell therapies for the sports medicine and severe burn care ~~markets and a developer of patient-specific expanded cell therapies for use in the treatment of patients with severe diseases and conditions.~~ markets.

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.~~adults. At the end of the second quarter of 2017, the Company removed ~~MACI’s predecessor,~~ Carticel^® ~~(autologous~~(autologous cultured chondrocytes), an earlier generation autologous chrondocyte implant (ACI) product, from the market. Carticel is 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). The Company also markets Epicel^® ~~(cultured~~(cultured epidermal autografts), a permanent skin replacement Humanitarian Use Device (HUD) for the treatment of adult and pediatric patients with deep-dermal or full-thickness burns ~~comprising~~ greater than or equal to 30 percent of total body surface area (TBSA). The Company also entered into exclusive license and supply agreements with MediWound Ltd. (MediWound) to commercialize NexoBrid^®in all countries 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. NexoBrid is currently in clinical development in North America, and a U.S. Biologics License Application (BLA) currently is targeted for submission to the U.S. Food and Drug Administration (FDA) in the second quarter of 2020. 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~~advanced therapies for use in the treatment of specific diseases.

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 satisfaction of liabilities and commitments in the normal course of business. As of June 30, ~~2018,~~2019, the Company has an accumulated deficit of ~~$373.2~~$391.7 million and had a net loss of ~~$4.7~~$19.8 million and $22.6 million during the ~~quarter~~three and six months ended June 30, ~~2018.~~2019. The Company had cash and cash equivalents of ~~$95.0~~$14.0 million, and short-term investments of $52.0 million as of June 30, ~~2018.~~2019. The Company expects that existing cash, ~~together with its~~ ~~term loan~~cash equivalents and ~~revolving line of credit agreement with Silicon Valley Bank (SVB) and MidCap Financial Services (MidCap) (the~~ ~~SVB-MidCap facility),~~short-term investments will be sufficient to support the Company's current operations through at least ~~August 2019. In connection with~~12 months from the ~~SVB-MidCap facility,~~ ~~the Company must remain in compliance with minimum monthly net revenue covenants (determined in accordance with U.S. GAAP), measured on a trailing twelve month basis.~~ ~~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.~~ ~~If the Company 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. As~~issuance of ~~June 30, 2018, the Company was in compliance with the minimum revenue covenant set forth in the Third Loan Modification Agreement between the Company, SVB and MidCap.~~these financial statements. The Company may seek additional funding through debt or equity financings. However, the Company 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 the Company's shareholders.


2.	Basis of Presentation

The condensed consolidated financial statements included herein have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (SEC). The preparation of condensed consolidated financial statements in conformity with generally accepted accounting principles in the United States of America (U.S. GAAP) requires management to make estimates, judgments, and assumptions that may affect the reported amounts of assets, liabilities, equity, revenues and expenses. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to such rules and regulations. The financial statements reflect, in the opinion of management, all adjustments (consisting only of normal, recurring adjustments) necessary to state fairly the financial position and results of operations as of and for the periods indicated. The results of operations for the three and six months ended June 30, ~~2018,~~2019, are not necessarily indicative of the results to be expected for the full year or for any other period. The June 30, ~~2018~~2019 condensed consolidated balance sheet data was derived from the Company’s audited consolidated financial statements, but does not include all disclosures required by U.S. GAAP.

These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, ~~2017,~~2018, as filed with the SEC on ~~March 5, 2018~~February 26, 2019 (Annual Report).

Consolidated Statement of Cash Flows

The following table presents certain supplementary cash flows information for the six months ended June 30, ~~2018~~2019 and ~~2017:~~2018:



	Six Months Ended June 30,
(In thousands)	2019		2018
Supplementary Cash Flows information:
Warrants exercised for common stock	$	—	$	2,409
Interest paid (net of interest capitalized)	4		754
Additions to equipment in process included in accounts payable	365		459
Right-of-use asset and lease liability recognized	560		—

Six Months Ended June 30,
(In thousands) 2018 2017
Supplementary Cash Flows information:
Warrants exercised for common stock $ 2,409
$ —
Interest paid (net of interest capitalized) 754
452
Shares converted between common and preferred stock —
38,389
Additions to equipment in process included in accounts payable 459
129


3.	Recent Accounting Pronouncements

~~Revenue Recognition~~

In May 2014, the Financial Accounting Standards Board (FASB) issued authoritative guidance requiring entities to apply a new model for recognizing revenue from contracts with customers and the reporting of principal versus agent considerations. The guidance superseded the then-applicable revenue recognition guidance and requires 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 became effective for the Company beginning January 1, 2018. See note 4 for further discussion.

Accounting for Leases

The FASB issued guidance to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. In accordance with the updated guidance, lessees are required 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~~2018. The leasing Accounting Standard Update 2016-02, became effective for the Company on January 1, 2019, and was adopted using the modified retrospective method. See note 7 for further discussion.

Measuring Credit Losses on Financial Instruments

The FASB issued updated guidance on measuring credit losses on financial instruments. The guidance removes the thresholds that companies apply to measure credit losses on financial instruments measured at amortized cost, such as loans, receivables, and held-to-maturity debt securities. Prior to the updated guidance, credit losses are recognized when it is probable that the loss has been incurred. The revised guidance removes all recognition thresholds and requires companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that a company expected to collect over the instrument’s contractual life. The guidance is effective for annual reporting periods ~~within~~beginning after December 15, 2019. The Company is currently in the process of evaluating ~~its leasing arrangements under the issued guidance and~~ the impact to its consolidated financial statements.

4. Revenue

Revenue Recognition and Net Product Sales

The new revenue standard became effective for the Company on January 1, 2018, and was adopted using the modified retrospective method. Based on the Company's evaluation of all of its product revenue contracts under the new revenue standard there was no cumulative adjustment recorded in the financial statements upon adoption of Accounting Standards Codification 606, ~~Revenue Recognition,~~ (ASC 606) on January 1, 2018. For the three and six months ended June 30, 2018, the timing and amount of revenue recognized under ASC 606 is not materially different from that under the previous guidance.

The Company recognizes product revenue from sales ~~to a customer (distributor or hospital)~~of MACI kits, MACI implants and Epicel grafts following the five step model in Accounting Standards Codification 606 Revenue Recognition (ASC 606: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) the Company satisfies the performance obligation. Under this revenue standard, the Company recognizes revenue when its customer obtains control of the promised goods, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods. There are no contractual rights of returns, refunds or similar obligations related to MACI, kits, or Epicel as of June 30, 2018; however, in certain limited cases the Company will accept a product return if a surgery is canceled. Revenue is not recognized in these cases, and historically such amounts have been insignificant.

Currently, for MACI, MACI kits and Epicel there are no variable pricing arrangements related to warranties or rebates offered to customers. Net product revenues from the third party distributor are primarily based on a contracted rate stated in the approved contract. In certain cases, the Company sells through the distributor but retains the credit and collection risk as well as the risk

that a third party payer rejected a claim or reduced the allowed amount payable for an implant. The net product revenues for these cases are based on expected payments from the insurance provider, hospital or patient. The estimates of such payment amounts are based on publicly available rates and past payer precedents. Changes in estimates are recorded through revenue in the period such change occurs.

The majority of orders are due within 60 days of delivery. Shipping and handling fees are included as a component of revenue. The Company recognizes any commission fees as an expense when incurred due to the short-term nature (less than 1 year) of the time period from order of a product to delivery. These fees are included in selling, general, and administrative expenses. There are no returns, refunds or similar obligations related to MACI, MACI kits, or Epicel as of June 30, 2018.606).

MACI Kits ~~and Implants~~

MACI ~~(and previously Carticel)~~ kits are sold directly to hospitals based on contracted rates in the approved contract or sales order. The Company recognizes MACI ~~(or Carticel)~~ kit revenue upon delivery of the biopsy kit at which time the customer (the doctor) is in control of the kit. The kit provides the doctor the ability to biopsy a sampling of cells to provide to the Company that can be used later to manufacture the implant. The ordering of the kit does not obligate the Company to manufacture an implant nor does the receipt of the cell tissue. The customer’s order of an implant is separate from the process of ordering the kit. Therefore, the sale of the kit and any subsequent sale of an implant are distinct contracts and are accounted for separately.

MACI Implants

The Company recognizes product revenues from sales of MACI ~~(and previously Carticel)~~ implants upon delivery at which time the customer is in control of the implant and the claim is billable. Prior authorization or 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. ~~As noted above,~~Depending upon the type of contract and payer for the MACI implant, the Company's net product revenues are either based on contracted rates or estimated based on expected payments from the insurance provider, hospital or patient. The estimates of such payment amounts vary by customer and payer and are based on either contracted rates, publicly available rates ~~and~~or past payer precedents. Changes in estimates are recorded through revenue in the period such change occurs. Net product revenues from sales to distributors may include a prompt pay discount.

On July 25, 2018 and August 10, 2018, the Company entered into ~~an amendment~~amendments to its distribution agreement with Orsini Pharmaceutical Services, Inc. (Orsini). The ~~amendment~~amendments modified certain payment ~~terms.~~terms for surgeries after June 15, 2018. In addition, under the revised agreement, the parties agreed to ~~eliminate~~limit Orsini's right to serve as the Company's exclusive distributor for MACI to a specified set of payers as the Company ~~is moving~~moved to a limited expanded network of distributors. ~~Orsini remains the exclusive pharmacy supplying MACI for only an enumerated list of payers.~~ The ~~amendment~~agreement with Orsini includes a provision whereby the Company retains the credit and collection risk from the end customer on implants after June 15, ~~2018, and~~2018. Orsini performs the collection activities. ~~Pursuant to~~The net product revenues for these cases are based on expected payments from the ~~revised arrangement,~~insurance provider, hospital or patient. The estimates of such payment amounts vary by customer and payer and are based on either contracted rates, publicly available rates or past payer precedents. Changes in estimates are recorded through revenue in the period in which such change occurs.

