VERICEL Q4 2020 RESULTS FEBRUARY 24, 2021 Safe Harbor 2 | --- | --- | --- | |----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------- ...

or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: September 30, 2020 Commission File Number 001-35280 VERICEL CORPORATION (Exact name of registrant as specified in its charter) (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identif ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: June 30, 2020 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 001-35280 VERICEL CORPORATION (Exact name of registrant as specified in its charter) (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identificati ...

SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: March 31, 2020 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 001-35280 VERICEL CORPORATION (Exact name of registrant as specified in its charter) (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) Michi ...

FORM 10-K FILING INFORMATION Details the company's 2019 Form 10-K filing, registrant status, and documents incorporated by reference [Registrant Information](index=1&type=section&id=Registrant%20Information) Vericel Corporation filed its 2019 Form 10-K, identifying as a Michigan-incorporated large accelerated filer trading on NASDAQ under VCEL - Vericel Corporation filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2019[2](index=2&type=chunk) Trading Symbol and Exchange | Title of Class | Trading Symbol(s) | Name of Each Exchange on Which Registered | | :--- | :--- | :--- | | Common Stock (No par value) | VCEL | NASDAQ | Filer Status | Filer Status | | | :--- | :--- | | Large accelerated filer | ☒ | | Accelerated filer | ☐ | | Non-accelerated filer | ☐ | | Smaller reporting company | ☐ | | Emerging growth company | ☐ | - As of February 21, 2020, **44,945,133** shares of Common Stock were outstanding[5](index=5&type=chunk) [Documents Incorporated by Reference](index=1&type=section&id=Documents%20Incorporated%20by%20Reference) The Proxy Statement for the April 29, 2020, Annual Meeting is incorporated by reference for specific Part III items - Proxy Statement for the Annual Meeting of Shareholders scheduled for April 29, 2020, is incorporated for Items 10, 11, 12, 13 and 14 of Part III[7](index=7&type=chunk) TABLE OF CONTENTS Provides an organized listing of all sections and items within the Form 10-K report Cautionary Note Regarding Forward-Looking Statements Warns that the report contains forward-looking statements subject to risks and uncertainties, with no obligation to update [Forward-Looking Statements Disclaimer](index=4&type=section&id=Forward-Looking%20Statements%20Disclaimer) This report contains forward-looking statements based on management's assumptions, subject to risks detailed in Item 1A, with no obligation to update - The report contains forward-looking statements identified by words such as 'will,' 'may,' 'anticipates,' 'believes,' 'intends,' 'estimates,' 'expects,' 'projects' and similar phrases[11](index=11&type=chunk) - These statements are based on management's reasonable assumptions but are subject to risks and uncertainties, particularly those listed in 'Part I, Item 1A Risk Factors,' which could cause actual results to differ materially[11](index=11&type=chunk)[12](index=12&type=chunk) - The company undertakes no obligation to publicly update any forward-looking statements, except as required by law[12](index=12&type=chunk) PART I Covers the company's business operations, risk factors, properties, and legal proceedings [Item 1. Business](index=5&type=section&id=Item%201.%20Business) Vericel specializes in advanced cell therapies for sports medicine and burn care, marketing MACI and Epicel, with a strategy to grow revenue, commercialize NexoBrid, and achieve profitability - Vericel Corporation is a leader in advanced cell therapies and specialty biologics for the sports medicine and severe burn care markets[17](index=17&type=chunk) - The company's objective is to become the leading developer in advanced therapies for these markets[18](index=18&type=chunk) - Key strategies include increasing MACI and Epicel revenue, lowering manufacturing costs, submitting a BLA for NexoBrid by mid-2020, and generating positive operating income[19](index=19&type=chunk) [General Information](index=5&type=section&id=General%20Information) Vericel specializes in advanced cell therapies, marketing MACI for cartilage repair and Epicel for severe burns, and holds North American rights to NexoBrid - Vericel Corporation is a leader in advanced cell therapies and specialty biologics for sports medicine and severe burn care markets[17](index=17&type=chunk) - MACI (autologous cultured chondrocytes on porcine collagen membrane) is an FDA-approved product for symptomatic, full-thickness cartilage defects of the knee in adults, approved on December 13, 2016[17](index=17&type=chunk) - Epicel (cultured epidermal autografts) is a permanent skin replacement Humanitarian Use Device (HUD) for adult and pediatric patients with deep-dermal or full-thickness burns greater than or equal to **30% TBSA**[17](index=17&type=chunk) - Vericel holds an exclusive license for North American commercial rights to NexoBrid, a registration-stage biological orphan product for debridement of severe thermal burns[17](index=17&type=chunk) [Our Strategy](index=5&type=section&id=Our%20Strategy) Vericel aims to lead in advanced sports medicine and burn care therapies by growing MACI and Epicel revenue, reducing costs, seeking NexoBrid approval, and achieving positive operating income - Objective: Become the leading developer in advanced therapies for sports medicine and severe burn care markets[18](index=18&type=chunk) - Increase MACI revenue by increasing the number of surgeons implanting MACI and the average number of implants per surgeon[19](index=19&type=chunk) - Increase Epicel revenue by expanding the number of burn centers consistently using Epicel[19](index=19&type=chunk) - Submit a Biologics License Application (BLA) for NexoBrid to the FDA midyear 2020 and commercialize it if approved[19](index=19&type=chunk) - Generate positive operating income by keeping the growth in commercial expense lower than the growth in revenue[19](index=19&type=chunk) [Product Portfolio](index=6&type=section&id=Product%20Portfolio) Vericel's portfolio includes FDA-approved MACI and Epicel, North American rights to NexoBrid in development, and discontinued ixmyelocel-T for heart failure - Marketed products include MACI (third-generation autologous implant for knee cartilage defects) and Epicel (permanent skin replacement for severe burns)[20](index=20&type=chunk) - Exclusive license and supply agreements with MediWound to commercialize NexoBrid in North America, currently in clinical development[20](index=20&type=chunk) - No current plans to continue development of ixmyelocel-T for advanced heart failure due to dilated cardiomyopathy (DCM)[20](index=20&type=chunk) [MACI](index=6&type=section&id=MACI) MACI is an FDA-approved autologous cellular scaffold for knee cartilage repair, generating **$91.6 million** in 2019 net revenues, with significant quarterly seasonality - MACI is an autologous cellular scaffold product for symptomatic, full-thickness cartilage defects of the knee, approved by the FDA on December 13, 2016, replacing Carticel[23](index=23&type=chunk)[24](index=24&type=chunk) - MACI offers simpler surgery, shorter procedure time, and broader indications compared to Carticel, supported by Phase 3 SUMMIT trial data showing statistically significant improvement in pain and function compared to microfracture[24](index=24&type=chunk)[26](index=26&type=chunk) - The U.S. market opportunity for MACI is approximately **125,000** clinically appropriate patients annually, with a target audience of about **3,000** sports medicine physicians[28](index=28&type=chunk)[30](index=30&type=chunk) MACI Net Revenues and Sales Volume Seasonality (2019) | Metric | Value | | :--- | :--- | | Net Revenues (2019) | **$91.6 million** | | Q1 Sales Volume (Avg. over 4 years) | **19%** (**16%-24%** range) | | Q2 Sales Volume (Avg. over 4 years) | **23%** (**21%-25%** range) | | Q3 Sales Volume (Avg. over 4 years) | **22%** (**20%-23%** range) | | Q4 Sales Volume (Avg. over 4 years) | **36%** (**32%-38%** range) | [Epicel](index=7&type=section&id=Epicel) Epicel is the only FDA-approved autologous epidermal product for severe burns, generating **$26.2 million** in 2019 net revenues, with inherent quarter-to-quarter variability - Epicel is a permanent skin replacement for full thickness burns ≥**30% TBSA**, and the only FDA-approved autologous epidermal product for large TBSA burns in adult and pediatric patients[33](index=33&type=chunk) - Approved as a Humanitarian Use Device (HUD) in 1998, Epicel became eligible for sale for profit in 2016 after its label was revised to include pediatric patients, with an Annual Distribution Number (ADN) of **360,400** devices[35](index=35&type=chunk)[36](index=36&type=chunk) Epicel Net Revenues (2019) | Metric | Value | | :--- | :--- | | Net Revenues (2019) | **$26.2 million** | | Patients treated annually (U.S.) | ~**100** | | Annual Distribution Number (ADN) | **360,400** devices | - Epicel revenue has inherent quarter-to-quarter variability due to the sporadic nature of severe burns, with no significant seasonality[39](index=39&type=chunk) [NexoBrid](index=8&type=section&id=NexoBrid) NexoBrid is a biological product for severe burn debridement, in North American clinical development, with a BLA submission targeted for mid-2020 - NexoBrid is a topically-administered biological product that enzymatically removes nonviable burn tissue (eschar) in patients with deep partial and full-thickness thermal burns[40](index=40&type=chunk) - Currently in clinical development in North America, with a BLA targeted for submission to the FDA midyear 2020[40](index=40&type=chunk) - MediWound Ltd. conducts clinical activities to support the BLA filing under the supervision of a Central Steering Committee[40](index=40&type=chunk) [Ixmyelocel-T](index=8&type=section&id=Ixmyelocel-T) Ixmyelocel-T, an Orphan Drug-designated therapy for heart failure, has no current plans for further Phase 3 clinical studies due to expense and strategic focus - Ixmyelocel-T is a patient-specific multicellular therapy for advanced heart failure due to dilated cardiomyopathy (DCM)[41](index=41&type=chunk) - Granted U.S. Orphan Drug designation by the FDA for DCM treatment[42](index=42&type=chunk) - No current plans to initiate or fund an additional Phase 3 clinical study due to required expense and focus on growing existing commercial products[42](index=42&type=chunk) [Production](index=9&type=section&id=Production) Vericel's Cambridge, Massachusetts facility handles U.S. manufacturing and R&D for MACI and Epicel, while its former Ann Arbor facility was converted to office space - The main cell-manufacturing facility is in Cambridge, Massachusetts, used for U.S. manufacturing and distribution of MACI and Epicel, and houses R&D[43](index=43&type=chunk) - The Ann Arbor, Michigan facility, previously used for ixmyelocel-T clinical trials, was converted to office space as there are no plans to continue its development[44](index=44&type=chunk) [Research & Development](index=9&type=section&id=Research%20%26%20Development) Vericel's R&D focuses on enhancing manufacturing efficiency and quality for cell therapy products, including process development and cell culture modifications - Ongoing R&D activities focus on improving efficient manufacturing of high-quality cell therapy products[45](index=45&type=chunk) - R&D program is focused on process development for all products, including tissue procurement and processing, cell culture surface and media modification, and other process efficiencies[45](index=45&type=chunk) [Patents and Proprietary Rights](index=9&type=section&id=Patents%20and%20Proprietary%20Rights) Vericel's success depends on patent protection for MACI (expiring 2023-2029, 12 years data exclusivity), trade secrets for Epicel, and a robust trademark portfolio - Success depends on obtaining patent protection for products and processes, including an intellectual property estate acquired from Sanofi for chondrocyte implants and related technologies[46](index=46&type=chunk)[47](index=47&type=chunk) - MACI has issued patents expiring between 2023 and 2029 and is entitled to **12 years** of data exclusivity until December 13, 2028[47](index=47&type=chunk) - Epicel has no patents but relies on trade secrets and un-patentable know-how, protected by confidentiality agreements[47](index=47&type=chunk)[48](index=48&type=chunk) - Vericel owns a broadly filed trademark portfolio for MACI, Epicel, and Carticel[52](index=52&type=chunk) [Sales and Marketing](index=10&type=section&id=Sales%20and%20Marketing) Vericel employs a focused sales strategy, with 48 MACI specialists targeting 5,000 orthopedic surgeons and 10 Epicel specialists targeting 132 burn centers - MACI sales organization has approximately **48** Clinical Account Specialists, with plans to expand to **76** by Q2 2020, targeting **5,000** sports medicine and general orthopedic surgeons[53](index=53&type=chunk) - Most private payers have medical policies covering MACI, and approvals can often be obtained on a case-by-case basis for others[54](index=54&type=chunk) - Epicel customers are supported by **10** Burn Therapy and Clinical Support Specialists, targeting approximately **132** specialized burn centers in the U.S[56](index=56&type=chunk) [Government Regulation](index=10&type=section&id=Government%20Regulation) Vericel's products and operations are extensively regulated by the FDA, covering approval processes, manufacturing, marketing, and compliance with healthcare fraud and abuse laws - Research, development, manufacturing, and marketing of products are subject to laws and regulations of governmental authorities in the U.S. (FDA) and other countries[57](index=57&type=chunk) - MACI is regulated as a combination cell therapy/device product requiring BLA approval, while Epicel is regulated by CBER under medical device authorities as an HDE[58](index=58&type=chunk) - NexoBrid is regulated as a botanical protein biologic and requires an approved BLA[58](index=58&type=chunk) - Commercial production must occur in FDA-registered facilities compliant with cGMP requirements for biologics[58](index=58&type=chunk) [Regulatory Process](index=10&type=section&id=Regulatory%20Process) The FDA regulates biologics via a lengthy, resource-intensive approval process, with non-compliance leading to severe penalties including civil and criminal prosecution - The FDA regulates biologics under the Federal Food, Drug, and Cosmetic Act (FFDCA) and the Public Health Service Act[59](index=59&type=chunk) - Obtaining BLA approval is a lengthy and expensive process, requiring extensive preclinical and clinical testing[59](index=59&type=chunk) - Noncompliance with requirements can result in civil penalties, product recalls, injunctions, refusal of approvals, and criminal prosecution[60](index=60&type=chunk)[61](index=61&type=chunk) [Product Approval](index=11&type=section&id=Product%20Approval) FDA approval for biologics requires extensive nonclinical and clinical trials (Phases 1-3) to prove safety and efficacy, involving INDs, IRBs, cGMP, and BLA submission - FDA approval requires proof of safety, purity, and potency through extensive nonclinical studies and well-controlled clinical trials[62](index=62&type=chunk) - Clinical trials typically proceed through Phase 1 (safety/tolerability), Phase 2 (dosage/adverse effects), and Phase 3 (efficacy/safety in expanded population)[65](index=65&type=chunk) - A Biologics License Application (BLA) must be submitted after clinical testing, including manufacturing and quality data, and is subject to FDA review and facility inspections for cGMP compliance[71](index=71&type=chunk)[72](index=72&type=chunk) - Post-marketing