SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
(Mark One)
 
x☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED: September 30, 20182019
 
OR
 
o☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-35280
VERICEL CORPORATIONCORPORATION
(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
CambridgeMA02139
(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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, no par valueVCELNASDAQ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes - x  No - o
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes - x No - o


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer - o
☐
Accelerated filer - x
☒
Non-accelerated filer - o
☐
Smaller reporting company - x
☒
  
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 43,347,34844,694,512
(Class) Outstanding at November 2, 2018October 31, 2019
   
   





VERICEL CORPORATION
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
 
PART I — FINANCIAL INFORMATION 
   
Item 1.
Financial Statements (Unaudited):
3
   
 
Condensed Consolidated Balance Sheets as of September 30, 20182019 and December 31, 20172018
3
   
 
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 20182019 and 20172018
4
   
 
Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 20182019 and 20172018
5
   
 
Consolidated Statements of Shareholders Equity (Deficit) from December 31, 2017 to September 30, 2018 and from December 31, 2018 to September 30, 2019
7
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 20182019 and 20172018
68
   
 
Notes to Condensed Consolidated Financial Statements
79
   
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
1820
   
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
2325
   
Item 4.
Controls and Procedures
2326
   
PART II — OTHER INFORMATION 
   
Item 1.
Legal Proceedings
2427
   
Item 1A.
Risk Factors
24
Item 1B.
Unresolved Staff Comments
2427
   
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
2427
Item 3.
Defaults Upon Senior Securities
27
Item 4.
Mine Safety Disclosure
27
Item 5.
Other Information
27
   
Item 6.
Exhibits
2427
   
Exhibit Index
2528
   
Signature
2629
   
 
i







PART I - FINANCIAL INFORMATION
 
Item 1.Financial Statements
 
VERICEL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, amounts in thousands)
 
 September 30, December 31, September 30, December 31,
 2018 2017 2019 2018
ASSETS  
  
  
  
Current assets:  
  
  
  
Cash and cash equivalents $53,289
 $26,862
 $36,905
 $18,286
Short term investments 44,462
 —
Accounts receivable (net of allowance for doubtful accounts of $286 and $249, respectively) 15,528
 18,270
Short-term investments 37,760
 64,638
Accounts receivable (net of allowance for doubtful accounts of $643 and $514, respectively) 19,958
 23,454
Inventory 3,638
 3,793
 6,823
 3,558
Other current assets 2,339
 1,581
 3,272
 2,847
Total current assets 119,256
 50,506
 104,718
 112,783
Property and equipment, net 5,207
 4,071
 7,190
 5,906
Right-of-use assets 25,619
 —
Total assets $124,463
 $54,577
 $137,527
 $118,689
LIABILITIES AND SHAREHOLDERS’ EQUITY  
  
  
  
Current liabilities:  
  
  
  
Accounts payable $4,580
 $5,552
 $5,281
 $7,108
Accrued expenses 5,592
 5,573
 6,960
 6,930
Deferred rent 534
 420
Current portion of term loan credit agreement (net of deferred costs of $69 and $67, respectively) 4,097
 350
Warrant liabilities —
 1,014
Other 189
 181
Current portion of operating lease liabilities 2,836
 —
Other liabilities 35
 754
Total current liabilities 14,992
 13,090
 15,112
 14,792
Revolving and term loan credit agreement (net of deferred costs of $150 and $196, respectively) 13,183
 16,888
Deferred rent 1,813
 2,059
Operating lease liabilities 25,311
 —
Other long-term liabilities 114
 1,666
Total liabilities 29,988
 32,037
 40,537
 16,458
COMMITMENTS AND CONTINGENCIES (Note 13) 

 

COMMITMENTS AND CONTINGENCIES 


 


Shareholders’ equity:  
  
  
  
Common stock, no par value; shares authorized — 75,000; shares issued and outstanding — 43,170 and 35,861, respectively 468,447
 383,020
Other comprehensive loss (18) —
Common stock, no par value; shares authorized — 75,000; shares issued and outstanding — 44,520 and 43,578, respectively 485,141
 471,180
Other comprehensive gain (loss) 29
 (39)
Warrants 302
 397
 —
 104
Accumulated deficit (374,256) (360,877) (388,180) (369,014)
Total shareholders’ equity 94,475
 22,540
 96,990
 102,231
Total liabilities and shareholders’ equity $124,463
 $54,577
 $137,527
 $118,689
 
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 September 30, Nine Months Ended September 30, Three Months Ended September 30, Nine Months Ended September 30,
 2018 2017 2018 2017 2019 2018 2019 2018
Product sales, net $22,484
 $14,260
 $59,522
 $40,574
 $30,499
 $22,484
 $78,460
 $59,522
Cost of product sales 8,138
 7,186
 23,531
 21,965
 9,324
 8,138
 26,986
 23,531
Gross profit 14,346
 7,074
 35,991
 18,609
 21,175
 14,346
 51,474
 35,991
Research and development 3,113
 2,919
 10,581
 9,357
 3,096
 3,113
 27,174
 10,581
Selling, general and administrative 12,569
 8,186
 35,314
 25,427
 14,982
 12,569
 44,761
 35,314
Total operating expenses 15,682
 11,105
 45,895
 34,784
 18,078
 15,682
 71,935
 45,895
Loss from operations (1,336) (4,031) (9,904) (16,175)
Income (loss) from operations 3,097
 (1,336) (20,461) (9,904)
Other income (expense):  
  
 0
  
  
  
    
Decrease (increase) in fair value of warrants 420
 (1,060) (2,524) (512)
Foreign currency translation loss —
 (6) (49) (20)
Increase (decrease) in fair value of warrants —
 420
 —
 (2,524)
Interest income 307
 2
 390
 6
 385
 307
 1,293
 390
Interest expense (460) (317) (1,340) (878) (2) (460) (6) (1,340)
Other income —
 5
 48
 6
Other income (expense) (10) —
 8
 (1)
Total other income (expense) 267
 (1,376) (3,475) (1,398) 373
 267
 1,295
 (3,475)
Net loss $(1,069) $(5,407) $(13,379) $(17,573)
Net income (loss) $3,470
 $(1,069) $(19,166) $(13,379)
                
Net loss per share attributable to common shareholders (Basic and Diluted) $(0.02) $(0.16) $(0.34) $(0.54)
Weighted average number of common shares outstanding (Basic and Diluted) 42,925
 33,667
 39,163
 32,783
Net income (loss) per share (Basic) $0.08
 $(0.02) $(0.44) $(0.34)
Weighted average number of common shares outstanding (Basic) 44,251
 42,925
 43,979
 39,163
Net income (loss) per share (Diluted) $0.07
 $(0.02) $(0.44) $(0.34)
Weighted average number of common shares outstanding (Diluted) 46,667
 42,925
 43,979
 39,163
 