On April 18, 2019, the Company ~~will pay Orsini a dispensing fee on a per implant basis. In addition, we have agreed to pay Orsini~~entered into an ~~incremental fee of approximately $1.3 million which will be paid as a service fee based on a fixed number of MACI cases subsequent to the date of~~ amendment with ~~any unpaid amount due to~~ Orsini ~~at June 30, 2019 or upon termination~~that extended the term of the agreement byuntil May 2022, modified the ~~Company, if earlier.~~per case dispensing fee, and eliminated Orsini’s exclusivity for all payers.

On July 26, 2018, the Company entered into a Dispensing Agreement (Dispensing Agreement) with AllCare Plus Pharmacy, Inc. (AllCare). Pursuant to the Dispensing Agreement, the Company appoints AllCare as a non-exclusive specialty pharmacy provider of MACI. The Company ~~will pay to~~pays AllCare a fee for each patient to whom MACI is dispensed. Under the Dispensing Agreement, the Company retains the credit and collection risk from the end customer on all implants. Depending upon the type of contract and payer for the MACI implant, the Company's net product revenues are based on contracted rates or estimated based on expected payments from the insurance provider, hospital or patient. The estimates of such payment amounts vary by customer and payer and are based on either contracted rates, publicly available rates or past payer precedents. Changes in estimates are recorded through revenue in the period such change occurs. On May 1, 2019, the Company entered into an amendment with AllCare that extended the term of the Dispensing Agreement until May 2022 and modified the per case dispensing fee.

Epicel

The Company sells Epicel directly to hospitals based on contracted rates stated in the approved contract or purchase order. Similar to MACI, there is no obligation to manufacture skin grafts upon receipt of a skin biopsy, and Vericel has no contractual right to receive payment until the product is delivered to the hospital. The Company recognizes product revenues from sales of Epicel upon delivery to the hospital at which time the customer is in control of the skin grafts and the claim is billable to the hospital.

Revenue by Product and Customer

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

Three Months Ended June 30, 2018 Six Months Ended June 30,
Revenue by product (in thousands) 2018 2017 2018 2017
MACI and Carticel implants and kits
Implants - based on contracted rate $ 7,362
$ 2,802
$ 18,111
$ 3,099
Implants - subject to third party reimbursement 6,346
7,744
7,430
14,093
Biopsy kits - direct bill 468
423
904
862
Change in estimates related to prior periods (51 ) 1,936
(265 ) (142 )
Epicel
Direct bill (hospital) 4,886
4,048
10,858
8,402
Total revenue $ 19,011
$ 16,953
$ 37,038
$ 26,314

~~Revenue Recognition for License Grants, Milestone and Royalty Payments~~

~~The Company recognizes other revenue from contracts with customers related to license grants, milestone related payments and royalty based payments by following the five step model described above.~~

~~Upon adoption of ASC 606~~, the Company reassessed the accounting for its license agreement with Innovative Cellular Therapeutics CO., LTD. (ICT) discussed in note 15. The Company identified its performance obligations under the agreement which include the license, a training obligation, and supply of certain raw materials for technology transfer. Based on its assessment of this agreement under the new revenue standard the Company determined that the license is distinct and provides ICT with the right to use the Company's technology and accordingly revenue should be recognized at the point in time at which the Company delivered the license (December 2017). This evaluation was based on 1) the rights provided to ICT under the license, including the ability to sublicense 2) the nature of the technology (primarily rights to technology already commercially approved in the US) and 3) ICT's ability to benefit from the license on its own including using its own existing resources as a manufacturer of autologous cell therapies. The transaction price was determined to be $1.2 million. No milestones or royalties are included in the transaction price as the criteria for including these variable payments have not yet been met. The Company assessed the allocation of arrangement consideration noting no differences in allocation from that determined under ASC 605. The license was delivered in December 2017 and revenue of $1.2 million was recorded in 2017 under the then applicable revenue accounting standard ASC 605. Based upon the Company's evaluation under ASC 606 there was no change in amount or timing of revenue recognized for the agreement and therefore no cumulative change adjustment was recorded upon adoption of the new revenue standard on January 1, 2018. The Company’s remaining performance obligations under the ICT license agreement consist of a training obligation related to technology transfer, and supply of certain raw materials for technology transfer.

The ICT license agreement provides for future milestone payments due to the Company upon the achievement of certain developmental and commercial events. The Company evaluates these milestones under the new revenue recognition standard at contract inception and at each reporting period date. Based on the Company’s evaluations to date, the Company has not included any of the future milestones in its determination of the transaction price as it is not yet probable that a significant reversal of revenue would not occur if the milestones were to be recognized. This evaluation was based on 1) the pace and eventual achievement of the milestones are largely dependent on ICT’s performance of its contractual obligations and the Company has no prior experience to determine the likelihood of ICT performing those obligations, and 2) the transfer of the funds for each of the milestone payments by ICT to the Company, if achieved, is subject to approval by the State Administration of Foreign Exchange of the People's Republic of China. The Company does not anticipate receiving any milestone payments in 2018 or in the near-term. Furthermore, there can be no assurance that the Company will receive any such milestone or receive any such transfer of funds from ICT ever.

The ICT license agreement contains future sales-based royalties to the Company in the low-to-mid double digits. These royalties meet the exception for sales-based or usage-based royalties because they predominantly relate to the license and will be recognized when and if the subsequent sales occur. However, there can be no assurance that the Company will receive any such royalties or receive any such transfer of funds from ICT ever.



	Three Months Ended June 30,					Six Months Ended June 30,
Revenue by product (in thousands)	2019		2018			2019		2018
MACI implants and kits
Implants based on contracted rate sold through a specialty pharmacy ^(a)	$	12,989	$	7,363		$	22,776	$	15,155
Implants subject to third-party reimbursement sold through a specialty pharmacy ^(b)	3,459		2,639			6,202		3,647
Implants sold direct based on contracted rates ^(c)	3,450		3,409			6,676		6,083
Implants sold direct subject to third-party reimbursement ^(d)	281		297			603		580
Biopsy kits - direct bill	557		468			1,099		904
Change in estimates related to prior periods	87		(51		)	50		(189		)
Epicel
Direct bill (hospital)	5,328		4,886			10,555		10,858
Total revenue	$	26,151	$	19,011		$	47,961	$	37,038

(a) Represents implants sold through Orsini or AllCare in which such specialty pharmacy has entered into a direct contract with the underlying insurance provider. The amount of reimbursement is known at the time of sale supported by the pharmacy's direct contract.

(b) Represents implants sold through Orsini or AllCare in which such specialty pharmacy does not have a direct contract with the underlying payer. The amount of reimbursement is established based on a payer or state fee schedule and/or payer history.

(c) Represents implants sold directly from the Company to the facility based on a contract and known price agreed upon prior to the surgery date.

(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.

Concentration of Credit Risk

From July 2016 through June 2017, the Company utilized a direct sales model and contracted with Dohmen Life Science Services, LLC (DLSS) to provide administrative services associated with case management and reimbursement support and to provide billing and collection services for MACI. The Company also utilized Vital Care, Inc. (Vital Care) to provide similar billing and collection services for a subset of insurance payers and patients. In the second quarter of 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 Pharmaceutical Services, Inc. as a specialty pharmacy distributor of MACI and has engaged a ~~third party~~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 and credit risk became more concentrated ~~and~~from June 30, 2017 through June 15, 2018 due to the shift to Orsini. Beginning June 16, 2018, the concentration of risk decreased because the Company retains the credit and collection risk ~~also shifted for~~from the ~~Company.~~end customer on implants after June 15, 2018. The Company sells Epicel directly to hospitals and not through a distributor. ~~The Company's receivables are less concentrated than those for MACI.~~

The Company's total revenue and accounts receivable balances were comprised of the following concentrations ~~greater than 10%~~ from its largest customers of ~~Carticel,~~ MACI and Epicel, as follows:



	Revenue Concentration								Accounts Receivable Concentration
	Three Months Ended June 30,				Six Months Ended June 30,				June 30,		December 31,
	2019		2018		2019		2018		2019		2018
MACI	7	%	39	%	7	%	41	%	7	%	8	%
Epicel	6	%	9	%	8	%	12	%	3	%	4	%

Revenue Concentration Revenue Concentration Accounts Receivable Concentration
Three Months Ended June 30, Six Months Ended June 30, June 30, December 31,
2018 2017 2018 2017 2018 2017
MACI and Carticel¹
39 % 14 % 41 % 9 % 50 % 46 %
Epicel 7 % 11 % 11 % 14 % 2 % 3 %

¹ ~~Carticel was removed from the market at the end of the second quarter of 2017~~


5.	Selected Balance Sheet Components

Inventory as of June 30, ~~2018~~2019 and December 31, ~~2017:~~2018:



(In thousands)	June 30, 2019		December 31, 2018
Raw materials	$	4,127	$	2,872
Work-in-process	596		638
Finished goods	65		48
Inventory	$	4,788	$	3,558

(In thousands) June 30, 2018 December 31, 2017
Raw materials $ 3,303
$ 3,532
Work-in-process 377
226
Finished goods 45
35
Inventory $ 3,725
$ 3,793

Property and equipment, net as of June 30, ~~2018~~2019 and December 31, ~~2017:~~2018:



(In thousands)	June 30, 2019			December 31, 2018
Machinery and equipment	$	2,456		$	1,536
Furniture, fixtures and office equipment	775			775
Computer equipment and software	5,906			3,712
Leasehold improvements	4,631			4,587
Construction in process	1,230			2,801
Financing right-of-use lease	166			—
Total property and equipment, gross	15,164			13,411
Less: Accumulated depreciation	(8,201		)	(7,505		)
	$	6,963		$	5,906

(In thousands) June 30, 2018 December 31, 2017
Machinery and equipment $ 1,212
$ 1,249
Furniture, fixtures and office equipment 757
872
Computer equipment and software 3,554
3,536
Leasehold improvements 4,459
4,213
Construction in process 1,583
822
Total property and equipment, gross 11,565
10,692
Less: Accumulated depreciation (6,892 ) (6,621 )
$ 4,673
$ 4,071

~~For both 2018 and 2017, depreciation~~Depreciation expense for the three and six months ended June 30, 2019 was $0.4 million and $0.7 million and $0.4 million and $0.8 million ~~respectively.~~for the same period in 2018.