studies, REMS, and ongoing compliance with cGMP and GTP are often required, and approvals can be withdrawn if issues arise[73](index=73&type=chunk)[75](index=75&type=chunk) [Regulation of Combination Products in the United States](index=14&type=section&id=Regulation%20of%20Combination%20Products%20in%20the%20United%20States) Combination products, with multiple regulated components, are assigned a lead FDA center based on their primary mode of action, with guidance from the Office of Combination Products - Combination products are comprised of two or more regulated components (drug, device, biologic) and are assigned a lead FDA center based on their 'primary mode of action'[78](index=78&type=chunk) - The FDA's Office of Combination Products addresses issues, provides guidance, and assigns primary jurisdiction for review[78](index=78&type=chunk) [Accelerated Approval for Regenerative Advanced Therapies](index=14&type=section&id=Accelerated%20Approval%20for%20Regenerative%20Advanced%20Therapies) The 21st Century Cures Act created an accelerated approval pathway for RMATs, expediting development for serious conditions using surrogate endpoints and real-world evidence - The 21st Century Cures Act created an accelerated approval pathway for regenerative advanced therapies (RMAT designation) to expedite development and review[79](index=79&type=chunk) - RMAT-designated therapies are eligible for accelerated approval using surrogate or intermediate endpoints and can fulfill post-approval requirements through clinical evidence, patient registries, or real-world data[79](index=79&type=chunk)[81](index=81&type=chunk) [Humanitarian Device Exemption](index=15&type=section&id=Humanitarian%20Device%20Exemption) The FDA's HDE pathway allows devices for rare diseases (<8,000 annually) to be approved based on safety and probable benefit, with for-profit sales possible under pediatric use criteria - HUDs are devices for rare diseases (<**8,000** individuals annually in the U.S.) and can be approved via an HDE application, which exempts the effectiveness requirement of a PMA[83](index=83&type=chunk)[84](index=84&type=chunk) - HDE approval requires demonstrating reasonable assurance of safety and that probable benefit outweighs risk[84](index=84&type=chunk) - HUDs can be sold for profit if they treat pediatric patients and are labeled for such use, provided the Annual Distribution Number (ADN) is not exceeded[85](index=85&type=chunk) [FDA Post-Approval Requirements](index=15&type=section&id=FDA%20Post-Approval%20Requirements) Post-approval, biologics and devices face rigorous FDA regulation, including cGMP and adverse event reporting, with non-compliance leading to severe enforcement actions and business impact - Post-approval regulation is rigorous, requiring compliance with cGMP, quality control, record-keeping, and adverse event reporting[86](index=86&type=chunk) - Manufacturers must register facilities with the FDA and are subject to periodic unannounced inspections[89](index=89&type=chunk) - Discovery of unknown problems or non-compliance can result in marketing restrictions, product withdrawal, civil/criminal sanctions, and adverse publicity[88](index=88&type=chunk) [Pediatric Research Equity Act](index=16&type=section&id=Pediatric%20Research%20Equity%20Act) PREA mandates pediatric safety and effectiveness data for BLA submissions, though orphan drug-designated products are generally exempt unless specific FDA regulations apply - PREA requires BLA supplements for new indications to include safety and effectiveness data for relevant pediatric subpopulations[90](index=90&type=chunk) - Biological products with orphan drug designation are currently exempt from PREA requirements[90](index=90&type=chunk) [U.S. Patent Term Restoration and Marketing Exclusivity](index=16&type=section&id=U.S.%20Patent%20Term%20Restoration%20and%20Marketing%20Exclusivity) Hatch-Waxman allows up to five years of patent term extension (max 14 years from approval), and biologics can gain six-month pediatric market exclusivity for completed studies - U.S. patents may be eligible for up to **five years** of patent term extension under the Hatch-Waxman Amendments, not exceeding **14 years** from product approval[91](index=91&type=chunk) - Biological products can obtain **six-month** pediatric market exclusivity based on voluntary completion of a pediatric study per an FDA 'Written Request'[92](index=92&type=chunk) [Biosimilars](index=17&type=section&id=Biosimilars) The Biologics Price Competition and Innovation Act created a biosimilar approval pathway, granting reference biologics 12 years of market exclusivity - The Biologics Price Competition and Innovation Act of 2009 created an approval pathway for biosimilars and interchangeable biosimilars[93](index=93&type=chunk) - Biosimilars are biological products 'highly similar' to a reference product with no clinically meaningful differences[93](index=93&type=chunk) - Reference biologics are granted **12 years** of exclusivity from the time of first licensure[93](index=93&type=chunk) [Advertising and Promotion](index=17&type=section&id=Advertising%20and%20Promotion) The FDA strictly regulates post-approval marketing, prohibiting off-label promotion and requiring substantiated claims, with non-compliance leading to significant penalties - The FDA closely regulates post-approval marketing and promotion, prohibiting off-label promotion of biologics and devices[94](index=94&type=chunk) - Claims in advertising must be balanced with safety information and adequately substantiated[94](index=94&type=chunk) - Failure to comply can result in adverse publicity, significant penalties, and regulatory actions[94](index=94&type=chunk) [Orphan Drug](index=17&type=section&id=Orphan%20Drug) Orphan drug designation for rare diseases (<200,000 U.S. individuals) grants seven years of market exclusivity, tax credits, and BLA user fee waivers - Orphan drug designation is for biologics treating rare diseases or conditions (generally <**200,000** individuals in the U.S.)[96](index=96&type=chunk) - The first BLA applicant to receive approval for an orphan-designated product/indication is entitled to a **seven-year** exclusive marketing period[96](index=96&type=chunk) - Benefits include tax credits for research and a waiver of the BLA application user fee[96](index=96&type=chunk) [Anti-Kickback and False Claims Laws](index=17&type=section&id=Anti-Kickback%20and%20False%20Claims%20Laws) Vericel is subject to federal and state anti-kickback and false claims laws, with violations leading to severe penalties including imprisonment, fines, and exclusion from federal programs - Subject to federal and state healthcare 'fraud and abuse' laws, including the Anti-Kickback Statute and False Claims Act[99](index=99&type=chunk)[100](index=100&type=chunk) - The Anti-Kickback Statute prohibits offering or paying remuneration to induce referrals for items covered by federal healthcare programs[100](index=100&type=chunk) - The False Claims Act prohibits presenting false or fraudulent claims to federal programs; manufacturers can be liable for 'causing' such claims, e.g., through off-label promotion[101](index=101&type=chunk) - Violations can result in imprisonment, criminal fines, civil money penalties, exclusion from federal healthcare programs, and treble damages[100](index=100&type=chunk)[101](index=101&type=chunk) [International Regulation](index=18&type=section&id=International%20Regulation) International regulations for clinical trials and sales vary, often more stringent than the U.S., as seen with MACI's expired European authorization due to manufacturing and pricing issues - Foreign regulations for clinical trials, commercial sales, and distribution vary by country and can have longer or shorter review timelines than the FDA[103](index=103&type=chunk) - MACI's European marketing authorization expired in June 2018 because registering a new EU-compliant manufacturing facility was not feasible due to an unfavorable pricing