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 September 30, Nine Months Ended September 30,
  2018 2017 2018 2017
Net loss $(1,069) $(5,407) $(13,379) $(17,573)
Other comprehensive loss:        
Net change in unrealized loss on investments $(18) —
 $(18) $—
Comprehensive loss $(1,087) $(5,407) $(13,397) $(17,573)
  Three Months Ended September 30, Nine Months Ended September 30,
  2019 2018 2019 2018
Net income (loss) $3,470
 $(1,069) $(19,166) $(13,379)
Other comprehensive income (loss):        
Unrealized (loss) gain on investments (9) (18) 29
 (18)
Comprehensive income (loss) $3,461
 $(1,087) $(19,137) $(13,397)


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    
BALANCE, DECEMBER 31, 201843,578
 $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 exercises228
 780
       780
Shares issued under the Employee Stock Purchase Plan19
 218
       218
Change in unrealized gain (loss) on investments      42
   42
BALANCE, MARCH 31, 201943,825
 $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 exercises227
 850
       850
Shares issued under the Employee Stock Purchase Plan14
 211
       211
Change in unrealized gain (loss) on investments      35
 

 35
BALANCE, JUNE 30, 201944,066
 $480,050
 $104
 $38
 $(391,650) $88,542
Net income        3,470
 3,470
Compensation expense related to stock options granted, net of forfeitures  3,285
       3,285
Stock option exercises416
 1,427
       1,427
Shares issued under the Employee Stock Purchase Plan18
 275
       275
Change in unrealized gain (loss) on investments      (9)   (9)
Exercise of warrants resulting in issuance of common stock20
 104
 (104)—
 —
  —
BALANCE, SEPTEMBER 30, 201944,520
 $485,141
 $—
 $29
 $(388,180) $96,990



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


  Common Stock Warrants Amounts Accumulated Other Comprehensive Income Accumulated Deficit Total
Shareholders’ Equity
  Shares Amount    
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
Net loss         (1,069) (1,069)
Compensation expense related to stock options granted, net of forfeitures   1,932
       1,932
Stock option exercises 305
 952
       952
Shares issued under the Employee Stock Purchase Plan 25
 200
       200
Exercise of warrants resulting in the issuance of common stock 156
 751
       751
Net change in warrant valuation of exercised warrants   1,129
       1,129
Change in unrealized gain (loss) on investments       (18)   (18)
BALANCE, SEPTEMBER 30, 2018 43,170
 $468,447
 $302
 $(18) $(374,256) $94,475





VERICEL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, amounts in thousands)
 
 Nine Months Ended September 30, Nine Months Ended September 30,
 2018 2017 2019 2018
Operating activities:  
  
  
  
Net loss $(13,379) (17,573) $(19,166) $(13,379)
Adjustments to reconcile net loss to net cash used for operating activities:  
  
  
  
Depreciation and amortization expense 1,133
 1,186
 1,174
 1,133
Stock compensation expense 5,739
 2,053
 10,095
 5,739
Change in fair value of warrants 2,524
 512
 —
 2,524
Inventory provision 303
 232
Loss on sale of fixed assets 23
 —
 —
 23
Foreign currency translation loss 49
 20
 21
 49
Amortization of premiums and discounts on marketable securities (529) —
Non-cash lease cost 2,011
 —
Change in operating assets and liabilities:  
  
  
  
Inventory (148) (793) (3,265) 155
Deferred rent (132) 91
Accounts receivable 2,742
 1,663
 3,496
 2,742
Prepaid and other current assets (758) (202) (425) (758)
Accounts payable (1,212) (1,068) (1,895) (1,212)
Accrued expenses 19
 (9) 30
 19
Operating lease liabilities (1,804) —
Other assets and liabilities, net 74
 (129) (76) (58)
Net cash used for operating activities (3,023) (14,017)
Net cash used in operating activities (10,333) (3,023)
Investing activities:  
  
  
  
Purchases of short term investments (44,480) —
Purchases of short-term investments (46,303) (44,480)
Maturities of short-term investments 73,777
 —
Expenditures for property, plant and equipment (2,101) (792) (2,255) (2,101)
Net cash used in investing activities (46,581) (792)
Net cash provided by (used in) investing activities 25,219
 (46,581)
Financing activities:  
  
  
  
Net proceeds from equity offering 70,028
 —
 —
 70,028
Net proceeds from common stock issuance due to stock option exercises 3,310
 7,549
 3,762
 3,310
Proceeds from exercise of warrants 2,716
 —
 —
 2,716
Other (23) (252) (29) (23)
Net cash provided by financing activities 76,031
 7,297
 3,733
 76,031
Net increase (decrease) in cash and cash equivalents 26,427
 (7,512)
Net increase in cash and cash equivalents 18,619
 26,427
Cash and cash equivalents at beginning of period 26,862
 22,978
 18,286
 26,862
Cash and cash equivalents at end of period $53,289
 $15,466
 $36,905
 $53,289
    
 
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 SEPTEMBER 30, 20182019 (UNAUDITED)
 
1.Organization
 
Vericel Corporation, a Michigan corporation (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®, CarticelEpicel® and EpicelCarticel® 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). In May 2019, 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 one1 reportable segment — the research, product development, manufacture and distribution of patient-specific, expanded cellularadvanced 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 September 30, 2018,2019, the Company has an accumulated deficit of $374.3$388.2 million and had net income of $3.5 million and a net loss of $1.1$19.2 million during the quarterthree and nine months ended September 30, 2018.2019.  The Company had cash and cash equivalents of $53.3$36.9 million, and short termshort-term investments of $44.5$37.8 million as of September 30, 2018.2019.  The Company expects that existing cash, cash equivalents and short termshort-term investments together with its term loan and revolving line of credit agreement with Silicon Valley Bank (SVB) and MidCap Financial Services (MidCap) (the SVB-MidCap facility), will be sufficient to support the Company's current operations through at least November 2019.  In connection with12 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.  Asissuance of September 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 balance sheet as of December 31, 2018 was derived from audited financial statements included hereinbut does not include all disclosures required by accounting principles generally accepted in the United States of America (U.S. GAAP). The accompanying condensed consolidated financial statements as of September 30, 2019 and for the three and nine months ended September 30, 2019 are unaudited and have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (SEC).  The preparation of condensed consolidated financial statements in conformity with generally accepted accounting principles in the United States of America (U.S. GAAP)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 nine months ended September 30, 2018, are not necessarily indicative of the results to be expected for the full year or for any other period. The September 30, 2018 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, 2018February 26, 2019 (Annual Report).