Accrued expenses as of June 30, ~~2018~~2019 and December 31, ~~2017:~~2018:



(In thousands)	June 30, 2019		December 31, 2018
Bonus related compensation	$	1,528	$	5,161
Employee related accruals	2,695		1,559
Other accrued expenses	478		210
	$	4,701	$	6,930

(In thousands) June 30, 2018 December 31, 2017
Bonus related compensation $ 1,452
$ 2,693
Employee related accruals 3,286
2,389
Other accrued expenses 373
491
$ 5,111
$ 5,573


6.	Stock Purchase Warrants

The Company has historically issued warrants to purchase shares of the Company’s common stock in connection with certain of its common stock offerings and in ~~September 2016 and~~ December 2017 the Company issued warrants in connection with the amended debt agreement discussed in note 7 (collectively the Debt Warrants). The warrants issued in August 2013 (August 2013 Warrants) include anti-dilution price protection provisions that require cash settlement of the warrants and accordingly require the warrants to be recorded as liabilities of the Company at the estimated fair value at the balance sheet date, with changes in estimated fair value recorded as income or expense (non-cash) in the Company’s statement of operations in each subsequent period.a previous loan agreement. The following table describes the outstanding warrants classified in equity as of June 30, ~~2018:~~2019:



		December 2017 Warrants
Exercise price		$4.27
Expiration date		December 6, 2023
Total shares issuable on exercise		26,951

August 2013 Warrants September 2016 Warrants December 2017 Warrants
Exercise price $4.80 $2.25 $4.27
Expiration date August 16, 2018 September 9, 2022 December 6, 2023
Total shares issuable on exercise 315,500 58,537 53,902

~~During the six months ended June 30, 2018, the Company issued 409,450 and 45,625shares of common stock upon the exercise of August 2013 and September 2016 Warrants with an exercise price of $4.80 and $2.25 per share, respectively for proceeds of $2.0 million.~~

The fair value of the warrants described in the table above iswere initially 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 common ~~stock based~~stock-based on historical volatility that matches the expected remaining life of the warrants. The risk-free interest rate 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~~remaining at zero.

~~The assumptions used by the Company are summarized in the following tables:~~

August 2013 Warrants June 30, 2018 December 31, 2017
Closing stock price $ 9.70
$ 5.45
Expected dividend rate — % — %
Expected stock price volatility 56.3 % 63.7 %
Risk-free interest rate 1.77 % 1.65 %
Expected life (years) 0.13
0.62


7.	~~Debt~~Leases

~~On December 6, 2017,~~The Company leases facilities in Ann Arbor, Michigan and Cambridge, Massachusetts. The Cambridge facility includes clean rooms, laboratories for MACI and Epicel manufacturing and office space. The Company also leases offsite warehouse space, vehicles and computer equipment.

The Company adopted the new leasing standards using the modified retrospective transition approach, as of January 1, 2019, with no restatement of prior periods. As a result of adoption, no cumulative adjustment to retained earnings occurred. In addition, the Company ~~replaced its~~elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward prior conclusions related to whether any expired or existing ~~term loan~~contracts are or contain leases, the lease classification for any expired or existing leases and ~~revolving line~~initial direct costs for existing leases. Certain of ~~credit agreement with~~ the ~~SVB-MidCap facility which provides access to up to $25.0 million.~~Company’s lease agreements include lease payments that are adjusted periodically for an index or rate. The ~~updated debt financing consists of a $15.0 million term loan which was drawn~~leases are initially measured using the projected payments adjusted for the index or rate in effect at the ~~closing~~commencement date. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. Upon adoption all operating lease commitments with a lease term greater than 12 months that were previously assessed under previous lease guidance, were recognized as right to use assets and upliabilities, on a discounted basis on the balance sheet. Leases with an initial term of 12 months or less are not recorded on the balance sheet and for the six months ended June 30, 2019, lease expense of less than $0.1 million was recorded related to ~~$10.0~~short-term leases for both the three and six months ended June 30, 2019.

Adoption of ASU 2016-02 resulted in the recording of additional right-of-use assets and lease liabilities of approximately $25.6 million and $27.8 million, respectively, as of January 1, 2019. There was an immaterial impact on the Company's consolidated net earnings and cash flows upon adoption. The contribution toward the cost of tenant improvements is recorded as a revolving line of credit. The term loan is interest only (indexed to Wall Street Journal (WSJ) Prime plus 4.25%) until December 1, 2018 followed by 36 equal monthly payments of principal plus interest maturing December 6, 2021. Under the termsreduction of the ~~agreement,~~operating lease assets and reclassed from deferred rent to lease operating assets. For both the ~~revolving line of credit is limited to a borrowing base calculated using eligible accounts receivable~~three and ~~maturing December 6, 2021 with an interest rate indexed to WSJ Prime plus 1.25%.~~ ~~The Company is subject to various financial~~six months ended June 30, 2019 and ~~nonfinancial covenants including but not limited to a monthly minimum net revenue covenant~~ ~~(determined in accordance with GAAP), measured on a trailing twelve month basis. SVB and MidCap have~~for the ~~ability to call debt based on material adverse change clauses which are subjectively determinable and result in a~~ ~~subjective acceleration clause. SVB and MidCap have a shared first priority perfected security interest in all assets of the Company other than intellectual property.~~

~~As of~~same periods ending June 30, 2018 ~~there was an outstanding balance of $15.0 million~~(as reported under the ~~term loan~~prior leasing guidance), the Company recognized $1.3 million and ~~$2.5~~$2.6 million of operating lease expense and less than $0.1 million of financing lease expense, respectively. The Company's leases contain non-lease components and activities that do not transfer a good or service to the Company. The Company elected not to combine lease and non-lease components and therefore non-lease costs were not included in the net lease assets or lease liabilities.

Total leased assets and liabilities as reassessed under the ~~revolving line of credit (net of total deferred costs of $0.2 million). The weighted average interest rate~~updated guidance and classified on the ~~outstanding term and revolving credit loans~~balance sheet, as of June 30, ~~2018 was 8.82%~~2019 are as follows:



(In thousands)	Classification	June 30, 2019
Assets
Operating	Right-of-use assets	$	24,815
Finance	Property and equipment, net	166
		$	24,981
Liabilities
Current
Operating	Current portion of operating lease liabilities	2,558
Finance	Other liabilities	34
		$	2,592
Non-current
Operating	Operating lease liabilities	24,607
Finance	Other long-term liabilities	134
		$	24,741

Cash paid for amounts included in ~~addition to a final payment of 3.6%~~the measurement of the Company's operating lease liabilities was $2.5 million for the six months ended June 30, 2019.

Maturity of lease liabilities as of June 30, 2019 are as follows:



(In thousands)	Operating Leases			Finance Leases			Total
2019	$	2,504		$	21		$	2,525
2020	4,944			41			4,985
2021	4,864			41			4,905
2022	4,929			41			4,970
2023	4,901			41			4,942
2024	4,968			—			4,968
Thereafter	11,269			—			11,269
Total lease payments	38,379			185			38,564
Less: Interest	(11,214		)	(17		)	(11,231		)
Present value of lease liabilities	$	27,165		$	168		$	27,333

An explicit rate is not provided for some of the Company's leases, therefore the Company uses a mix of incremental borrowing rate based on the information available at commencement date, as well as implicit and explicit rates in determining the present value of lease payments.

The Company has options to renew lease terms for facilities and other assets. The exercise of lease renewal options is generally at the Company's sole discretion. The Company evaluates renewal and termination options at the lease commencement date to determine if it is reasonably certain to exercise the option on the basis of economic factors. For certain leases, the Company's exercise of the renewal option was determined to be probable and the renewal period was accordingly included in the lease term ~~loan due upon maturity. The available capacity~~and related calculations. Lease terms and discount rates as of June 30, 2019 are as follows:



	June 30, 2019
Weighted average remaining lease term (years)
Operating leases	7.26
Finance leases	4.01
Weighted average discount rate
Operating leases	9.53	%
Finance leases	5.00	%

Future minimum payments related to operating and capital leases, as reflected under the ~~revolving line of credit as of~~ ~~June 30, 2018~~ ~~was~~ ~~$6.8 million~~. ~~The Company was, and continues to be, in compliance with its financial and non-financial debt covenants.~~

~~Annual principal payments on debt at June 30,~~prior guidance, for the fiscal year ended December 31, 2018, are as ~~follows:~~

follows with no changes from prior disclosure:



(In thousands)	Total		2019		2020		2021		2022		2023		More than 5 years
Operating leases	$	15,386	$	4,879	$	4,719	$	4,754	$	966	$	68	$	—
Capital leases	205		41		41		41		41		41		—
Total	$	15,591	$	4,920	$	4,760	$	4,795	$	1,007	$	109	$	—

(In thousands)
Years Ending December 31, Amount
2018 $ 417
2019 5,000
2020 5,000
2021 7,083
2022 —
Thereafter —
$ 17,500


8.	Stock-based Compensation

Stock Option, Restricted Stock Units and Equity Incentive Plans

The Company has historically had various stock incentive plans and agreements that provide for the issuance of nonqualified and incentive stock options as well as other equity awards. Such awards may be granted by the Company’s Board of Directors to certain of the Company’s employees, directors and consultants.

Options and restricted stock units granted to employees and non-employees under these plans expire no later than ten years from the date of grant and ~~other than those granted to non-employee directors,~~ generally become exercisable over a four year period, under a graded-vesting methodology for stock options and annually on the anniversary grant date for restricted stock units, following the date of grant. The Company generally issues new shares upon the exercise of stock ~~options.~~options or vesting of restricted stock units. For certain non-employee consultants, stock option awards continue to vest post-termination. The guidance for non-employee stock compensation accounting for equity-classified awards was updated, and these awards are now subject to fixed grant date fair value principles which eliminates the variable mark-to-market accounting. The options were valued as of the adoption date of July 1, 2018.