environment and renewal deadlines[27](index=27&type=chunk)[104](index=104&type=chunk)[105](index=105&type=chunk) [Pharmaceutical Coverage, Pricing, and Reimbursement](index=19&type=section&id=Pharmaceutical%20Coverage,%20Pricing,%20and%20Reimbursement) Product sales depend on third-party reimbursement, with payers increasingly scrutinizing medical necessity and cost-effectiveness, making adequate reimbursement crucial for profitability - Sales of approved products depend on reimbursement from third-party payers (government, managed care, private health insurers)[106](index=106&type=chunk) - Third-party payers are increasingly examining medical necessity and cost-effectiveness, which may limit coverage or reduce reimbursement rates[106](index=106&type=chunk) - Inadequate reimbursement could prevent the company from realizing an appropriate return on investment and successfully commercializing products[106](index=106&type=chunk) [Competitive Environment for Cartilage Repair and Burn Treatment](index=19&type=section&id=Competitive%20Environment%20for%20Cartilage%20Repair%20and%20Burn%20Treatment) Vericel faces intense competition in biotechnology and medical devices; MACI competes with microfracture and allografts, while Epicel competes with treatments like RECELL® System - The biotechnology and medical device industries are characterized by rapidly evolving technology and intense competition from major multinational companies, pharmaceutical companies, biotechnology companies, and stem cell companies[107](index=107&type=chunk) - For cartilage defects, MACI competes with microfracture, osteochondral allografts (e.g., DeNovo® NT, Cartiform®, Prochondrix®), and other developing technologies like Hyalofast® and Agili-C®[108](index=108&type=chunk)[109](index=109&type=chunk) - MACI is the only FDA-approved ACI product in the U.S., but another ACI product (NOVOCART® 3D) is in Phase 3 development[110](index=110&type=chunk) - Epicel is the only FDA-approved autologous epidermal product for large TBSA burns (≥**30%**), competing with meshed split-thickness auto-grafting and Avita Medical's RECELL® System for partial and full-thickness burns[111](index=111&type=chunk) [Employees](index=20&type=section&id=Employees) As of December 31, 2019, Vericel employed **241** full-time individuals, many experienced, with good employee relations and no collective bargaining agreements - As of December 31, 2019, Vericel employed approximately **241** full-time employees[113](index=113&type=chunk) - A significant number of management and professional employees have prior experience in pharmaceutical, biotechnology, or medical product companies[113](index=113&type=chunk) - None of the employees are covered by collective bargaining agreements, and management considers relations with employees to be good[113](index=113&type=chunk) [Executive Officers](index=20&type=section&id=Executive%20Officers) Vericel's executive officers as of December 31, 2019, include Dominick C. Colangelo (President and CEO), Gerard Michel (CFO), and Michael Halpin (COO), all with extensive industry experience Executive Officers as of December 31, 2019 | Name | Position | Age | Executive Officer Since | | :--- | :--- | :--- | :--- | | Dominick C. Colangelo | President and Chief Executive Officer | **54** | 2013 | | Gerard Michel | Chief Financial Officer & Vice President of Corporate Development | **56** | 2014 | | Michael Halpin | Chief Operating Officer | **58** | 2019 | - Dominick C. Colangelo has over **20 years** of executive management and corporate development experience in the biopharmaceutical industry[114](index=114&type=chunk) - Gerard Michel has over **25 years** of experience in the pharmaceutical industry across multiple functional areas, including business development and finance[115](index=115&type=chunk) - Michael Halpin has over **28 years** of regulatory, quality assurance, and clinical research experience with various medical device, combination product, and advanced therapy technologies[116](index=116&type=chunk) [Available Information](index=21&type=section&id=Available%20Information) Vericel's SEC filings and corporate governance documents are available free on its website (www.vcel.com) and the SEC's website (www.sec.gov) - Additional information about Vericel is available on its website (www.vcel.com)[117](index=117&type=chunk) - Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K are available free of charge on the company's website and the SEC's website (www.sec.gov)[117](index=117&type=chunk) - Corporate Governance documents are posted on the Investor Relations section of the website[117](index=117&type=chunk) [Item 1A. Risk Factors](index=21&type=section&id=Item%201A.%20Risk%20Factors) Vericel faces risks from manufacturing, supply chain, reimbursement, market acceptance, cybersecurity, competition, intellectual property, and common stock volatility - Operations and financial results are subject to various risks and uncertainties that could adversely affect business, financial condition, results of operations, cash flows, and stock price[118](index=118&type=chunk) - Risks include limited manufacturing capacity, reliance on sole/single source third-party suppliers, and the inherent complexities and costs of cell therapy manufacturing[119](index=119&type=chunk)[121](index=121&type=chunk)[129](index=129&type=chunk) - Financial risks include failure to obtain adequate reimbursement, significant quarterly/annual fluctuations in results, inability to manage growth, and potential for continued losses[133](index=133&type=chunk)[138](index=138&type=chunk)[143](index=143&type=chunk)[145](index=145&type=chunk) - Regulatory and market risks involve maintaining approvals, changes in regulations, market acceptance of novel technologies, intense competition, and potential for product liability claims[153](index=153&type=chunk)[157](index=157&type=chunk)[158](index=158&type=chunk)[160](index=160&type=chunk)[200](index=200&type=chunk)[201](index=201&type=chunk) - Intellectual property risks include inability to protect proprietary information, insufficient patent protection, and potential for infringement litigation[236](index=236&type=chunk)[238](index=238&type=chunk)[241](index=241&type=chunk)[250](index=250&type=chunk) [Risks Related to our Business](index=21&type=section&id=Risks%20Related%20to%20our%20Business) Vericel's business risks include manufacturing and supply chain dependence, cell therapy complexities, reimbursement challenges, financial volatility, cybersecurity threats, and intense market competition - Reliance on a single U.S. manufacturing facility in Cambridge, Massachusetts, for all commercial operations poses a significant risk of supply disruption if the facility is damaged or production is discontinued[119](index=119&type=chunk) - Dependence on third-party sole or single-source suppliers for critical components (e.g., Matricel for MACI membrane) could impair manufacturing if suppliers fail or new FDA approvals are delayed[121](index=121&type=chunk)[122](index=122&type=chunk) - Cell therapy manufacturing is highly complex, costly, and characterized by inherent risks like biological raw material inconsistencies and significant quality control requirements[129](index=129&type=chunk) - Failure to obtain and maintain adequate third-party reimbursement and favorable rates for products could materially harm financial condition and operating results[133](index=133&type=chunk)[135](index=135&type=chunk) - The company has incurred net losses each year since inception, with a **$9.7 million** net loss in 2019, and may not achieve consistent profitability[145](index=145&type=chunk) - Cybersecurity incidents could lead to loss of confidential data, remediation expenses, liability under privacy laws (e.g., HIPAA, GDPR), litigation, and reputational damage[161](index=161&type=chunk)[162](index=162&type=chunk)[163](index=163&type=chunk) - Intense competition from major medical device, pharmaceutical, and biotechnology