Consolidated Statement of Cash Flows


The following table presents certain supplementary cash flows information for the nine months ended September 30, 20182019 and 2017:2018:
  Nine Months Ended September 30,
(In thousands) 2019 2018
Supplementary Cash Flows information:    
Warrants exercised for common stock $104
 $3,538
Interest paid (net of interest capitalized) 6
 1,161
Additions to equipment in process included in accounts payable 46
 191
Right-of-use asset and lease liability recognized 2,338
 —

  Nine Months Ended September 30, 2018
(In thousands) 2018 2017
Supplementary Cash Flows information:    
Warrants exercised for common stock $3,538
 $—
Interest paid (net of interest capitalized) 1,161
 691
Shares converted to common from preferred stock —
 38,389
Additions to equipment in process included in accounts payable 191
 486


3.Recent Accounting Pronouncements
Revenue RecognitionAccounting for Leases


In May 2014, theThe 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 periods within 2019.2018. The Company has evaluated its leasing arrangements under the issued guidance and determined all leases are classified as operating leases and will be recognized as assets and future payments as liabilities on the balance sheet. Based on the Company's evaluation to date,Accounting Standard Update 2016-02 became effective for the Company expects that the adoption of the new leasing standards will result in the recognition of material right-to-use assetson January 1, 2019 and liabilities in the Company's condensed consolidated balance sheet. The adoption of the new leasing standards is not expected to have a material impact to the Company's condensed consolidated statements of income.

Accounting for Non-Employee Share Based Payment Arrangements

The FASB issued guidance to expand the scope of stock compensation guidance to include stock compensation granted to nonemployees. Previously, stock compensation granted to nonemployees was subject to vesting date, as opposed to grant date, fair value principles that required companies to re-measure fair value at each reporting period until settlement for equity classified awards. 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 non-employee stock awards granted by the Company have a service condition but no performance condition, each of which is measuredadopted using the Black-Scholes valuation model. The guidance was adopted early and applied as of July 1, 2018 and reflected in the Company's financial statements. The impact upon adoption was not material and no cumulative adjustment was recorded.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 probable loss 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.securities and available-for-sale debt securities with unrealized losses. 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 companiesCompanies are required 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 measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported amount. The guidance is effective for annual reporting periods beginning after December 15, 2019. The Company is currently in the process of evaluating 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 nine months ended September 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 September 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. 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 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 September 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)facility) 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
From July 1, 2017 until June 15, 2018 the Company sold MACI primarily to distributors and directly to hospitals or patients at contracted rates. Beginning on June 16, 2018, the Company contracted with a specialty pharmacy, Orsini Pharmaceutical Services, Inc. (Orsini) to distribute its MACI product in arrangements whereby the Company retains the credit and collection risk from the end customer. Since July 26, 2018, the Company has also contracted with AllCare Plus Pharmacy, Inc. (AllCare), a specialty pharmacy, in arrangements whereby the Company retains the credit and collection risk from the end customer. The


Company pays both specialty pharmacies a fee for each patient to whom MACI is dispensed. Both Orsini and AllCare perform collection activities to receive payment from customers. The Company recognizes product revenues fromhas engaged a third-party services provider to provide the patient support program to manage patient cases and to ensure complete and correct billing information is provided to the insurers and hospitals.

In addition, the Company also sells MACI directly to DMS Pharmaceutical (DMS) for all military implants. The sales of MACI (and previously Carticel) implants upon deliverydirectly to DMS are sold at which time the customer is in control of the implant and the claim is billable. a contracted rate.

Prior authorization orand confirmation of coverage level by the patient’s private insurance plan, hospital or government payer is a prerequisite to the shipment of product to a patient. As noted above, the Company's netThe Company recognizes product revenues from sales of all MACI implants upon delivery at which time the customer obtains control of the implant and the claim is billable. The total consideration which the Company expects to collect in exchange for MACI implants (the transaction price) may be fixed or variable. Direct sales to hospitals or distributors are based onrecorded at a contracted ratesprice, and other than customary prompt pay discounts, there are typically no forms of variable consideration.

When the Company sells MACI, the patient is responsible for payment, however, the Company is typically reimbursed by a third-party insurer or estimated based on expected paymentsgovernment payer, subject to a patient co-pay amount. Reimbursements from the insurance provider, hospital or patient. The estimates of such payment amountsthird-party insurers and government payers vary by customerpatient and payer and are based on either contracted rates, publicly available rates, government fee schedules or past payer precedents. Net product revenues recognized consist of amounts billed net of contractual allowances for differences between amounts billed and the estimated consideration the Company expects to receive from the transaction. The Company estimates the amount of consideration it expects to receive for these transactions using the portfolio approach. These estimates include the impact of contractual allowances, which considers historical collection experience from both the payer and patient, denial rates and the terms of the Company’s contractual arrangements. The Company records a reduction to revenue at the time of sale for its estimate of the amount of consideration that will not be collected. The allowance for uncollectible consideration was $4.2 million as of September 30, 2019 and $2.0 million at December 31, 2018.

Changes in estimates of the transaction price are recorded through revenue in the period in which 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 amendments to its distribution agreement with Orsini Pharmaceutical Services, Inc. (Orsini). The amendments modified certain payment terms for surgeries after June 15, 2018. In addition, under the revised agreement, the parties agreed to eliminate Orsini's right to serve as the Company's exclusive distributor for MACI as the Company is moving to a limited expanded network of distributors. Orsini remains the exclusive pharmacy supplying MACI for only an enumerated list of payers. The amended agreement includes a provision whereby the Company retains the credit and collection risk from the end customer on implants after June 15, 2018. Orsini performs the collection activities. 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 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.
Pursuant to the revised arrangement, the Company will pay Orsini a dispensing fee on a per implant basis. In addition, in consideration of Orsini’s future administrative services related to prior period sales resulted in a $0.7 million and $0.4 million increase to revenue for the amendment, the Company has agreed to pay Orsini 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 Junethree and nine months ended September 30, 2019, or upon terminationrespectively and an increase to revenue of $0.1 million and a decrease to revenue of $0.3 million for the agreement by the Company, if earlier.


On July 26,three and nine months ended September 30, 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 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. The net product revenues for these cases are based on contracted rates stated in the approved contract or other documentation with the insurance provider, hospital or patient.respectively.
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 showsreflect the products from which the Company generated its revenue:
  Three Months Ended September 30, Nine Months Ended September 30,
Revenue by product (in thousands) 2018 2017 2018 2017
MACI and Carticel implants and kits        
     Implants - based on contracted rate $243
 $8,046
 $18,354
 $11,145
Implants - subject to third party reimbursement 15,593
 1,079
 23,156
 15,172
Biopsy kits - direct bill 488
 412
 1,392
 1,274
Change in estimates related to prior periods 125
 372
 (273) 230
Epicel        
     Direct bill (hospital) 6,035
 4,351
 16,893
 12,753
Total revenue $22,484
 $14,260
 $59,522
 $40,574
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 because 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 September 30, Nine Months Ended September 30,
Net revenue by product (in thousands) 2019 2018 2019 2018
MACI implants and kits        
Implants based on contracted rates sold to or through a specialty pharmacy (a)
 $11,779
 $11,102
 $34,555
 $26,257
Implants subject to third-party reimbursement sold through a specialty pharmacy (b)
 4,030
 1,612
 10,584
 5,468
Implants sold direct based on contracted rates (c)
 3,039
 2,632
 9,715
 8,715
Implants sold direct subject to third-party reimbursement (d)
 573
 490
 1,176
 1,070
Biopsy kits - direct bill 533
 488
 1,632
 1,392
Change in estimates related to prior periods 656
 125
 353
 (273)
Epicel        
     Direct bill (hospital) 9,889
 6,035
 20,445
 16,893
Total revenue $30,499
 $22,484
 $78,460
 $59,522
         
(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 based on contracted rates at the time of sale supported by the pharmacy's direct contract. Also represents sales directly to DMS based on a contracted rate. Prior to June 15, 2018, the sales to Orsini represented here were based on a fixed transfer price under the distribution model.
         