The ~~2017~~2019 Omnibus Incentive Plan ~~(2017~~(2019 Plan) was approved ~~by the Company's shareholders~~ on May ~~3, 2017 at the annual meeting of shareholders. The 2017 Plan~~1, 2019 and provides incentives through the grant of stock options, stock appreciation rights, restricted stock awards and restricted stock units. The exercise price of stock options

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

As of June 30, ~~2018,~~2019, there were ~~3,022,033~~3,517,347 shares available for future grant under the ~~2017~~2019 Plan.

Employee Stock Purchase Plan

Employees are able to purchase stock under the Vericel Corporation Employee Stock Purchase Plan (ESPP). The ESPP allows for the issuance of an aggregate of 1,000,000 shares of common stock of which ~~485,676~~558,977 have been ~~granted~~issued since the inception of the plan in 2015. Participation in this plan is available to substantially all employees. The ESPP is a compensatory plan accounted for under the expense recognition provisions of the share-based payment accounting standards. Compensation expense is recorded based on the fair market value of the purchase options at the grant date, which corresponds to the first day of each purchase period and is amortized over the purchase period. On July ~~2, 2018,~~1, 2019, employees purchased ~~24,242~~18,729 shares resulting in proceeds from the sale of common stock of ~~$0.2~~$0.3 million under the ESPP.

Service-Based Stock Options

During the three and six months ended June 30, ~~2018,~~2019, the Company granted ~~119,450~~152,500 and ~~1,482,760~~1,638,510 service-based options to purchase common ~~stock, respectively.~~stock. The options have an exercise price equal to the fair market value per share of common stock on the grant date, generally vest over four years (other than non-employee director options which vest over one year), and have a term of ten years. The Company issues new shares upon the exercise of stock options. The weighted average grant-date fair value of service-based options granted under the ~~Option Plan~~2017 and 2019 Plans for the three and six month periods ended June 30, ~~2018~~2019 was $11.94 and $12.74, respectively and $9.26 and $6.85, respectively, ~~and $1.86 and $1.94,~~ for the same periods in ~~2017.~~2018.

Restricted Stock Units

During the three and six months ended June 30, 2019, the Company granted 10,500 and 186,922 service-based restricted stock units. The restricted stock units vest annually over four years in equal installments commencing on the first anniversary of the grant date (other than non-employee director options which vest over one year from the grant date). The Company issues new shares upon the vesting of restricted stock units. Restricted stock awards are recorded at fair value at the date of grant, which is based on the closing share price on the grant date. Compensation expense is recorded for restricted stock units that are expected to vest based on their fair value at grant date, and is amortized over the expected vesting period. The weighted average grant-date fair value of restricted stock units awarded for the three and six month periods ended June 30, 2019 was $16.62 and $17.71. The total grant-date fair value of restricted stock units granted in the six months ended June 30, 2019 was $3.3 million. No restricted stock units were granted in 2018.

Stock Compensation Expense

Non-cash stock-based compensation expense (employee stock purchase plan, ~~and~~ service-based stock ~~options)~~options and restricted stock units) included in cost of goods sold, research and development expenses and selling, general and administrative expenses is summarized in the following table:



	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2019		2018		2019		2018
Cost of goods sold	$	716	$	394	$	976	$	536
Research and development	886		442		1,410		917
Selling, general and administrative	2,581		1,629		4,424		2,354
Total non-cash stock-based compensation expense	$	4,183	$	2,465	$	6,810	$	3,807

Three Months Ended June 30, Six Months Ended June 30,
(In thousands) 2018 2017 2018 2017
Cost of goods sold $ 394
$ 106
$ 536
$ 197
Research and development 442
156
917
214
Selling, general and administrative 1,629
534
2,354
887
Total non-cash stock-based compensation expense $ 2,465
$ 796
$ 3,807
$ 1,298

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.


	Six Months Ended June 30,				Six Months Ended June 30,
Service-Based Stock Options	2018		2017		2019		2018
Expected dividend rate	—	%	—	%	—	%	—	%
Expected stock price volatility	82.3 – 88.3%		80.1 – 88.2%		79.5-85.5%		82.3-88.3%
Risk-free interest rate	2.4 – 2.9%		1.8 – 2.3%		1.9-2.7%		2.4-2.9%
Expected life (years)	5.2 – 6.3		5.5 – 6.3		5.3-6.3		5.2-6.3

Marketable debt securities are classified as available-for-sale and carried at fair value in the accompanying 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 June 30, 2019 and December 31, 2018:



	June 30, 2019
			Gross Unrealized
(In thousands)	Amortized Cost		Gains		Losses		Fair Value
Money market funds	$	4,831	$	—	$	—	$	4,831
Commercial paper	17,149		—		—		17,149
Corporate notes	17,225		20		—		17,245
U.S. government securities	6,955		11		—		6,966
U.S. asset-backed securities	10,680		7		—		10,687
	$	56,840	$	38	$	—	$	56,878
Classified as:
Cash equivalents							$	4,831
Short-term investments							52,047
							$	56,878



	December 31, 2018
			Gross Unrealized
(In thousands)	Amortized Cost		Gains		Losses			Fair Value
Money market funds	$	5,838	$	—	$	—		$	5,838
Repurchase agreements	5,000		—		—			5,000
Commercial paper	30,710		—		—			30,710
Corporate notes	13,168		—		(24		)	13,144
U.S. government securities	10,167		—		(1		)	10,166
U.S. asset-backed securities	10,632		—		(14		)	10,618
	$	75,515	$	—	$	(39	)	$	75,476
Classified as:
Cash equivalents								$	10,838
Short-term investments								64,638
								$	75,476

At December 31, 2018, the Company invested $5.0 million in overnight repurchase agreement securities classified as cash equivalents on the balance sheet. As of June 30, 2019, no amounts were invested in overnight repurchase agreements.

There were no marketable securities that the Company considers to be other-than-temporarily impaired as of June 30, 2019. The Company's investment strategy is to buy short-duration marketable securities with a high credit rating. As of June 30, 2019, all marketable securities held by the Company had remaining contractual maturities of one year or less.

If any adjustment to fair value reflects a decline in the value of the investment, the Company considers all available evidence to evaluate the extent to which the decline is “other than temporary,” including the Company's intention to sell and, if so, mark the investment to market through a charge to our consolidated statements of operations. There have been no impairments of the Company’s assets measured and carried at fair value during the six months ended June 30, 2019.

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

There was no movement between ~~level~~Level 1 and ~~level~~Level 2 or between ~~level~~Level 2 and Level 3 from December 31, 2018 to June 30, 2019. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level 3.of input that is significant to the fair value measurement. The commercial paper, corporate notes, government securities and asset-backed securities are classified as Level 2 as they were valued based upon quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets. The following table summarizes the valuation of the Company’s financial instruments that are measured at fair value on a recurring basis:

June 30, 2018 December 31, 2017
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 $ 1,549
$ —
$ 1,549
$ —
$ 1,014
$ —
$ 1,014
$ —

~~The following table summarizes the change in the estimated fair value of the Company’s outstanding warrant liabilities as of June 30, 2018:~~



	June 30, 2019								December 31, 2018
			Fair value measurement category								Fair value measurement category
(In thousands)	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
Assets:
Money market funds	$	4,831	$	4,831	$	—	$	—	$	5,838	$	5,838	$	—	$	—
Repurchase agreements	—		—		—		—		5,000		—		5,000		—
Commercial paper	17,149		—		17,149		—		30,710		—		30,710		—
Corporate notes	17,245		—		17,245		—		13,144		—		13,144		—
U.S. government securities	6,966		—		6,966		—		10,166		—		10,166		—
U.S. asset-backed securities	10,687		—		10,687		—		10,618		—		10,618		—
	$	56,878	$	4,831	$	52,047	$	—	$	75,476	$	5,838	$	69,638	$	—

Warrant Liabilities (In thousands)
Balance at December 31, 2017 $ 1,014
Increase in fair value 2,944
Warrant exercise (2,409 )
Balance at June 30, 2018 $ 1,549

~~The increase in fair value of warrants is due to the increase in stock price which has a direct impact to the Black-Scholes valuation model discussed in note 6.~~

~~Revolving and Term Loan Credit Agreements~~

At each of June 30, 2018 and December 31, 2017, the Company had a total of $17.3 million net debt outstanding under our revolving and term loan credit agreements, which are variable rate loans. The fair value of these loans approximates book value based on the borrowing rates currently available for variable rate loans obtained from third party lending institutions. These fair values represent level 2 under the three-tier hierarchy described above.

~~At-the-Market Sales Agreement~~

On October 10, 2016, the Company entered into an at-the-market sales agreement with Cowen (ATM Agreement), pursuant to which the Company could sell shares of its common stock through Cowen, as sales agent, in registered transactions from the Company's shelf registration statement filed in June 2015, for aggregate proceeds of up to $25.0 million. Shares of common stock sold under the ATM were sold at market prices. The Company was required to pay up to 3% of the gross proceeds to Cowen as a commission. A total of 2,340,879 shares of common stock were sold under the ATM Agreement of which 1,983,023 were sold in 2017 for proceeds of $7.2 million (net of $0.3 million in commission and issuance costs). There were no shares sold under the ATM Agreement during the six months ended June 30, 2018. Effective May 29, 2018, the Company terminated the ATM Agreement and no further sales pursuant to the ATM Agreement will be made following such date of termination.

~~Public Equity Offering~~

In June 2018, the Company sold a total of 5,750,000 shares of its common stock in an underwritten public offering at a price per share of $13.00 per share. The Company received proceeds of $70.1 million, net of $4.7 million of underwriters’ discount and issuance costs consisting primarily of legal and accounting fees. The Company recorded these proceeds as a common stock issuance.