companies, many with greater resources, could impact market share and profitability[107](index=107&type=chunk)[201](index=201&type=chunk) [Risks Related to Intellectual Property](index=38&type=section&id=Risks%20Related%20to%20Intellectual%20Property) Vericel's IP risks include protecting trade secrets (Epicel), expiring MACI patents, potential litigation, changes in patent law, and compliance with licensing agreements - Inability to protect the confidentiality of proprietary information and trade secrets, especially for Epicel which has no patent protection, could impair competitive position[236](index=236&type=chunk)[238](index=238&type=chunk) - Some MACI patents have expired, and others may be insufficient to provide significant commercial protection, potentially leading to increased competition[239](index=239&type=chunk)[240](index=240&type=chunk) - The company may be subject to costly patent infringement claims or forced to litigate to protect its IP, diverting resources and potentially resulting in substantial damages or inability to use disputed technologies[250](index=250&type=chunk)[251](index=251&type=chunk)[254](index=254&type=chunk) - Changes in patent law, particularly in biotechnology, could negatively impact the company's patent portfolio and ability to obtain or enforce patents[242](index=242&type=chunk)[243](index=243&type=chunk)[244](index=244&type=chunk) - Failure to fulfill obligations under intellectual property licenses (e.g., with MediWound for NexoBrid) could result in loss of critical license rights[228](index=228&type=chunk) [Risks Related to an Investment in our Common Stock](index=44&type=section&id=Risks%20Related%20to%20an%20Investment%20in%20our%20Common%20Stock) Investment risks include common stock price volatility, potential dilution from future equity offerings, no anticipated dividends, and corporate provisions that may hinder acquisition - The market price of common stock has been volatile, ranging between **$13.77** and **$20.29** during 2019, and may continue to fluctuate due to various internal and external factors[260](index=260&type=chunk) - Future equity offerings may result in substantial dilution to existing shareholders and could cause the stock price to decline[262](index=262&type=chunk) - The company does not anticipate paying dividends on its common stock, requiring shareholders to rely on stock appreciation for any return on investment[263](index=263&type=chunk)[264](index=264&type=chunk) - Corporate documents and Michigan law contain provisions that may make it more difficult for the company to be acquired, even if beneficial to shareholders[268](index=268&type=chunk) [Item 1B. Unresolved Staff Comments](index=45&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) No unresolved staff comments are reported [Item 2. Properties](index=45&type=section&id=Item%202.%20Properties) Vericel leases **57,000 square feet** in Cambridge and **6,000 square feet** in Ann Arbor, believing current facilities are adequate but may need more for future expansion - Leases approximately **57,000 square feet** in Cambridge, Massachusetts, for manufacturing and office space, with a lease expiring in February 2022 (option to extend to Feb 2027)[270](index=270&type=chunk) - Leases **6,000 square feet** in Ann Arbor, Michigan, with a lease expiring in April 2023[270](index=270&type=chunk) - Current facilities are believed to be adequate, but additional facilities may be required for research and development expansion or manufacturing operations[270](index=270&type=chunk) [Item 3. Legal Proceedings](index=45&type=section&id=Item%203.%20Legal%20Proceedings) Vericel is not currently involved in any material legal proceedings, though disputes may arise in the normal course of business - The company is not currently a party to any material legal proceedings[271](index=271&type=chunk) - May become involved in disputes in connection with the operation of its business from time to time[271](index=271&type=chunk) [Item 4. Mine Safety Disclosures](index=45&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to Vericel Corporation PART II Covers market information for common equity, selected financial data, management's discussion and analysis, and financial statements [Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchase of Equity Securities](index=46&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity,%20Related%20Shareholder%20Matters%20and%20Issuer%20Purchase%20of%20Equity%20Securities) Vericel's common stock (VCEL) trades on NASDAQ, showing price volatility; the company has **165** record holders and does not anticipate paying cash dividends - Common stock is quoted on the NASDAQ Capital Market under the symbol 'VCEL'[275](index=275&type=chunk) Common Stock Price Range (2018-2019) | Year Ended December 31, | High | Low | | :--- | :--- | :--- | | **2018** | | | | First Quarter | **$12.30** | **$5.70** | | Second Quarter | **$14.60** | **$9.60** | | Third Quarter | **$14.80** | **$9.10** | | Fourth Quarter | **$18.44** | **$10.77** | | **2019** | | | | First Quarter | **$20.29** | **$16.23** | | Second Quarter | **$18.89** | **$15.01** | | Third Quarter | **$19.83** | **$14.93** | | Fourth Quarter | **$19.20** | **$13.77** | - As of February 21, 2020, there were approximately **165** holders of record of the common stock[277](index=277&type=chunk) - The company has never declared or paid cash dividends and does not anticipate doing so in the foreseeable future, planning to retain all future earnings for business development[277](index=277&type=chunk) Equity Compensation Plan Information (as of Dec 31, 2019) | Plan Type | Securities to be Issued upon Exercise | Weighted Average Exercise Price | Securities Remaining Available for Future Issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | **5,052,950** | **$10.35** | **3,344,242** | | Employee stock purchase plan | **19,076** | **$11.73** | **404,201** | - In 2017, ICT exercised a warrant for **816,850** shares via cashless exercise[285](index=285&type=chunk) - In 2018 and 2019, Silicon Valley Bank and MidCap Financial Trust exercised warrants for a total of **134,893** shares via cashless exercise[286](index=286&type=chunk) - There were no repurchases of common stock during the year ended December 31, 2019[287](index=287&type=chunk) [Item 6. Selected Financial Data](index=47&type=section&id=Item%206.%20Selected%20Financial%20Data) Vericel's selected financial data shows consistent revenue growth from **$51.2 million** (2015) to **$117.9 million** (2019), with a **$9.7 million** net loss in 2019, and improved gross profit of **68.1%** Selected Consolidated Statements of Operations Data (in thousands, except per share amounts) | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Product sales, net | **$117,850** | **$90,857** | **$62,760** | **$54,383** | **$51,168** | | Total revenue | **$117,850** | **$90,857** | **$63,924** | **$54,383** | **$51,168** | | Cost of product sales | **$37,571** | **$32,160** | **$30,354** | **$28,307** | **$26,470** | | Gross profit | **$80,279** | **$58,697** | **$33,570** | **$26,076** | **$24,698** | | Research and development | **$30,391** | **$13,599** | **$12,944** | **$15,295** | **$18,890** | | Selling, general and administrative | **$61,139** | **$49,007** | **$35,610** | **$27,388** | **$22,479** | | Loss from operations | **$(11,251)** | **$(3,909)** | **$(14,984)** | **$(19,245)** | **$(16,671)** | | Net loss | **$(9,665)** | **$(8,137)** | **$(17,286)** | **$(19,566)** | **$(16,340)** | | Net loss per share (Basic and Diluted) | **$(0.22)** | **$(0.20)** | **$(0.52)** | **$(1.18)** | **$(0.97)** | | Weighted average common shares outstanding | **44,180** | **40,242** | **33,355** | **23,093** | **23,760** | Selected Consolidated Balance Sheet Data (in thousands) | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Cash and cash equivalents | **$26,889** | **$18,286** | **$26,862** | **$22,978** | **$14,581** | | Short term investments | **$42,829** | **$64,638** | — | — | — | | Total cash, cash equivalents, and short term investments | **$69,718** | **$82,924** | **$26,862** | **$22,978** | **$14,581** | | Working capital | **$91,860** | **$97,991** | **$37,416** | **$31,870** | **$15,235** | | Total assets | **$153,238** | **$118,689** | **$54,577** | **$48,598** | **$34,309** | | Total liabilities | **$42,147** | **$16,458** | **$32,037** | **$23,890** | **$12,179** | | Total shareholders' equity | **$111,091** | **$102,231** | **$22,540** | **$24,708** | **$22,130** | - Research and development expenses in 2019 included a **$17.5 million** upfront payment for the NexoBrid license[290](index=290&type=chunk) - Loss on impairment of intangible asset in 2016 was due to the write-off of commercial use rights for Carticel upon MACI's approval[291](index=291&type=chunk) [Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=49&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses Vericel's focus on growing MACI and Epicel, advancing NexoBrid, reporting a **$9.7 million** net loss in 2019 (due to NexoBrid payment), and achieving a **68.1%** gross profit ratio - Primary focus since 2014 acquisition of MACI, Epicel, and Carticel has been to invest in existing commercial business to grow revenue[322](index=322&type=chunk) - Net loss for 2019 was **$9.7 million**, including a **$17.5 million** upfront payment for the NexoBrid license[307](index=307&type=chunk) - Total revenue increased to **$117.9 million** in 2019 from **$90.9 million** in 2018, primarily due to significant volume growth for MACI and Epicel[308](index=308&type=chunk)[309](index=309&type=chunk) - Gross profit ratio improved to **68.1%** in 2019, up from **64.6%** in 2018 and **52.5%** in 2017, driven by increased sales volume and a highly fixed manufacturing cost structure[313](index=313&type=chunk) - The company believes existing cash, cash equivalents, and investments will be sufficient to support operations for at least **12 months** from the issuance of financial statements[327](index=327&type=chunk) [Safe Harbor Statement under The Private Securities Litigation Reform Act of 1995](index=50&type=section&id=Safe%20Harbor%20Statement%20under%20The%20Private%20Securities%20Litigation%20Reform%20Act%20of%201995) This section reiterates the cautionary note on forward-looking statements, emphasizing risks from Item 1A and disclaiming any obligation to update them - Reports contain forward-looking statements about future business conditions, plans, and prospects, identified by specific phrasing[294](index=294&type=chunk) - These statements are based on reasonable assumptions but are subject to risks and uncertainties, particularly those in 'Item 1A Risk Factors,' which could cause actual results to differ materially[294](index=294&type=chunk) - The company undertakes no obligation to publicly update forward-looking statements, except as required by law[295](index=295&type=chunk) [Overview](index=50&type=section&id=Overview) Vericel is a biopharmaceutical company focused on advanced cell therapies, marketing MACI and Epicel, holding NexoBrid rights, and discontinuing ixmyelocel-T development - Vericel Corporation is a leader in advanced cell therapies and specialty biologics for sports medicine and severe burn care markets[296](index=296&type=chunk) - Markets two FDA-approved autologous cell therapy products in the U.S.: MACI for knee cartilage defects and Epicel for deep-dermal or full-thickness burns[296](index=296&type=chunk) - Holds exclusive North American commercial rights to NexoBrid, a registration-stage biological orphan product for debridement of severe thermal burns[296](index=296&type=chunk) - No current plans to continue development of ixmyelocel-T for advanced heart failure[298](index=298&type=chunk) [Manufacturing](index=50&type=section&id=Manufacturing) Vericel's Cambridge, Massachusetts facility handles U.S. manufacturing and distribution for MACI and Epicel - The company operates a cell-manufacturing facility in Cambridge, Massachusetts[297](index=297&type=chunk) - This facility is used for U.S. manufacturing and distribution of MACI and Epicel[297](index=297&type=chunk) [Product Portfolio (MD&A)](index=50&type=section&id=Product%20Portfolio%20(MD%26A)) Vericel's portfolio includes marketed MACI and Epicel, NexoBrid in North American development (BLA mid-2020), and discontinued ixmyelocel-T for heart failure - Marketed products: MACI (third-generation autologous implant for knee cartilage defects) and Epicel (permanent skin replacement for severe burns)[298](index=298&type=chunk) - NexoBrid is in clinical development in North America, with a BLA submission targeted for mid-2020[298](index=298&type=chunk)[304](index=304&type=chunk) - Development of ixmyelocel-T for advanced heart failure has been discontinued due to required expense for further Phase 3 studies and a focus on existing commercial products[298](index=298&type=chunk)[306](index=306&type=chunk) [MACI and Carticel](index=51&type=section&id=MACI%20and%20Carticel) MACI, a third-generation ACI product, generated **$91.6 million** in 2019 net revenues, with sales force expansion and strong Q4 seasonality - MACI, a third-generation ACI product, replaced Carticel in Q2 2017 for symptomatic, full-thickness cartilage defects of the knee[299](index=299&type=chunk) - Net revenues for MACI were **$91.6 million** for the year ended December 31, 2019[300](index=300&type=chunk) - Sales force expanded from **40** to **48** representatives in Q2 2019, with plans to expand to **76** in 2020 to target **2,000** general orthopedic surgeons in addition to **3,000** sports medicine physicians[300](index=300&type=chunk) - MACI sales volumes are consistently stronger in the fourth quarter (average **36%** of annual volumes) due to insurance deductible limits and patient rehabilitation preferences[312](index=312&type=chunk) [Epicel](index=51&type=section&id=Epicel) Epicel, an FDA-approved permanent skin replacement for severe burns, generated **$26.2 million** in 2019 net revenues, with revenue variability but no significant seasonality - Epicel is a permanent skin replacement for deep dermal or full thickness burns ≥**30% TBSA**, regulated by CBER under medical device authorities[301](index=301&type=chunk) - Approved as a Humanitarian Use Device (HUD), it became eligible for sale for profit in 2016 after including pediatric patients in its label, with an ADN of **360,400**[302](index=302&type=chunk)[303](index=303&type=chunk) - Net revenues for Epicel were **$26.2 million** for the year ended December 31, 2019[303](index=303&type=chunk) - Epicel revenue has inherent quarter-to-quarter variability but does not exhibit significant seasonality[312](index=312&type=chunk) [NexoBrid](index=51&type=section&id=NexoBrid) NexoBrid, a biological product for severe burn debridement, is in North American clinical development, with a BLA submission targeted for mid-2020 - NexoBrid is a topically-administered biological product for enzymatic removal of nonviable burn tissue in deep partial and full-thickness thermal burns[304](index=304&type=chunk) - Currently in clinical development in North America, with a BLA submission to the FDA targeted for midyear 2020[304](index=304&type=chunk) - MediWound will continue to conduct clinical activities to support the BLA filing under the supervision of a Central Steering Committee[304](index=304&type=chunk) [Ixmyelocel-T](index=52&type=section&id=Ixmyelocel-T) Ixmyelocel-T, an Orphan Drug-designated therapy for heart failure, has no current plans for further Phase 3 clinical studies due to expense and strategic focus - Ixmyelocel-T is a multicellular therapy derived from adult patient bone marrow for advanced heart failure due to DCM[305](index=305&type=chunk) - The FDA indicated that at least one additional Phase 3 clinical study would be required to support a BLA[306](index=306&type=chunk) - No current plans to initiate or fund a Phase 3 trial due to the required expense and