(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
Prior to June 2017,16, 2018 the Company utilizedcompany sold MACI primarily to its distributor Orsini at 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 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 from June 30, 2017 through June 15, 2018 due to the shift from DLSS to Orsini.fixed transfer price. Beginning June 16, 2018, the concentration of risk decreased because the Company retainsstarted retaining the credit and collection risk from the end customer on implants after June 15, 2018.resulting in a decrease in risk concentration. 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 from its largest customerscustomer of Carticel, MACI and Epicel based on customers whose revenue or accounts receivable concentration is greater than 10% in any of the periods disclosed below and are as follows:

Revenue Concentration
Accounts Receivable Concentration

Three Months Ended September 30,
Nine Months Ended September 30,
September 30,
December 31,

2019
2018
2019
2018
2019
2018
MACI—% —% —% 24% —%
2%
Epicel10% 5% 9% 9% 6%
4%


Revenue Concentration
Accounts Receivable Concentration

Three Months Ended September 30,
Nine Months Ended September 30,
September 30,
December 31,

2018
2017
2018
2017
2018
2017
MACI and Carticel1
<10%
55%
24%
25%
<10%
46%
Epicel<10%
10%
<10%

13%
<10%
<10%
1 Carticel was removed from the market at the end of the second quarter of 2017.




5.Selected Balance Sheet Components
 
Inventory as of September 30, 20182019 and December 31, 2017:2018:
(In thousands)September 30, 2019 December 31, 2018
Raw materials$5,730
 $2,872
Work-in-process976
 638
Finished goods117
 48
Inventory$6,823
 $3,558
(In thousands)September 30, 2018 December 31, 2017
Raw materials$3,130
 $3,532
Work-in-process456
 226
Finished goods52
 35
Inventory$3,638
 $3,793

 
Property and equipment, net as of September 30, 20182019 and December 31, 2017:2018: 
(In thousands) September 30, 2019 December 31, 2018
Machinery and equipment$2,577
 $1,536
Furniture, fixtures and office equipment775
 775
Computer equipment and software6,007
 3,712
Leasehold improvements4,631
 4,587
Construction in process1,716
 2,801
Financing right-of-use lease157
 —
Total property and equipment, gross15,863
 13,411
Less: Accumulated depreciation(8,673) (7,505)
 $7,190
 $5,906
(In thousands) September 30, 2018 December 31, 2017
Machinery and equipment$1,424
 $1,249
Furniture, fixtures and office equipment757
 872
Computer equipment and software3,695
 3,536
Leasehold improvements4,459
 4,213
Construction in process2,084
 822
Total property and equipment, gross12,419
 10,692
Less: Accumulated depreciation(7,212) (6,621)
 $5,207
 $4,071



 
Depreciation expense for the three and nine months ended September 30, 20182019 was $0.4 million and $1.2 million and $0.3 million and $1.1 million respectively, and $0.4 million and $1.2 million, for the same periodsperiod in 2017.2018.


Accrued expenses as of September 30, 20182019 and December 31, 2017:2018:
(In thousands)September 30, 2019 December 31, 2018
Bonus related compensation$3,426
 $5,161
Employee related accruals2,546
 1,559
Other accrued expenses988
 210
 $6,960
 $6,930

(In thousands)September 30, 2018 December 31, 2017
Bonus related compensation$2,180
 $2,693
Employee related accruals2,955
 2,389
Other accrued expenses457
 491
 $5,592
 $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) expired in August 2018, and included anti-dilution price protection provisions that required cash settlement of the warrants and accordingly required 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. The following table describes the outstanding warrants as of September 30, 2018:
  September 2016 Warrants December 2017 Warrants
Exercise price $2.25 $4.27
Expiration date September 9, 2022 December 6, 2023
Total shares issuable on exercise 58,537 53,902

During the nine months ended September 30, 2018, the Company issued 565,895 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 $2.7 million. As of September 30, 2018, the unexercised August 2013 warrants expired and no August 2013 warrants are outstanding.

offerings. The fair value of the warrants described in the table aboveas of December 31, 2018 were 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 basedstock-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 remainremaining at zero.  0.  

During the nine months ended September 30, 2019, the Company issued 19,808 shares of common stock upon the exercise of warrants with an exercise price of $4.27 per share. There are no outstanding warrants as of September 30, 2019.

7.Leases

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 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 contracts are or contain leases, the lease classification for any expired or existing leases and initial direct costs for existing leases. Certain of the Company’s lease agreements include lease payments that are adjusted periodically for an index or rate. The leases are initially measured using the projected payments adjusted for the index or rate in effect at the commencement date. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. 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 balance sheet. Leases with an initial term of 12 months or less are not recorded on the balance sheet and for the nine months ended September 30, 2019, lease expense of less than $0.1 million was recorded related to short-term leases for both the three and nine months ended September 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 reduction of the operating lease assets and reclassed from deferred rent to lease operating assets. For the three and nine months ended September 30, 2019, the Company recognized $1.4 million and $4.0 million of operating lease expense and less than $0.1 million of financing lease expense, respectively. For the three and nine months ending September 30, 2018 (as reported under the prior leasing guidance) the Company recognized $1.3 million and $3.9 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 updated guidance and classified on the balance sheet, as of September 30, 2019 are as follows:
(In thousands) Classification September 30, 2019
Assets    
Operating Right-of-use assets $25,619
Finance Property and equipment, net 157
    $25,776
Liabilities    
Current    
Operating Current portion of operating lease liabilities $2,836
Finance Other liabilities 35
    $2,871
Non-current    
Operating Operating lease liabilities $25,311
Finance Other long-term liabilities 114
    $25,425

Cash paid for amounts included in the measurement of the Company's operating lease liabilities was $3.6 million for the nine months ended September 30, 2019.