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



	Three Months Ended June 30,						Six Months Ended June 30,
(Amounts in thousands except per share amounts)	2019			2018			2019			2018
Numerator:
Net loss	$	(19,792	)	$	(4,651	)	(22,636		)	$	(12,310	)
Denominator for basic and diluted EPS:
Weighted-average common shares outstanding	43,956			38,349			43,841			37,251
Net loss per share attributable to common shareholders (basic and diluted)	$	(0.45	)	(0.12		)	$	(0.52	)	(0.33		)

Three Months Ended June 30, Six Months Ended June 30,
(Amounts in thousands except per share amounts) 2018 2017 2018 2017
Numerator:

Net loss $ (4,651 ) $ (2,388 ) $ (12,310 ) $ (12,166 )
Denominator for basic and diluted EPS:

Weighted-average common shares outstanding 38,349
32,765
37,251
32,333
Net loss per share attributable to common shareholders (basic and diluted) $ (0.12 ) $ (0.07 ) $ (0.33 ) $ (0.38 )

Common equivalent shares are not included in the diluted per share calculation where the effect of their inclusion would be anti-dilutive. The ~~aggregate~~ number of common equivalent shares ~~(related to~~of options ~~warrants~~of 5.6 million, restricted stock unit awards of 0.2 million and ~~preferred stock) that~~less than 0.1 million of warrants have been excluded from the computations of diluted net loss per common share at June 30, ~~2018~~2019 and ~~2017~~ ~~were 5.8~~2018. The number of common equivalent shares of options of 5.4 million and ~~5.5~~0.4 million ~~respectively.~~of warrants have been excluded from the computations of diluted net loss per common share at June 30, 2018.

12. NexoBrid License and Supply Agreements

On May 6, 2019, the Company entered into exclusive license and supply agreements with MediWound Ltd. (MediWound) to commercialize NexoBrid^® and any improvements to Nexobrid in all countries of 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.

NexoBrid is currently in clinical development in North America, and pursuant to the terms of the license agreement, MediWound will continue to conduct all clinical activities described in the development plan to support the BLA filing with the United States Food and Drug Administration under the supervision of a Central Steering Committee comprised of members of each party.

In May 2019, the Company paid MediWound $17.5 million in consideration of the license. The $17.5 million upfront payment was recorded to research and development expense in the three months ended June 30, 2019 as the license is for registration-stage product rights and is considered in process research and development. The Company is also obligated to pay MediWound $7.5 million upon U.S. regulatory approval of the BLA for NexoBrid and up to $125 million 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 million. The Company also will pay MediWound tiered royalties on net sales ranging from high single-digit to low double-digit percentages, subject to customary reductions. The U.S. Biomedical Advanced Research and Development Authority (BARDA) has committed to procure NexoBrid, and the Company will pay a percentage of gross profits to MediWound on initial committed amounts and a royalty on any additional BARDA purchases of NexoBrid beyond the initial committed amount. The Company also entered into a supply agreement with MediWound under which MediWound will manufacture NexoBrid for the Company on a unit price basis which may be increased based on a published index. MediWound is obligated to supply the Company with NexoBrid for sale in North America on an exclusive basis for the first five years of the term of the supply agreement. After the exclusivity period or upon supply failure, the Company will be permitted to establish an alternate source of supply.

13. Commitments and Contingencies

The Company leases facilities in Ann Arbor, Michigan and Cambridge, Massachusetts. The Cambridge facility includes clean rooms, laboratories for MACI and Epicel manufacturing and office space. The Company also pays for use of an offsite warehouse space and leases various vehicles and computer equipment.

In March 2016, the Company amended its current lease in Cambridge to, among other provisions, extend the term 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~~part of the operating lease assets under the new leasing guidance described below, on the Company's condensed consolidated balance ~~sheet and is amortized to the Company's condensed consolidated statement of operations as reductions to rent expense over the lease term.~~sheet. As of June 30, ~~2018,~~2019, the Company has recorded $1.9 million of leasehold improvements funded by the tenant improvement allowance.

~~In addition~~The Company adopted the updated leasing guidance as described in note 7, as of January 1, 2019. Upon adoption all operating lease commitments with a lease term greater than 12 months that were previously assessed under previous lease guidance, were recognized as right to use assets and liabilities, on a discounted basis on the ~~property leases,~~balance sheet. Leases with an initial term of 12 months or less are not recorded on the ~~Company also leases an offsite warehouse, various vehicles~~balance sheet and ~~computer equipment.~~ lease expense is recorded on a straight-line basis over the lease term.

The Company's purchase commitments consist of minimum purchase amounts of materials used in the Company's cell manufacturing process to manufacture its marketed cell therapy products.

~~As of June 30, 2018, future minimum payments related to leases and other contractual obligations are as follows:~~

(In thousands) Total 2018 2019 2020 2021 2022 More than 5 years
Operating leases $ 18,200
$ 2,515
$ 4,932
$ 4,922
$ 4,813
$ 954
$ 64
Debt and interest related payments 21,169
1,192
6,254
5,794
7,929
—
—
Purchase commitments 2,682
68
676
646
646
646
—
Capital leases 77
39
14
10
10
4
—
Total $ 42,128
$ 3,814
$ 11,876
$ 11,372
$ 13,398
$ 1,604
$ 64

~~Rent expense for the three and six months ended June 30, 2018 was $1.3 million and $2.8 million, respectively, and $1.3 million and $2.7 million for the same periods in 2017.~~

~~13. License Agreement~~

On May 10, 2017, 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 Company's product portfolio in Greater China, South Korea, Singapore, and other countries in Asia. ICT acquired an exclusive license to certain patent rights, know-how and intellectual property relating to Carticel, MACI, ixmyelocel-T, and Epicel. The remaining variable consideration, which is related to the development and commercialization milestones and royalty based payments, is monitored for completion and related revenue recognition as discussed in note 4.

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

Overview

Vericel Corporation is a leader in advanced cell therapies for the sports medicine and severe burn care markets, and a developer of ~~patient-specific expanded~~ cell therapies for use in the treatment of patients with severe diseases and conditions. We currently market two FDA approved autologous cell therapy products in the United States. 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 of 2017, we removed MACI’s predecessor, Carticel^® (autologous cultured chondrocytes), from the market. Carticel is 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).adults. We also market Epicel^® (cultured epidermal autografts), a permanent skin replacement Humanitarian Use Device (HUD) for the treatment of adult and pediatric patients with deep-dermal or full-thickness burns ~~comprising~~ greater than or equal to 30 percent of total body surface area (TBSA).

Manufacturing

We have a cell-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 and early 2017, we also operated a centralized cell manufacturing facility in Ann Arbor, Michigan. The Ann Arbor facility previously 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 ~~approved~~FDA-approved autologous cell ~~therapy products:~~therapies: MACI, a ~~third generation~~third-generation autologous implant for the repair of symptomatic, full-thickness cartilage defects of the knee in adult patients and Epicel, a permanent skin replacement for adult and pediatric patients with deep dermal or full thickness burns ~~in adults and pediatrics with~~ greater than or equal to 30% of ~~TBSA, both of which~~TBSA. Both products are currently marketed in the U.S. We also own Carticel ~~a first-generation product for autologous chondrocyte implantation, or ACI,~~ which is no longer marketed in the U.S. We also entered into exclusive license and supply agreements with MediWound to commercialize NexoBrid in all countries of North America. NexoBrid is currently in clinical development in North America. Until 2017, our active product candidate portfolio included ixmyelocel-T, a patient-specific multicellular therapy for the treatment of advanced heart failure due to dilated cardiomyopathy, or DCM. We have no current plans to continue the development of ~~ixmyelocel-T unless funded by a partner.~~ixmyelocel-T.

~~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 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~~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~~MACI replaced Carticel, an earlier generation ACI product for the treatment and repair of cartilage defects in the knee and was the first ~~shipment and implantation of MACI occurred on January 31, 2017, and we stopped manufacturing and marketing Carticel at the end of the second quarter in 2017.~~FDA-approved autologous cartilage repair product.

In the U.S., the physician target audience which repairs cartilage defects is ~~very~~ concentrated and is comprised of a group of ~~physicians~~orthopedic surgeons who self-identify as and/or have ~~the~~a formal specialty ofas sports medicine physicians. We believe this target audience is approximately 2,500 to 3,000 physicians. ~~During 2017~~In addition to these physicians there is a population of approximately 8,000 general orthopedic surgeons who treat cartilage injuries, although typically at a much lower average volume relative to the sports medicine

physicians. As we ~~announced the expansion of~~look to more effectively engage this customer base, we expanded our field force from 2840 to 4048 representatives ~~the vast majority of whom we have employed and were~~ in ~~the field by the beginning of~~ the second quarter of ~~2018.~~2019.Most private payers have a medical policy that ~~allows~~covers treatment with ~~MACI. All of~~MACI with the top 30 largest commercial payers ~~for Carticel have~~having a formal medical policy for MACI or ACI in general. For those private payers which have not yet approved a medical policy for MACI, for medically appropriate cases we can often obtain approval on a case by case basis. For the three and six months ended June 30, ~~2018,~~2019, net revenues for MACI were $20.8 million and $37.4 million, respectively and $14.1 million and $26.2 million, ~~respectively.~~for the same periods in 2018.

Epicel

Epicel is a permanent skin replacement for deep dermal or full thickness burns greater than or equal to 30% of TBSA. Epicel is regulated by the Center for Biologics Evaluation and Research, or CBER of the ~~Federal~~U.S. Food and Drug Administration, or FDA under medical device authorities, and is the only FDA-approved autologous epidermal product available for large total surface area burns. Epicel was designated as a HUD in 1998 and a Humanitarian Device Exception (HDE) application for the product was submitted in 1999. HUDs are devices that are intended for diseases or conditions that affect fewer than 8,000 individuals annually in the U.S. Under an HDE approval, a HUD cannot be sold for an amount that exceeds the cost of research and development, fabrication and distribution unless certain conditions are met. ~~For the three and six months ended June 30, 2018, net revenues for Epicel were $4.9 million and $10.9 million, respectively.~~

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 as long as the number of devices distributed in any calendar year does not exceed the Annual Distribution Number (ADN). The ADN is defined as the number of devices reasonably needed to treat a population of 8,000 individuals per year in the U.S.