focus on growing existing commercial products[306](index=306&type=chunk) [Results of Operations](index=52&type=section&id=Results%20of%20Operations) Vericel reported a **$9.7 million** net loss in 2019, driven by the NexoBrid license payment, despite **$117.9 million** in total revenues and a **68.1%** gross profit ratio Consolidated Statements of Operations (in thousands) | Metric | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Net revenues | **$117,850** | **$90,857** | **$63,924** | | Cost of product sales | **$37,571** | **$32,160** | **$30,354** | | Gross profit | **$80,279** | **$58,697** | **$33,570** | | Total operating expenses | **$91,530** | **$62,606** | **$48,554** | | Loss from operations | **$(11,251)** | **$(3,909)** | **$(14,984)** | | Other income (expense) | **$1,586** | **$(4,228)** | **$(2,302)** | | Net loss | **$(9,665)** | **$(8,137)** | **$(17,286)** | [Net Loss](index=52&type=section&id=Net%20Loss) Vericel's 2019 net loss was **$9.7 million**, including a **$17.5 million** NexoBrid license payment, compared to **$8.1 million** in 2018 and **$17.3 million** in 2017 - Net loss for 2019 totaled **$9.7 million**, including a **$17.5 million** upfront payment for the NexoBrid license[307](index=307&type=chunk) - Net loss for 2018 was **$8.1 million**, including a **$0.8 million** loss on extinguishment of debt[307](index=307&type=chunk) - Net loss for 2017 was **$17.3 million**, including a **$0.9 million** loss on extinguishment of debt[307](index=307&type=chunk) [Net Revenues](index=52&type=section&id=Net%20Revenues) Net revenues increased to **$117.9 million** in 2019 (from **$90.9 million** in 2018), driven by MACI (**$91.6 million**) and Epicel (**$26.2 million**) volume growth - Net revenues increased to **$117.85 million** in 2019 from **$90.86 million** in 2018, primarily due to significant volume growth for MACI and Epicel[309](index=309&type=chunk)[311](index=311&type=chunk) Revenue by Product (in thousands) | Product | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | MACI | **$91,620** | **$67,741** | **$43,902** | | Epicel | **$26,230** | **$23,116** | **$18,858** | | License Revenue | — | — | **$1,164** | | Total | **$117,850** | **$90,857** | **$63,924** | - MACI sales volumes show strong seasonality, with the fourth quarter averaging **36%** of total annual volumes over the last four years[312](index=312&type=chunk) - Epicel revenue has inherent quarter-to-quarter variability but does not exhibit significant seasonality[312](index=312&type=chunk) [Gross Profit and Gross Profit Ratio](index=53&type=section&id=Gross%20Profit%20and%20Gross%20Profit%20Ratio) Gross profit increased to **$80.3 million** in 2019, with the ratio improving to **68.1%**, driven by higher MACI and Epicel sales and fixed manufacturing costs Gross Profit and Gross Profit Ratio (in thousands) | Metric | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Gross profit | **$80,279** | **$58,697** | **$33,570** | | Gross profit % | **68.1%** | **64.6%** | **52.5%** | - Gross profit increased due to higher MACI and Epicel sales combined with a highly fixed manufacturing cost structure[313](index=313&type=chunk) [Research and Development Costs](index=53&type=section&id=Research%20and%20Development%20Costs) R&D expenses significantly increased to **$30.4 million** in 2019, primarily due to a **$17.5 million** upfront payment for the NexoBrid license Research and Development Costs (in thousands) | Metric | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Research and development costs | **$30,391** | **$13,599** | **$12,944** | - Increase in 2019 R&D costs primarily due to a **$17.5 million** upfront payment for the North American rights to NexoBrid[314](index=314&type=chunk) Allocation of Research and Development Costs (in thousands) | Project | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Dilated Cardiomyopathy | — | **$1,345** | **$4,909** | | ACI | **$8,088** | **$9,099** | **$5,814** | | Epicel | **$3,538** | **$3,155** | **$2,221** | | Nexobrid | **$18,765** | — | — | | Total | **$30,391** | **$13,599** | **$12,944** | - ACI and Epicel costs increased in 2018 primarily due to increased employee stock-based compensation expenses[315](index=315&type=chunk) [Selling, General and Administrative Costs](index=53&type=section&id=Selling,%20General%20and%20Administrative%20Costs) SG&A expenses rose to **$61.1 million** in 2019, driven by increased stock-based compensation, MACI sales force expansion, marketing, and patient reimbursement support Selling, General and Administrative Costs (in thousands) | Metric | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Selling, general and administrative costs | **$61,139** | **$49,007** | **$35,610** | - Increase in 2019 primarily due to a **$4.2 million** increase in stock-based compensation, **$2.6 million** in MACI sales force expenses, **$2.4 million** in marketing, and **$1.8 million** in patient reimbursement support services[316](index=316&type=chunk) - Increase in 2018 primarily due to **$4.4 million** in employee-related expenses (MACI sales force expansion), **$4.0 million** in selling expenses and patient support services, and **$2.7 million** in stock-based compensation[317](index=317&type=chunk) [Other Income (Expense)](index=54&type=section&id=Other%20Income%20(Expense)) Total other income was **$1.6 million** in 2019, a significant improvement from a **$4.2 million** expense in 2018, driven by increased interest income and absence of warrant/debt extinguishment losses Other Income (Expense) (in thousands) | Metric | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Increase in fair value of warrants | — | **$(2,524)** | **$(257)** | | Loss on extinguishment of debt | — | **$(838)** | **$(860)** | | Interest income | **$1,614** | **$897** | **$14** | | Interest expense | **$(8)** | **$(1,732)** | **$(1,107)** | | Other expense | **$(20)** | **$(31)** | **$(92)** | | Total other income (expense) | **$1,586** | **$(4,228)** | **$(2,302)** | - The change in 2019 compared to 2018 is primarily due to increased interest income from marketable debt securities and no change in warrant value (due to expiration of 2013 warrants) or interest expense (term loan repaid)[318](index=318&type=chunk) - The change in 2018 compared to 2017 is primarily due to warrant value fluctuations (increase in stock price), interest expense, and loss on extinguishment of debt[319](index=319&type=chunk) [Stock Compensation](index=54&type=section&id=Stock%20Compensation) Total non-cash stock-based compensation expense increased to **$13.2 million** in 2019, primarily due to stock price fluctuations impacting option and RSU fair values Non-Cash Stock-Based Compensation Expense (in thousands) | Category | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Cost of goods sold | **$2,029** | **$1,015** | **$428** | | Research and development | **$2,428** | **$1,672** | **$506** | | General, selling and administrative | **$8,722** | **$4,536** | **$1,746** | | Total | **$13,179** | **$7,223** | **$2,680** | - The increase in stock-based compensation expense is primarily due to fluctuations in stock prices, impacting the fair value of options and restricted stock units[320](index=320&type=chunk) [Liquidity and Capital Resources](index=55&type=section&id=Liquidity%20and%20Capital%20Resources) Vericel's liquidity includes **$26.9 million** cash and **$52.1 million** investments; 2019 saw **$7.2 million** operating cash use (NexoBrid payment), **$10.6 million** from investing, and **$5.3 million** from financing, with capital deemed sufficient for 12 months - As of December 31, 2019, cash and cash equivalents totaled **$26.9 million**, and investments totaled **$52.1 million**[323](index=323&type=chunk) - Cash used for operating activities was **$7.2 million** in 2019, primarily due to a **$9.7 million** net loss and a **$17.5 million** cash outflow for the NexoBrid license, partially offset by non-cash charges[323](index=323&type=chunk) - Net