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


(In thousands) Operating Leases Finance Leases Total
2019
 $1,324
 $—
 $1,324
2020
 5,336
 41
 5,377
2021
 5,255
 41
 5,296
2022
 5,309
 41
 5,350
2023
 5,292
 41
 5,333
2024
 5,302
 —
 5,302
Thereafter
 11,269
 —
 11,269
Total lease payments
 39,087
 164
 39,251
Less: Interest
 (10,940) (15) (10,955)
Present value of lease liabilities
 $28,147
 $149
 $28,296


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 and related calculations. Lease terms and discount rates as of September 30, 2019 are as follows:
  September 30, 2019
Weighted average remaining lease term (years)  
Operating leases7.07
7.Finance leasesDebt3.75
Weighted average discount rate
Operating leases9.46%
Finance leases5.00%

On December 6, 2017, the Company replaced its existing term loan
Future minimum payments related to operating and revolving line of credit agreement with the SVB-MidCap facility which provides access to up to $25.0 million. The updated 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. Under the terms of the agreement, the revolving line of credit is limited to a borrowing base


calculated using eligible accounts receivable and maturing December 6, 2021 with an interest rate indexed to WSJ Prime plus 1.25%. The Company is subject to various financial and nonfinancial covenants including but not limited to a monthly minimum net revenue covenant (determined in accordance with GAAP), measured on a trailing twelve month basis. SVB and MidCap have the ability to call debt based on material adverse change clauses, which are subjectively determinable and result in a subjective acceleration clause. SVB and MidCap have a shared first priority perfected security interest in all assets of the Company other than intellectual property.

As of September 30, 2018, there was an outstanding balance of $15.0 millioncapital leases, as reflected under the term loan and $2.5 million underprior guidance, for the revolving line of credit (net of total deferred costs of $0.2 million). The weighted average interest rate on the outstanding term and revolving credit loans as of September 30, 2018 was 9.07% in addition to a final payment of 3.6% of the term loan due upon maturity. The available capacity under the revolving line of credit as of September 30, 2018 was $7.5 million. The Company was, and continues to be, in compliance with its financial and non-financial debt covenants.

Annual principal payments on debt at September 30,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
20195,000
20205,000
20217,083
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 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 20172019 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 Plan1, 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 20172019 Plan shall not be less than the fair market value of the Company’s common stock on the date of grant.  The 20172019 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 no0 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 20172019 Plan.




As of September 30, 2018,2019, there were 2,917,6143,605,081 shares available for future grant under the 20172019 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 507,613576,723 have been grantedissued 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 October 1, 2018,2019, employees purchased 21,93717,746 shares resulting in proceeds from the sale of common stock of $0.2 million under the ESPP.


Service-Based Stock Options


During the three and nine months ended September 30, 2018,2019, the Company granted 147,000111,600 and 1,629,7601,750,110 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 Option2017 Omnibus Incentive Plan and 2019 Plan for the three and nine month periods ended September 30, 20182019 was $13.28 and $12.77, respectively and $10.90 and $9.62, respectively, and $2.53 and $1.99, for the same periods in 2017.2018.


Restricted Stock Units

During the nine months ended September 30, 2019, the Company granted 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 nine months ended September 30, 2019 was $17.71. The total grant-date fair value of restricted stock units granted in the nine months ended September 30, 2019 was $3.3 million. NaN 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 September 30, Nine Months Ended September 30,
(In thousands) 2019 2018 2019 2018
Cost of goods sold $543
 $284
 $1,519
 $820
Research and development 583
 365
 1,993
 1,282
Selling, general and administrative 2,159
 1,283
 6,583
 3,637
Total non-cash stock-based compensation expense $3,285
 $1,932
 $10,095
 $5,739

  Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2018 2017 2018 2017
Cost of goods sold $284
 $119
 $820
 $316
Research and development 365
 177
 1,282
 391
Selling, general and administrative 1,283
 459
 3,637
 1,346
Total non-cash stock-based compensation expense $1,932
 $755
 $5,739
 $2,053


The fair value of each service-based stock option grant for the reported periods is estimated on the date of the grant using the Black-Scholes option-pricing model using the weighted average assumptions noted in the following table.
 
  Nine Months Ended September 30,
Service-Based Stock Options 2018 2017
Expected dividend rate —% —%
Expected stock price volatility 82.3 – 88.3%
 80.1 – 88.2%
Risk-free interest rate 2.4 – 2.9%
 1.8 – 2.3%
Expected life (years) 5.3 – 6.3
 5.5 – 6.3


  Nine Months Ended September 30,
Service-Based Stock Options 2019 2018
Expected dividend rate —% —%
Expected stock price volatility 79.5-85.5%
 82.3-88.3%
Risk-free interest rate 1.4-2.7%
 2.4-2.9%
Expected life (years) 5.3-6.3
 5.3-6.3
         

9.Cash Equivalents and Investments
Cash Equivalents
Cash equivalents consist of short-term, highly liquid investments with original maturities of three months or less from the date of purchase and consist primarily of demand deposits, money market funds, overnight repurchase agreements and short duration agency bonds and commercial paper.
Investments
Short-term investments consist ofMarketable debt securities classified as available-for-sale and have maturities greater than 90 days, but less than one year as of the balance sheet date. All investments are carried at fair value based upon quoted market prices. Unrealized gains and losses on available-for-sale securities are excluded from earnings and are reported as a component of accumulated other


comprehensive loss. The cost of available-for-sale securities sold is based on the specific-identification method. Realized gains and losses are included in earnings, and are derived for specific-identification method for determining the costs of investments sold. If a decline in the fair value is considered other-than-temporary, based on available evidence, the unrealized loss is reclassified from accumulated other comprehensive income (loss) to the statements of operations. Realized gains and losses are determined on the specific identification method and are included in investment and other income, net.
During the quarter ended September 30, 2018, the Company purchased marketable debt securities, which are classified as available-for-sale and carried at fair value in the accompanying consolidated balance sheets on a tradesettlement date basis. The following tables summarize the gross unrealized gains and losses of the Company’s marketable securities as of September 30, 2019 and December 31, 2018:
 September 30, 2018 September 30, 2019
   Gross Unrealized     Gross Unrealized  
(In thousands) Amortized Cost Gains Losses Fair Value Amortized Cost Gains Losses Fair Value
Money market funds $18,684
 $—
 $—
 $18,684
 $19,431
 $—
 $—
 $19,431
Repurchase agreements 10,002
 —
 —
 10,002
Commercial paper 21,832
 —
 —
 21,832
 13,018
 —
 —
 13,018
Corporate notes 13,058
 —
 (11) 13,047
 13,549
 19
 —
 13,568
U.S. government securities 3,174
 —
 (1) 3,173
 6,986
 6
 —
 6,992
U.S. asset-backed securities 8,430
 —
 (6) 8,424
 4,178
 4
 —
 4,182
 $75,180
 $—
 $(18) $75,162
 $57,162
 $29
 $—
 $57,191
Classified as:                
Cash equivalents       $30,700
       $19,431
Short-term investments       44,462
       37,760
     $75,162
      $57,191
As of September 30,
  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 $10.0$5.0 million in overnight repurchase agreement securities classified as cash equivalents on the balance sheet. As of September 30, 2019, no amounts were invested in overnight repurchase agreements.
The Company's portfolio of marketable securities had an average AA- credit rating and thereThere were no marketable securities that the Company considers to be other-than-temporarily impaired as of September 30, 2018.2019. The Company's investment strategy is to buy short-duration marketable securities with a high credit rating. As of September 30, 2018,2019, 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 comprehensive loss.operations. There have been no impairments of the Company’s assets measured and carried at fair value during the nine months ended September 30, 2018.2019.


10.Fair Value Measurements


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


Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).