On February 18, 2016, the FDA approved our HDE supplement to revise the labeled indications of use to specifically include pediatric patients and to add pediatric labeling. The revised product label also now specifies that the probable benefit of Epicel, mainly related to survival, was demonstrated in two Epicel clinical experience databases and a physician-sponsored study comparing outcomes in patients with massive burns treated with Epicel relative to standard care. Due to the change in the label to specifically include use in pediatric patients, Epicel is no longer subject to the HDE profit restrictions. In conjunction with adding the pediatric labeling and meeting the pediatric eligibility criteria, the FDA has determined the ADN number for Epicel is 360,400 which is approximately 5045 times larger than the volume of grafts sold in ~~2017.~~2018. We currently have a 5-person field force. For the three and six months ended June 30, 2019, net revenues for Epicel were $5.3 million and $10.6 million, respectively, and $4.9 million and $10.9 million for the same periods in 2018.

NexoBrid

Our preapproval stage portfolio includes NexoBrid, a topically-administered biological product that enzymatically removes nonviable burn tissue, or eschar, in patients with deep partial and full-thickness thermal burns. NexoBrid is currently in clinical development in North America, and pursuant to the terms of our license agreement with MediWound, MediWound will continue to conduct all clinical activities described in the development plan to support the filing of a BLA with the United States Food and Drug Administration under the supervision of a Central Steering Committee comprised of members of each party.

Ixmyelocel-T

Our preapproval stage portfolio also includes ixmyelocel-T, a unique ~~patient-specific~~ multicellular therapy derived from an adult patient’s own bone marrow which utilizes our proprietary, highly automated and scalable manufacturing system. ~~The patient-specific~~This multicellular therapy was developed for the treatment of advanced heart failure due to DCM.

Ixmyelocel-T has been granted a U.S. Orphan Drug designation 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 followed for an additional 12 months for safety. 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 ~~have been~~were offered the option to receive ixmyelocel-T. We successfully treated the last patients in February 2017, and the last follow-up visit occurred 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, the FDA indicated we would be required to conduct at least one additional Phase 3 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, 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.~~own.

Results of Operations

Net Loss

Our net loss for the three and six months ended June 30, ~~2018~~2019 totaled $19.8 million and $22.6 million, respectively and $4.7 million and $12.3 ~~million, respectively and $2.4 million and $12.2~~ million for the same periods in ~~2017.~~2018.


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2018			2017			2018			2017			2019			2018			2019			2018
Total revenues	$	19,011		$	16,953		$	37,038		$	26,314		$	26,151		$	19,011		$	47,961		$	37,038
Cost of product sales	7,727			7,670			15,393			14,779			9,022			7,727			17,662			15,393
Gross profit	11,284			9,283			21,645			11,535			17,129			11,284			30,299			21,645
Total operating expenses	15,530			11,804			30,213			23,679			37,329			15,530			53,857			30,213
Loss from operations	(4,246		)	(2,521		)	(8,568		)	(12,144		)	(20,200		)	(4,246		)	(23,558		)	(8,568		)
Other income (expense)	(405		)	133			(3,742		)	(22		)	408			(405		)	922			(3,742		)
Net loss	$	(4,651	)	$	(2,388	)	$	(12,310	)	$	(12,166	)	$	(19,792	)	$	(4,651	)	$	(22,636	)	$	(12,310	)

Net revenues increased for the three ~~months ended June 30, 2018 compared to the same period the previous year due primarily to significant volume increases for both MACI~~ and Epicel. During the three months ended June 30, 2017, we reversed a revenue reserve of $1.4 million related to a dispute between a third party payer and our distributor of MACI and Carticel for which we originally recorded a $2.8 million reserve during the three months ended March 31, 2017.

~~Net revenues increased for the~~ six months ended June 30, ~~2018~~2019 compared to the same ~~period the previous year~~periods in 2018 primarily due ~~primarily~~ to significant MACI volume increases for both MACI and Epicel. During the six months ended June 30, 2017, we recorded a revenue reserve of $1.4 million related to a dispute between a third party payer and our distributor of MACI and Carticel.growth.

Seasonality. Over the last four years ~~the percentage of total product revenue has on average been 21%, 25%, 21%~~ACI (MACI and ~~33%~~Carticel prior to its replacement) sales volumes from the first tothrough the fourth quarter have on average represented 20%, 24%, 22% and 35% respectively, of total annual volumes. In some years individual quarters ~~and is driven~~have deviated from these means by ~~the seasonality of both~~up to 4%. MACI ~~and Epicel sales. MACI revenue is~~orders are stronger in the ~~second quarter and~~ fourth quarter due to ~~a number of~~several factors including insurance copay limits and the time of year patients prefer to start rehabilitation. Epicel revenue is also subject to seasonal fluctuations mostly associated with the use of heating elements during the colder months, with stronger sales occurring in the winter months of the first 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 absent due to the extreme variability inherent with Epicel’s patient volume. ~~The variability between~~Over the ~~same quarters in consecutive~~last four years the percentage of annual product orders for Epicel has on average been ~~as high as 11% of~~28%, 25%, 21% and 27% from the ~~annual volume for Epicel.~~first to the fourth quarters.

Gross Profit and Gross Profit Ratio

Gross profit ~~ratio~~ increased for the three and six months ended June 30, ~~2018~~2019 compared to the same period in ~~2017~~2018 due primarily to an increase in MACI ~~and Epicel~~ sales combined with ~~a significant portion~~our highly fixed manufacturing cost structure which consists mainly of ~~our manufacturing~~labor and facility costs ~~being fixed.~~that do not materially fluctuate with volume increases.

Research and Development Costs

The following table summarizes the approximate allocation of cost for our research and development projects:

Research and development costs for the three months ended June 30, ~~2018~~2019 were ~~$3.7~~$21.1 million ~~versus $3.0~~compared to $3.7 million for the same period a year ago. The increase ~~was due primarily to the continued increase~~ in ~~MACI~~ research and development costs related to preparations for a pediatric clinical study, a post-approval FDA commitment, in the U.S. which offset the ixCELL-DCM trial expenses that were incurred in 2017. There was also an additional $0.3 million in stock compensation expense forduring the three months ended June 30, ~~2018 compared to the same period a year ago~~2019 is due to ~~an increase in our stock price.~~a $17.5 million upfront payment to MediWound for the North American rights to NexoBrid.

Research and development costs for the six months ended June 30, ~~2018~~2019 were ~~$7.5~~$24.1 million ~~versus $6.4~~compared to $7.5 million for the same period a year ago. The increase ~~was due primarily to the continued increase~~ in ~~MACI~~ research and development costs related to preparations for a pediatric clinical study in the U.S. which offset the ixCELL-DCM trial expenses that were incurred in 2017. There was also an additional $0.7 million in stock compensation expense forduring the six months ended June 30, ~~2018~~2019 is due to the $17.5 million upfront payment to MediWound for the North American rights to NexoBrid, partially offset by costs related to the ongoing MACI pediatric trial, which decreased, compared to the same period a year ~~ago due to an increase in our stock price.~~ago.

Selling, General and Administrative Costs

Selling, general and administrative costs for the three months ended June 30, ~~2018~~2019 were ~~$11.8~~$16.3 million compared to ~~$8.8~~$11.8 million for the same period a year ago. The increase in selling, general and administrative costs for the three months ended June 30, ~~2018~~2019 is due primarily to a $1.1 million increase in marketing expenses, an incremental $0.7 million in MACI sales force ~~employee~~ expenses ~~as a result of~~driven by the ~~sales force~~ expansion in ~~2018 as compared~~the second quarter of 2019, a $1.0 million increase in stock-based compensation expenses and a $0.9 million increase in selling expenses and patient reimbursement support services. The increase in selling expenses and patient reimbursement support services is primarily driven by higher MACI sales volume and the engagement of a third-party services provider to ~~2017 and $0.5 million additional spend on reimbursement and case management services. There was also an additional $1.1 million in stock compensation expense for~~provide the ~~three months ended~~patient support program under the current distributor model which began June ~~30,~~15, 2018, compared to the same period a year ago.

Selling, general and administrative costs for the six months ended June 30, ~~2018~~2019 were ~~$22.7~~$29.8 million ~~versus $17.2~~compared to $22.7 million for the same period a year ago. The increase in selling, general and administrative costs for the six months ended June 30, ~~2018~~2019 is due primarily to a $2.1 million increase in stock-based compensation expenses, a $1.5 million increase in selling expenses and patient reimbursement support services, an incremental $1.3 million in MACI sales force ~~employee~~ expenses asdriven by the expansions in the second quarter of 2019 and a ~~result of the sales force expansion as compared to 2017 and $1.1~~$1.3 million ~~additional spend on reimbursement and case management services. There was also an additional $1.4 million~~increase in ~~stock compensation expense for the six months ended June 30, 2018 compared to the same period a year ago.~~marketing expenses.

Other Income (Expense)

Three Months Ended June 30, Six Months Ended June 30,
(In thousands) 2018 2017 2018 2017
Decrease (increase) in fair value of warrants $ (37 ) $ 441
$ (2,944 ) $ 548
Foreign currency translation loss (5 ) (13 ) (49 ) (14 )
Other income 2
1
48
1
Net interest expense (365 ) (296 ) (797 ) (557 )
Total other expense $ (405 ) $ 133
$ (3,742 ) $ (22 )



	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2019			2018			2019		2018
Increase in fair value of warrants	$	—		$	(37	)	$	—	$	(2,944	)
Other income (expense)	(18		)	(3		)	18		83
Net interest income (expense)	426			(365		)	904		(881		)
Total other income (expense)	$	408		$	(405	)	$	922	$	(3,742	)

The ~~change in~~ other income and expense for the three and six months ended June 30, ~~2018 compared to 2017~~2019 is due primarily to ~~the change in warrant value~~interest income as a result of our investments in various marketable debt securities. The same periods in 2018 relate to the increase in our stock price ~~and the reduction~~ in ~~the time to maturity. Fluctuations~~2018 resulting in an increase in the fair value of warrants, and we did not experience a change in warrant value for the three and six months ended June 30, 2019 due to the expiration of the liability classified 2013 warrants in ~~future periods could result in significant non-cash adjustments~~2018 which contributed to the ~~condensed consolidated financial statements; however, any income or expense recorded will not impact our cash, operating expenses or cash flow.~~valuation change.