There was no movement between levelLevel 1 and levelLevel 2 or between levelLevel 2 and level 3.Level 3 from December 31, 2018 to September 30, 2019. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The commercial paper, corporate notes, 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:




  September 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 $19,431
 $19,431
 $—
 $—
 $5,838
 $5,838
 $—
 $—
Repurchase agreements —
 —
 —
 —
 5,000
 —
 5,000
 —
Commercial paper 13,018
 —
 13,018
 —
 30,710
 —
 30,710
 —
Corporate notes 13,568
 —
 13,568
 —
 13,144
 —
 13,144
 —
U.S. government securities 6,992
 —
 6,992
 —
 10,166
 —
 10,166
 —
U.S. asset-backed securities 4,182
 —
 4,182
 —
 10,618
 —
 10,618
 —
  $57,191
 $19,431
 $37,760
 $—
 $75,476
 $5,838
 $69,638
 $—

  September 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
Assets:                
Money market funds $18,684
 $18,684
 $—
 $—
 $—
 —
 —
 —
Repurchase agreements 10,002
 —
 10,002
 —
 —
 —
 —
 —
Commercial paper 21,832
 —
 21,832
 —
 —
 —
 —
 —
Corporate notes 13,047
 —
 13,047
 —
 —
 —
 —
 —
U.S. government securities 3,173
 —
 3,173
 —
 —
 —
 —
 —
U.S. asset-backed securities 8,424
 —
 8,424
 —
 —
 —
 —
 —
  $75,162
 $18,684
 $56,478
 $—
 $—
 $—
 $—
 $—
Liabilities:  
  
  
  
  
  
  
  
Warrant liabilities $—
 $—
 $—
 $—
 $1,014
 $—
 $1,014
 $—

The following table summarizes the change in the estimated fair value of the Company’s outstanding warrant liabilities as of September 30, 2018: 
Warrant Liabilities (In thousands) 
Balance at December 31, 2017$1,014
Increase in fair value (net of expired warrants)2,524
Warrant exercise(3,538)
Balance at September 30, 2018$—
  The increase in fair value of warrants is due to the increase in stock price that has a direct impact on the Black-Scholes valuation model discussed in note 6.

Revolving and Term Loan Credit Agreements
At each of September 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.


11.Shareholders' Equity
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 nine months ended September 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 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.

12.Net LossEarnings (Loss) Per Common Share
 
Basic earnings per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by adding the dilutive potential common shares to the weighted average number of common shares that were outstanding during the period. For purposes of the diluted earnings per share calculation, outstanding stock options and restricted stock units are considered common stock equivalents, using the treasury stock method.

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




  Three Months Ended September 30, Nine Months Ended September 30,
(Amounts in thousands except per share amounts) 2019 2018 2019 2018
Numerator:  
  
  
  
Net income (loss) $3,470
 $(1,069) $(19,166) $(13,379)
Denominator:  
  
    
Weighted-average common shares outstanding (basic) 44,251
 42,925
 43,979
 39,163
Weighted-average shares outstanding (diluted) 46,667
 42,925
 43,979
 39,163
Net income (loss) per share attributable to common shareholders (basic) $0.08
 $(0.02) $(0.44) $(0.34)
         
Net income (loss) per share attributable to common shareholders (diluted) $0.07
 $(0.02) $(0.44) $(0.34)
         
Anti-dilutive shares excluded from the calculation of diluted earnings per share(a):
        
Stock options 1,619 5,196 5,116 5,196
Restricted stock unit awards —
 —
 159 —
Warrants —
 112 —
 112
         
(a) Common equivalent shares are not included in the diluted per share calculation where the effect of their inclusion would be anti-dilutive. 
  Three Months Ended September 30, Nine Months Ended September 30,
(Amounts in thousands except per share amounts) 2018 2017 2018 2017
Numerator:  
  
  
  
Net loss $(1,069) $(5,407) $(13,379) $(17,573)
Denominator for basic and diluted EPS:  
  
    
Weighted-average common shares outstanding 42,925
 33,667
 39,163
 32,783
Net loss per share attributable to common shareholders (basic and diluted) $(0.02) $(0.16) $(0.34) $(0.54)

 
Common equivalent shares are not included
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 diluted per share calculation wheredevelopment plan to support the effectBLA filing with the United States Food and Drug Administration under the supervision of their inclusiona 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 nine months ended September 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 anti-dilutive.triggered when annual net sales of NexoBrid or improvements to it in North America exceed $75 million.  The aggregate numberCompany 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 common equivalent shares (relatedgross profits to options, warrantsMediWound on initial committed amounts and preferred stock) that have been excluded froma royalty on any additional BARDA purchases of NexoBrid beyond the computationsinitial 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 diluted net loss per common share at September 30, 2018 and 2017 were 5.3 million and 5.4 million, respectively.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 rentpart 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 September 30, 2018,2019, the Company has recorded $1.9$2.0 million of leasehold improvements funded by the tenant improvement allowance.


In additionThe 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 vehiclesbalance 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. The Company’s agreement with Orsini includes certain minimum administrative fees included in purchase commitments below.

As of September 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 $16,915
 $1,273
 $4,908
 $4,902
 $4,811
 $957
 $64
Debt and interest related payments 20,860
 814
 6,290
 5,817
 7,939
 —
 —
Purchase commitments 3,206
 526
 711
 681
 644
 644
 —
Total $40,981
 $2,613
 $11,909
 $11,400
 $13,394
 $1,601
 $64
Rent expense for the three and nine months ended September 30, 2018 was $1.3 million and $4.1 million, respectively, and $1.5 million and $4.1 million for the same periods in 2017.

14. 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. Throughout 2016 and early 2017, we also operated a centralized cell manufacturing facility in Ann Arbor, Michigan.
 
Product Portfolio
 
Our approved and marketed products include two approvedFDA-approved autologous cell therapy products:therapies: MACI, a third generationthird-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 whichTBSA. 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. In addition, we have 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 generationthird-generation product for autologous implantchondrocyte implantation (ACI), a class of methods for the repair of symptomatic, single or multiple full-thickness cartilage defects of the knee with or without bone involvement in adults. TheMACI 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 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 physiciansorthopedic surgeons who self-identify as and/or have thea formal specialty ofas sports medicine physicians. We believe this target audience is approximately 3,000 physicians. WeIn 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 segment. As we look to more effectively engage this customer base, we expanded our field force from 2840 to 4048 representatives in 2018.the second quarter of 2019 to target the majority of the approximately 3,000 sports medicine physicians. In 2020 we plan on a further expansion to 76 representatives to enable the field force to also call on 2,000 of the general orthopedic surgeons.Most private payers have a medical policy that allowscovers treatment with MACI. All ofMACI with the top 30 largest commercial payers for Carticel havehaving a formal medical policy for MACI or ACI in general. For thoseEven for 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 nine months ended September 30, 2018,2019, net revenues for MACI were $20.6 million and $58.0 million, respectively and $16.4 million and $42.6 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.total body surface area (TBSA).  Epicel is regulated by the Center for Biologics Evaluation and Research, or CBER of the FederalU.S. Food and Drug Administration, or FDA under medical device authorities, and is the only FDA-approved autologouscultured epidermal autograft product available for large total surface area burns. Epicel was designated as a HUDHumanitarian Use Device (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 nine months ended September 30, 2018, net revenues for Epicel were $6.0 million and $16.9 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-person9-person field force. For the three and nine months ended September 30, 2019, net revenues for Epicel were $9.9 million and $20.4 million, respectively, and $6.0 million and $16.9 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 a BLA currently is targeted for submission to the FDA in the second quarter of 2020. 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-specificThis 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 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 unless funded by a partner.own.





Results of Operations
 
Net LossIncome (Loss)
 
Our net earnings and loss for the three and nine months ended September 30, 20182019 totaled $3.5 million and $19.2 million, respectively and a loss of $1.1 million and $13.4 million, respectively and $5.4 million and $17.6 million for the same periods in 2017.2018.
 Three Months Ended September 30, Nine Months Ended September 30, Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2018 2017 2018 2017 2019 2018 2019 2018
Total revenues $22,484
 $14,260
 $59,522
 $40,574
 $30,499
 $22,484
 $78,460
 $59,522
Cost of product sales 8,138
 7,186
 23,531
 21,965
 9,324
 8,138
 26,986
 23,531
Gross profit 14,346
 7,074
 35,991
 18,609
 21,175
 14,346
 51,474
 35,991
Total operating expenses 15,682
 11,105
 45,895
 34,784
 18,078
 15,682
 71,935
 45,895
Loss from operations (1,336) (4,031) (9,904) (16,175)
Income (loss) from operations 3,097
 (1,336) (20,461) (9,904)
Other income (expense) 267
 (1,376) (3,475) (1,398) 373
 267
 1,295
 (3,475)
Net loss $(1,069) $(5,407) $(13,379) $(17,573)
Net income (loss) $3,470
 $(1,069) $(19,166) $(13,379)
 


Net Revenues


Net revenues increased for the three and nine months ended September 30, 20182019 compared to the same period the previous yearperiods in 2018 due primarily to significant volume increasesgrowth for both MACI and Epicel.

Net revenues increased for the nine months ended September 30, 2018 compared to the same period the previous year due primarily to significant volume increases for both MACI and Epicel. During the nine months ended September 30, 2017, we recorded a reduction to revenue of $0.6 million related to a dispute between a third party payer and our distributor of MACI and Carticel.

 Three Months Ended September 30, Nine Months Ended September 30, Three Months Ended September 30, Nine Months Ended September 30,
Revenue by product (in thousands) 2018 2017 2018 2017 2019 2018 2019 2018
Carticel and MACI $16,449
 $9,909
 $42,629
 $27,821
MACI $20,610
 $16,449
 $58,015
 $42,629
Epicel 6,035
 4,351
 16,893
 12,753
 9,889
 6,035
 20,445
 16,893
Total Revenue $22,484
 $14,260
 $59,522
 $40,574
 $30,499
 $22,484
 $78,460
 $59,522
 
Seasonality. Between 2014Over the last four years ACI (MACI and Carticel prior to 2017, the percentage of total product revenue has on average been 21%, 25%, 21% and 33%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 drivenhave deviated from these means by the seasonality of bothup to 4%. MACI and Epicel sales. MACI and Carticel revenue has historically beenorders are stronger in the second quarter and fourth quarter due to a number ofseveral factors including insurance copay limits and the time of year patients prefer to start rehabilitation. Since the launch of MACI the seasonality trends have become less predictable and have been impacted by the underlying growth in sales. 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 betweenOver the same quarters in consecutivelast four years the percentage of annual product orders for Epicel has on average been as high as 11% of28%, 25%, 21% and 27% from the annual volume for Epicel.first to the fourth quarters.
 
Gross Profit and Gross Profit Ratio
 Three Months Ended September 30, Nine Months Ended September 30, Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2018 2017 2018 2017 2019 2018 2019 2018
Gross profit $14,346
 $7,074
 $35,991
 $18,609
 $21,175
 $14,346
 $51,474
 $35,991
Gross profit % 64% 50% 60% 46% 69% 64% 66% 60%


Gross profit ratio increased for the three and nine months ended September 30, 20182019 compared to the same period in 20172018 due primarily to an increase in MACI and Epicel sales combined with a significant portionour highly fixed manufacturing cost structure which consists mainly of our manufacturinglabor and facility costs being fixed.that do not materially fluctuate with volume increases.




Research and Development Costs
 Three Months Ended September 30, Nine Months Ended September 30, Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2018 2017 2018 2017 2019 2018 2019 2018
Research and development costs $3,113
 $2,919
 $10,581
 $9,357
 $3,096
 $3,113
 $27,174
 $10,581


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


 Three Months Ended September 30, Nine Months Ended September 30, Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2018 2017 2018 2017 2019 2018 2019 2018
Dilated Cardiomyopathy $153
 $909
 $1,119
 $4,050
 $2
 $153
 $32
 $1,119
MACI 2,095
 1,430
 7,169
 3,678
 1,804
 2,095
 6,165
 7,169
Epicel 865
 580
 2,293
 1,629
 875
 865
 2,813
 2,293
NexoBrid 415
 —
 18,164
 —
Total research and development costs $3,113
 $2,919
 $10,581
 $9,357
 $3,096
 $3,113
 $27,174
 $10,581


Research and development costs for the three months ended September 30, 2019 and 2018 were $3.1 million versus $2.9 million formillion. Research and development expenses are due primarily to manufacturing process improvement activities, the same period a year ago, primarily due to a reduction in the ixCELL-DCM clinicalongoing MACI pediatric trial, expenses comparedpharmacovigilance and other reporting and compliance requirements, and medical affairs and external grants which are similar to the same period in 2017, which are partially offset by the MACI pediatric clinical study, a post-approval FDA commitment, in the U.S. in 2018.previous year.


Research and development costs for the nine months ended September 30, 20182019 were $10.6$27.2 million versus $9.4compared to $10.6 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 $0.9 million in stock compensation expense for during the nine months ended September 30, 20182019 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.


Selling, General and Administrative Costs
 Three Months Ended September 30, Nine Months Ended September 30, Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2018 2017 2018 2017 2019 2018 2019 2018
Selling, general and administrative costs $12,569
 $8,186
 $35,314
 $25,427
 $14,982
 $12,569
 $44,761
 $35,314
 
Selling, general and administrative costs for the three months ended September 30, 20182019 were $12.6$15.0 million compared to $8.2$12.6 million for the same period a year ago. The increase in selling, general and administrative costs for the three months ended September 30, 20182019 is due primarily to $1.2 million in service fees paid to MACI pharmacy distributors, a $1.0$0.9 million increase in reimbursement support services resulting from increased MACI demand,stock-based compensation expenses, a $1.0$0.8 million increase in marketing expenses, and a $0.7 million increase in MACI sales force employee expenses as a result ofdriven by the sales force expansion in 2018 as compared to 2017 and an additional $0.8 million in stock compensation expense.the second quarter of 2019.