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:

The changes in stock-based compensation expense are due primarily to fluctuations in the fair value of the options granted in ~~2018~~2019 compared to ~~2017~~2018 as a result in the increase in stock price. In addition, we granted restricted stock units in 2019 and none in 2018.

Liquidity and Capital Resources

Since the acquisition in 2014 of ~~the CTRM Business of~~MACI, Epicel and Carticel from Sanofi, our primary focus has been to invest in our existing commercial business with the goal of growing revenue. In June 2018, we sold a total of 5,750,000 shares of our common stock in an underwritten public offering at a price of $13.00 per share. We received proceeds of $70.1 million, net of $4.7 million of underwriters’ discount and issuance costs consisting primarily of legal and accounting fees. We recorded these proceeds as a common stock issuance. We currently intend to use the net proceeds from this offering primarily for general corporate purposes, as well as to expand our business by in-licensing or acquiring, as the case may be, product candidates, technologies, other assets, commercial products or businesses which would be complementary to our existing commercial franchises or our advanced cell therapy platform; however, we have no current commitments or obligations to do so.

We have raised significant funds in order to complete our product development programs, and complete clinical trials needed to market and commercialize our products. To date, we have financed our operations primarily through public and private sales of our equity ~~securities,~~securities. At present revenue levels, we do not currently anticipate the need to finance our operations through the sales of equity securities.

Our cash and ~~funds from the SVB-Mid-Cap facility.~~

~~In 2016 we entered into an ATM Agreement with Cowen~~cash equivalents totaled $14.0 million, and short-term investments totaled $52.0 million 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. Any ATM Shares sold were issued pursuant to our shelf registration statement on Form S-3 (File No. 333-205336). Effective May 29, 2018, we terminated the ATM Agreement and no further sales pursuant to the ATM Agreement will be made. There were no shares sold under the ATM Agreement during the six months ended June 30, ~~2018.~~2019. The cash used in operations of $18.2 million was largely a result of our net loss of $22.6 million which included a cash outflow of $17.5 million for the upfront payment for the NexoBrid license. The net loss was offset by noncash charges including $6.8 million of stock compensation expense and $0.7 million of depreciation expense.

Our cash and cash equivalents totaled $95.0 million as of June 30, 2018. During the six months ended June 30, 2018, the cash used for operations of $5.0 million was ~~$5.0 million. The cash used for operations was fueled~~ largely bya result of our ~~operating~~net loss of $12.3 million, offset by noncash charges including $3.8 million of stock compensation expense, $2.9 million due to the change in fair value of warrants and $0.8 million of depreciation expense.

The change in cash provided by investing activities as of June 30, 2019 is the result of $32.4 million in short-term investments purchases offset by $45.5 million of short-term investment maturities and property plant and equipment purchases of $1.2 million primarily for manufacturing upgrades and leasehold improvements through June 30, 2019. The change in cash used for investing activities as of June 30, 2018 is the result of the purchases of $1.0 million of property plant and equipment ~~purchases of $1.0 million~~ for manufacturing ~~upgrades through June 30, 2018.~~upgrades.

The change in cash provided from financing activities is the result of net proceeds from the exercise of stock options of $2.1 million during the six months ended June 30, 2019. The change in cash provided from financing activities during the six months ended June 30, 2018 is the result of net proceeds from our ~~recent follow-on~~ public equity offering of common stock of $70.1 million, proceeds from the exercise of stock options of $2.1 million and ~~the~~ exercise of warrants of $2.0 ~~million during the six months ended June 30, 2018.~~million.

We have a term loan and revolving line of credit agreement with SVB and MidCap Financial Services, or MidCap, which provide access to up to $25.0 million. The debt financing consists of a $15.0 million term loan which was drawn at the closing and up to $10.0 million of a revolving line of credit. The term loan is interest only (indexed to Wall Street Journal (WSJ) Prime plus 4.25%) until December 1, 2018 followed by 36 equal monthly payments of principal plus interest maturing December 6, 2021. Per the initial terms of the agreement, the revolving credit is limited to a borrowing base calculated using eligible accounts receivable maturing December 6, 2021 with an interest rate indexed to WSJ Prime plus 1.25%. In connection with the SVB-MidCap facility, we must remain in compliance with minimum monthly net revenue covenants (determined in accordance with U.S. GAAP), measured on a trailing twelve month basis. ~~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. We do 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 June 30, 2018, there was an outstanding balance of $15.0 million under the term loan and $2.5 million under the revolving line of credit.

~~While we~~ believe that, based on ~~our~~ current revenue levels, cash on hand, cash equivalents and short-term investments we are ~~in a position~~able to ~~sustain~~operate our business without the need to finance our operations through ~~at least August 2019, if actual results differ from our projections or we pursue other strategic opportunities,~~the sales of equity securities. If revenues decline for a sustained period, we may need to access additional capital. In addition, if our revenues do not meet the existing threshold set forth in the debt covenants, 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,capital; 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. Actual cash requirements may differ from projections and will depend on many factors, including the level of future research and development, the scope and results of ongoing and potential clinical trials, the costs involved in filing, prosecuting and enforcing patents, the need for

additional manufacturing capacity, competing technological and market developments, costs of possible acquisition or development of complementary business activities, and the cost to market ~~and market acceptance of~~ our products.

Off-Balance Sheet Arrangements

At June 30, ~~2018,~~2019, we were not party to any off-balance sheet arrangements.

Critical Accounting Policies

Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (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. These estimates and judgments, in and of themselves, could materially impact the condensed consolidated financial statements and disclosures based on varying assumptions. The accounting policies discussed in our Form 10-K for the fiscal year ended December 31, ~~2017~~2018 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. ~~With the exception of the new revenue standard which has been discussed in note 4 to these financial statements, there~~There have been no material changes to that information disclosed in our Annual Report during the six months ended June 30, ~~2018.~~2019.

Forward-Looking Statements

This report, including the documents that we incorporate by reference, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). Any 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 of words or phrases such as “anticipates,” “estimates,” “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, these statements involve estimates, assumptions and uncertainties which could cause actual results to differ materially from those expressed in them. The factors described in our Annual Report, among others, could have a material adverse effect upon our business, results of operations and financial conditions.

Because the factors referred to in the preceding paragraph could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements we make, you should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement

is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. 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;

•reimbursement for our products;

•submission of a BLA for NexoBrid to the FDA;

•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;

•anticipation of future losses;

•replacement of manufacturing sources;

•commercialization plans; or

•revenue expectations and operating results.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As of June 30, ~~2018,~~2019, 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 our market risk, refer to Item 7A. Quantitative and Qualitative Disclosures About Market Risk in our Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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 Exchange Act, is recorded, processed, summarized and reported

within the time periods specified in the SEC’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”), 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 June 30, ~~2018,~~2019, our Certifying Officers concluded that the Company’s disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There ~~have been~~were no changes in our internal control over financial reporting during the quarter ended June 30, ~~2018~~2019, that have materially affected, or are reasonably likely to materially affect, ~~the Company’s~~our internal control over financial reporting.

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, we are not currently a party to any material pending legal proceedings.

Item 1A. Risk Factors

~~There have been no material changes from~~Certain risks described below update the risk factors ~~previously disclosed~~discussed in ~~the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2018 and the risk factors found in Part I,~~ Item 1A, "Risk Factors," of ~~the Company's~~our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2017.~~2018, which could materially affect our business, financial condition, results of operations, or cash flows. The risks described below and in the Annual Report on Form 10-K ~~and Quarterly Report on Form 10-Q for the quarter ended March 31, 2018~~ are not the only risks ~~the Company faces.~~we face. Additional risks and uncertainties not currently known or currently deemed to be immaterial also may materially and adversely affect ~~the Company’s~~our business, financial condition, results of operations or cash flows.

We rely on complex information technology (IT) systems for various critical purposes, including timely delivery of product and maintaining patient confidentiality.

We have developed a comprehensive, integrated information technology (IT) system for the intake of physician orders for our products, to track product delivery, and to store patient-related data we obtain for purposes of manufacturing MACI and Epicel. We rely on this system to maintain the chain of identity for each autologous product, and to ensure timely delivery of product prior to expiration. Each product has a limited usable life measured in days from the completion of the manufacturing process to patient implant or grafting. Accordingly maintaining accurate scheduling logistics is critical. In addition, this IT system stores and protects the privacy of the required patient information for the manufacture of our products. If our systems were to fail or be disrupted for an extended period of time, we could lose product sales and our revenue and reputation would suffer. In the event our systems were to be breached by an unauthorized third party, they could potentially access confidential patient information we obtain in manufacturing our products, which could cause us to suffer reputational damage and loss of customer confidence. Any one of these events could cause our business to be materially harmed and our results of operations would be adversely impacted.

If we fail to fulfill our obligations under our intellectual property licenses with third parties, we could lose license rights that are important to our business.

We are a party to intellectual property license agreements with third parties, including our license agreement with MediWound Ltd. for NexoBrid, and may enter into additional license agreements in the future. Our existing license agreements impose, and we expect that our future license agreements will impose, various diligence, milestone payment, royalty, insurance and other obligations on us. If we fail to comply with these obligations, our licensors may have the right to terminate these agreements, in which event we might not be able to develop and market any product that is covered by these agreements. Termination of these licenses or reduction or elimination of our licensed rights may result in our having to negotiate new or reinstated licenses with less favorable terms. In addition, if these in‑licenses are terminated, or if the underlying patents fail to provide the intended exclusivity, competitors would have the freedom to seek regulatory approval of, and to market, products identical to ours after the expiry of data exclusivity. The occurrence of such events could materially harm our business.

If our licensing arrangement with MediWound is unsuccessful, our revenues and product development may be limited.

We have entered into a licensing arrangement with MediWound Ltd. for the development of NexoBrid in North America. However, there can be no assurance that this agreement and our and MediWound's efforts pursuant to it will result in FDA approval of NexoBrid, or that we will be able to market NexoBrid at a profit. Under the terms of the License Agreement, MediWound will continue to conduct all development activities under the supervision of a Central Steering Committee comprised of members of each party until the BLA is approved and subsequently transferred to Vericel. Collaboration and licensing arrangements pose the following risks:

Product development is a lengthy and expensive process, with an uncertain outcome.

We intend to commercialize NexoBrid in the U.S. and potentially other North American countries. However, before we can commercialize NexoBrid, we must first obtain regulatory approval for the sale of NexoBrid in any jurisdiction, which includes the submission of an application utilizing completed and ongoing clinical studies to demonstrate that the product is safe and effective. We depend on MediWound for its efforts in completing clinical trials and other clinical activities pursuant to the development plan, obtaining regulatory approval and manufacturing and supplying NexoBrid.

Certain events could delay or prevent our ability to successfully gain regulatory approval, including:

We may be unable to successfully obtain approval of NexoBrid for treatment of severe burns in the United States and other North American markets.

Our continued growth partially depends on our and MediWound’s ability to develop and obtain regulatory approval from the FDA for NexoBrid for treatment of severe burns in the United States. MediWound recently announced top-line results from the Phase 3 pivotal study to support a BLA submission to the FDA, according to which the study has met its primary and all secondary endpoints. Planned twelve-month and twenty-four month safety follow-ups are ongoing for cosmesis, function, quality of life and other safety measurements. While this and previous studies have met their primary endpoints, we cannot predict the outcome of the planned safety follow-ups, whether the FDA will accept a BLA submission based on the available preclinical and clinical data, how long the FDA may take to review and approve NexoBrid following the BLA submission or whether any such approval in the United States will ultimately be granted. Similarly, we cannot predict how long regulatory authorities in Mexico or Canada will take to provide NexoBrid with marketing authorization in their jurisdictions or whether such authorizations will be granted at all. The failure to receive regulatory approval in the United States would have a materially adverse impact on our business prospects.

There is no guarantee that NexoBrid will be accepted in the market even if regulatory approval is received.

The success of NexoBrid, if and when approved, depends upon the acceptance of NexoBrid by patients, the medical community and third-party payors, effectively competing with other products, a continued acceptable safety profile following approval and qualifying for, maintaining, enforcing and defending related intellectual property rights and claims. Even if we and MediWound successfully obtain regulatory approvals to market NexoBrid, our revenues will be dependent, in part, upon the size of the markets for which we gain regulatory approval. If the markets that we are targeting are not as significant as we estimate, we may not generate significant revenues from sales of such products, if approved.

Our licensor MediWound is dependent on a contract with the U.S. Biomedical Advanced Research and Development Authority to fund the Phase 3 pivotal studies and other development activities of NexoBrid in the United States.

MediWound has a contract with BARDA valued at up to $132 million for the advancement of the development and manufacturing, as well as the procurement, of NexoBrid in the United States. Under the contract, BARDA has agreed to fund up to $56 million of the development costs of NexoBrid required to obtain marketing approval in the United States, including its ongoing pediatric Phase 3 study and its expansion to include U.S. pediatric burn care sites, and has an option to further fund $10 million in development activities for other potential NexoBrid indications. BARDA has also made a $16.5 million commitment for procurement of NexoBrid, which is contingent upon the U.S. FDA Emergency Use Authorization and/or FDA regulatory approval for NexoBrid, and has a $50 million option for additional procurement of NexoBrid. In addition, MediWound was recently awarded a new contract to develop NexoBrid for the treatment of Sulfur Mustard injuries as part of BARDA preparedness for mass casualty events. The contract provides approximately $12 million of funding to support research and development activities up to pivotal studies in animals under the U.S. FDA Animal Efficacy Rule and contains options for additional funding of up to $31 million for additional development activities, animal pivotal studies, and the BLA submission for licensure of NexoBrid for the treatment of Sulfur Mustard injuries. MediWound also was recently awarded funding for the NexoBrid expanded access treatment (NEXT) protocol being conducted under the FDA’s expanded access program. However, the contracts provide that BARDA may terminate the contract at any time, at its convenience, without any further funding obligations. There can be no assurances that BARDA will not terminate the contract. Changes in government budgets and agendas may result in a decreased and de-prioritized emphasis on supporting the development of products for the treatment of severe burns such as NexoBrid. Any reduction or delay in BARDA funding may result in a decrease in planned development activities, including the development of NexoBrid for the treatment of Sulfur Mustard injuries and the NEXT study. In addition, the loss of funding may adversely affect MediWound’s ability to complete the required activities to file the BLA without access to alternative sources of funding. This could lead to a modification to the financial provisions of our agreement or a significant delay in the development of NexoBrid. Further, we cannot provide any assurances as to when or whether BARDA’s commitment for procurement of NexoBrid will occur nor when or whether BARDA's option to fund additional development activities for NexoBrid will be exercised.

Item 1B. Unresolved Staff Comments

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

The Company did not have any repurchases or unregistered issuances of its equity securities during the quarter ended June 30, ~~2018.~~2019.

Item 3. Defaults Upon Senior Securities

Item 4. Mine Safety Disclosures

Item 5. Other Information

The Exhibits listed in the Exhibit Index are filed as a part of this Quarterly Report on Form 10-Q.



PART I — FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited):	3

	Condensed Consolidated Balance Sheets as of June 30, ~~2018~~2019 and December 31, ~~2017~~2018	3

	Condensed Consolidated Statements of Operations for the three and six months ended June 30, ~~2018~~2019 and ~~2017~~2018	4

	Condensed Consolidated Statements of ~~Cash Flows~~Comprehensive Loss for the three and six months ended June 30, ~~2018~~2019 and ~~2017~~2018	5

	~~Notes~~Consolidated Statements of Shareholders Equity (Deficit) from December 31, 2017 to ~~Condensed Consolidated Financial Statements~~June 30, 2018 and from December 31, 2018 to June 30, 2019	6

	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018	7

	Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1419

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2023

Item 4.	Controls and Procedures	2023

PART II — OTHER INFORMATION

Item 1.	Legal Proceedings	2125

Item 1A.	Risk Factors	2125

Item 1B.	Unresolved Staff Comments	2127

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2127

Item 6.	Exhibits	2127

Exhibit Index		2228

Signature		2330



	Three Months Ended June 30, 2018					Six Months Ended June 30,
Revenue by product (in thousands)	2018			2017		2018			2017
MACI and Carticel implants and kits
Implants - based on contracted rate	$	7,362		$	2,802	$	18,111		$	3,099
Implants - subject to third party reimbursement	6,346			7,744		7,430			14,093
Biopsy kits - direct bill	468			423		904			862
Change in estimates related to prior periods	(51		)	1,936		(265		)	(142		)
Epicel
Direct bill (hospital)	4,886			4,048		10,858			8,402
Total revenue	$	19,011		$	16,953	$	37,038		$	26,314



(In thousands)	June 30, 2018		December 31, 2017
Raw materials	$	3,303	$	3,532
Work-in-process	377		226
Finished goods	45		35
Inventory	$	3,725	$	3,793



	August 2013 Warrants	September 2016 Warrants	December 2017 Warrants
Exercise price	$4.80	$2.25	$4.27
Expiration date	August 16, 2018	September 9, 2022	December 6, 2023
Total shares issuable on exercise	315,500	58,537	53,902



(In thousands)
Years Ending December 31,	Amount
2018	$	417
2019	5,000
2020	5,000
2021	7,083
2022	—
Thereafter	—
	$	17,500



Warrant Liabilities (In thousands)
Balance at December 31, 2017	$	1,014
Increase in fair value	2,944
Warrant exercise	(2,409		)
Balance at June 30, 2018	$	1,549



Exhibit No.		Description

10.1†**		Sixth Amendment to Distribution Agreement between Orsini Pharmaceutical Services, Inc. and the Company, dated April 18, 2019.

10.2†**		First Amendment to Dispensing Agreement by and between AllCare Plus Pharmacy and the Company, dated May 1, 2019.

10.3#		Vericel Corporation 2019 Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 1, 2019).

10.4#		Form of Incentive Stock Option Agreement for Employees under the 2019 Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on May 1, 2019).

10.5#		Form of Incentive Stock Option Agreement for New Hires under the 2019 Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on May 1, 2019).

10.6#		Form of Non-Qualified Stock Option Agreement under the 2019 Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on May 1, 2019).

10.7#		Form of Restricted Stock Unit Award Agreement for Employees under the 2019 Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on May 1, 2019).

10.8#		Form of Restricted Stock Unit Award Agreement for non-employee directors under the 2019 Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on May 1, 2019).

10.9†**		License Agreement between MediWound, Ltd. and the Company, dated May 6, 2019.

10.10†**		Supply Agreement between MediWound, Ltd. and the Company, dated May 6, 2019.

10.11**		Amended and Restated Employment Agreement by and between Michael Halpin and the Company, dated September 14, 2017.

10.12**		First Amendment to Employment Agreement by and between Michael Halpin and the Company, dated June 3, 2019.

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 of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS**		XBRL Instance Document

101.SCH**		XBRL Taxonomy Extension Schema Document

101.CAL**		XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB**		XBRL Taxonomy Extension Label Linkbase Document

101.PRE**		XBRL Taxonomy Extension Presentation Linkbase Document

101 DEF**		XBRL Taxonomy Extension Definition Linkbase Document



	VERICEL CORPORATION


	/s/ DOMINICK C. COLANGELO
	Dominick C. Colangelo
	President and Chief Executive Officer
	(Principal Executive Officer)


	/s/ GERARD MICHEL
	Gerard Michel
	Chief Financial Officer and Vice President, Corporate Development
	(Principal Financial Officer)