Selling, general and administrative costs for the nine months ended September 30, 20182019 were $35.3$44.8 million versus $25.4compared to $35.3 million for the same period a year ago. The increase in selling, general and administrative costs for the nine months ended September 30, 20182019 is due primarily to a $3.2$3.0 million increase in stock-based compensation expenses, a $2.1 million increase in marketing expenses, an incremental $1.9 million increase 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, a $2.1$1.1 million increase in patient reimbursement support services resulting from increased MACI demand and $1.2 million in service fees paid to MACI pharmacy distributors. There was also an additional $2.2 million in stock compensation expense.services.


Other Income (Expense)
  Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2018 2017 2018 2017
Decrease (increase) in fair value of warrants $420
 $(1,060) $(2,524) $(512)
Foreign currency translation loss —
 (6) (49) (20)
Other income —
 5
 48
 6
Net interest expense (153) (315) (950) (872)
Total other expense $267
 $(1,376) $(3,475) $(1,398)
  Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2019 2018 2019 2018
Increase in fair value of warrants $—
 $420
 $—
 $(2,524)
Other income (expense) (10) —
 8
 (1)
Net interest income (expense) 383
 (153) 1,287
 (950)
Total other income (expense) $373
 $267
 $1,295
 $(3,475)

The change in other income and expense for the three and nine months ended September 30, 2018 compared to 20172019 is due primarily to the change in warrant valueinterest income as a result of our investments in various marketable debt securities. The other income and expense for the same periods in 2018 relate to the increase in our stock price and the reductionin 2018 resulting in an increase in the timefair value of warrants and interest expense related to maturity.the then outstanding term loan. For the three and nine months ended September 30, 2019 we did not incur interest expense as the term


loan was repaid in December 2018 and we did not experience a change in warrant value due to the expiration of the liability classified 2013 warrants in 2018.

Stock Compensation
 
Non-cash stock-based compensation expense included in cost of goods sold, research and development expenses and selling, general and administrative expenses is summarized in the following table: 
 Three Months Ended September 30, Nine Months Ended September 30, Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2018 2017 2018 2017 2019 2018 2019 2018
Cost of goods sold $284
 $119
 $820
 $316
 $543
 $284
 $1,519
 $820
Research and development 365
 177
 1,282
 391
 583
 365
 1,993
 1,282
Selling, general and administrative 1,283
 459
 3,637
 1,346
 2,159
 1,283
 6,583
 3,637
Total non-cash stock-based compensation expense $1,932
 $755
 $5,739
 $2,053
 $3,285
 $1,932
 $10,095
 $5,739


The changes in stock-based compensation expense are due primarily to fluctuations in the fair value of the options granted in 20182019 compared to 20172018 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 ofMACI, 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 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 fromcash equivalents totaled $36.9 million, and short-term investments totaled $37.8 million as of September 30, 2019. During the SVB-Mid-Cap facility.nine months ended September 30, 2019, the cash used in operations of $10.3 million was largely a result of our net loss of $19.2 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 $10.1 million of stock compensation expense and $1.2 million of depreciation expense.



In 2016 we entered into an ATM Agreement with Cowen as sales agent to sell, from time to time, our common stock, no par value per share (ATM Shares), having an aggregate sale price of up to $25.0 million, through an “at the market offering” program. 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.


Our cash and cash equivalents totaled $53.3 million, and short term investments totaled $44.5 million as of September 30, 2018. During the nine months ended September 30, 2018, the cash used for operations of $3.0 million was $3.0 million.  The cash used for operations was driven largely bya result of our operatingnet loss of $13.4 million, offset by noncash charges including $5.7 million of stock compensation expense, $2.5 million due to the change in fair value of warrants and $1.1 million of depreciation expense.


The change in cash provided by investing activities as of September 30, 2019 is the result of $46.3 million in short-term investments purchases offset by $73.8 million of short-term investment maturities and property plant and equipment purchases of $2.3 million primarily for manufacturing upgrades and leasehold improvements through September 30, 2019. The change in cash used for investing activities as of September 30, 2018 is the result of $44.5 million in short term investments and the purchases of $2.1 million of property plant and equipment for manufacturing upgrades and $44.5 million in short term investments through September 30, 2018.
 
The change in cash provided from financing activities is the result of net proceeds from the exercise of stock options of $3.8 million during the nine months ended September 30, 2019. The change in cash provided from financing activities during the nine months ended September 30, 2018 is the result of net proceeds from our recent follow-on public equity offering of common stock of $70.0 million, proceeds from the exercise of stock options of $3.3 million and the exercise of warrants of $2.7 million during the nine months ended September 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 September 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.


We believe that, based on our current revenue levels, cash on hand, cash equivalents and short-term investments we are in a positionable to sustainoperate our business without the need to finance our operations through at least November 2019. In the future,sales of equity securities. If revenues decline for a sustained period, we may need to access additional 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 our products.




Off-Balance Sheet Arrangements
 
At September 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, 20172018 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 standards for stock compensation and revenue which has been discussed in notes 3 and 4 to these financial statements, respectively, thereThere have been no material changes to that information disclosed in our Annual Report during the nine months ended September 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,” “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;
•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 September 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. We invest our excess cash balances in marketable securities including municipal bond securities, U.S. government agency securities and high-grade corporate


bonds that meet high credit quality standards, as specified in our investment policy. Our investment policy seeks to manage these assets to achieve our goals of preserving principal and maintaining adequate liquidity. Because of the short-term nature of these investments, we do not believe we have material exposure due to market risk. 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 September 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 beenwere no changes in our internal control over financial reporting during the quarter ended September 30, 20182019, that have materially affected, or are reasonably likely to materially affect, the Company’sour 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 the risk factors previously disclosed 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 Annual Report on Form 10-K for the year ended December 31, 2017.2018 and Quarterly Report on Form 10-Q for the quarter ended June 30, 2019. The risks described 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. Additional risks and uncertainties not currently known or currently deemed to be immaterial also may materially and adversely affect the Company’s business, financial condition, results of operations or cash flows.


Item 1B.  Unresolved Staff Comments
Not applicable.

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 September 30, 2018.2019.
 
Item 3.  Defaults Upon Senior Securities
 
Not applicable.


Item 4.  Mine Safety Disclosures
 
Not applicable.


Item 5.  Other Information
 
Not applicable.


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






EXHIBIT INDEX
Exhibit No. Description
   
10.1**†
Fourth Amendment to Distribution Agreement between Orsini Pharmaceutical Services, Inc. and theCompany, dated July 25, 2018.
10.2**†
Dispensing Agreement by and between AllCare Plus Pharmacy and the Company, dated July 26, 2018.

10.3**†
Fifth Amendment to Distribution Agreement between Orsini Pharmaceutical Services, Inc. and theCompany, dated October 18, 2018.
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


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






SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
Date: November 6, 20185, 2019
 
 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)


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