cash provided by investing activities was **$10.6 million** in 2019, resulting from investment maturities offsetting purchases[325](index=325&type=chunk) - Net cash provided by financing activities was **$5.3 million** in 2019, mainly from stock option exercises[326](index=326&type=chunk) - The company believes existing cash, cash equivalents, and investments will be sufficient for at least **12 months** from the issuance of financial statements[327](index=327&type=chunk) [Cash Flows](index=55&type=section&id=Cash%20Flows) In 2019, Vericel used **$7.2 million** in operating cash, provided **$10.6 million** from investing, and **$5.3 million** from financing, resulting in an **$8.7 million** net increase in cash Summary of Cash Flows (in thousands) | Metric | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Cash used for operating activities | **$(7,183)** | **$(412)** | **$(13,183)** | | Cash provided by (used for) investment activities | **$10,615** | **$(67,027)** | **$(1,510)** | | Cash provided by financing activities | **$5,260** | **$58,863** | **$18,577** | | Net increase (decrease) in cash, cash equivalents and restricted cash | **$8,692** | **$(8,576)** | **$3,884** | | Cash, cash equivalents, and restricted cash at end of period | **$26,978** | **$18,286** | **$26,862** | - 2019 operating cash use was due to net loss and NexoBrid license payment, offset by non-cash charges like stock compensation (**$13.2 million**) and depreciation (**$1.7 million**)[323](index=323&type=chunk) - 2019 investing activities were driven by **$85.6 million** in investment maturities, offsetting **$63.1 million** in short-term and **$9.3 million** in long-term investment purchases[325](index=325&type=chunk) - 2019 financing activities were primarily from **$5.3 million** in stock option exercises[326](index=326&type=chunk) [Contractual Obligations](index=56&type=section&id=Contractual%20Obligations) Vericel's contractual obligations include operating lease payments for facilities and **$1.8 million** in future minimum purchase commitments for manufacturing materials through 2022 - Leases facilities in Ann Arbor, Michigan, and Cambridge, Massachusetts, including clean rooms, laboratories, and office space[329](index=329&type=chunk) - Adopted new leasing guidance (ASU 2016-02) on January 1, 2019, recognizing operating lease commitments as right-of-use assets and liabilities on the balance sheet[331](index=331&type=chunk) Future Minimum Purchase Commitments (in thousands) | Year | Total | | :--- | :--- | | 2020 | **$607** | | 2021 | **$607** | | 2022 | **$607** | | 2023 | — | | 2024 | — | | More than 5 Years | — | | **Total** | **$1,821** | [Critical Accounting Policies and Estimates](index=56&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) Vericel's critical accounting policies involve significant estimates for revenue recognition (MACI contractual allowances), stock-based compensation (Black-Scholes model), and a full valuation allowance on deferred tax assets - Preparation of financial statements requires management to make estimates and assumptions that could materially impact financial statements[333](index=333&type=chunk) - Revenue from MACI implants is recognized net of contractual allowances, estimated using a portfolio approach based on historical collection experience, denial rates, and contractual arrangements[338](index=338&type=chunk) - Stock-based compensation fair value for stock options is determined using the Black-Scholes option valuation method, with key assumptions including volatility, risk-free interest rate, dividend yield, and expected term[340](index=340&type=chunk) - A full valuation allowance is recorded on deferred tax assets, primarily federal net operating losses, due to a three-year cumulative loss position and expected future losses[341](index=341&type=chunk) [Off-Balance Sheet Arrangements](index=57&type=section&id=Off-Balance%20Sheet%20Arrangements) Vericel Corporation has no off-balance sheet arrangements likely to materially affect its financial condition - The company has no off-balance sheet arrangements that have or are reasonably likely to have a material effect on its financial condition[343](index=343&type=chunk) [Recent Accounting Pronouncements](index=57&type=section&id=Recent%20Accounting%20Pronouncements) Refer to Note 3 of the consolidated financial statements for details on recent accounting pronouncements - Refer to Note 3 to the consolidated financial statements for details on recent accounting pronouncements[344](index=344&type=chunk) [Item 7A. Quantitative and Qualitative Disclosures About Market Risk](index=58&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) Vericel's primary market risk is interest rate changes, with a **100 basis point** unfavorable shift impacting investment fair value by **$0.3 million** in 2019, with no derivatives or significant credit risk - Primary market risk exposure is to changes in interest rates, affecting the fair value of marketable debt securities[346](index=346&type=chunk) - A **100 basis point** (**1%**) unfavorable change in interest rates would decrease the investment portfolio's fair value by approximately **$0.3 million** in 2019 and **$0.2 million** in 2018[346](index=346&type=chunk) - The company does not use interest rate derivative instruments or hedging transactions[346](index=346&type=chunk) - Not subject to significant credit risk associated with accounts receivables[347](index=347&type=chunk) - Foreign exchange risk is primarily related to liabilities due to vendors outside the U.S., typically paid in Euro[348](index=348&type=chunk) [Item 8. Financial Statements and Supplementary Data](index=58&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) Presents Vericel's audited consolidated financial statements for 2017-2019, including the Independent Auditor's Report and detailed notes on accounting policies, balance sheet components, and key agreements - Includes audited consolidated financial statements: Balance Sheets, Statements of Operations, Comprehensive Loss, Shareholders' Equity, and Cash Flows[350](index=350&type=chunk) - Features the Report of Independent Registered Public Accounting Firm, which provides opinions on the financial statements and internal control over financial reporting[352](index=352&type=chunk)[353](index=353&type=chunk)[354](index=354&type=chunk) - Detailed notes to consolidated financial statements cover critical accounting policies, recent accounting pronouncements, revenue recognition, debt, leases, investments, and stock-based compensation[381](index=381&type=chunk) [Report of Independent Registered Public Accounting Firm](index=59&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm) PricewaterhouseCoopers LLP issued unqualified opinions on Vericel's 2019 financial statements and internal controls, highlighting MACI contractual allowances as a critical audit matter - PricewaterhouseCoopers LLP audited the consolidated financial statements and internal control over financial reporting[353](index=353&type=chunk) - Issued unqualified opinions, stating financial statements present fairly and internal control over financial reporting was effective as of December 31, 2019[354](index=354&type=chunk) - A critical audit matter was identified regarding contractual allowances related to MACI sales subject to third-party reimbursement, due to significant management judgment and measurement uncertainty[362](index=362&type=chunk)[363](index=363&type=chunk)[364](index=364&type=chunk) [Consolidated Balance Sheets](index=62&type=section&id=Consolidated%20Balance%20Sheets) As of December 31, 2019, Vericel reported **$153.2 million** in total assets, **$42.1 million** in liabilities (including new lease liabilities), and **$111.1 million** in shareholders' equity Consolidated Balance Sheets (amounts in thousands) | ASSETS | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | **$26,889** | **$18,286** | | Short term investments | **$42,829** | **$64,638** | | Accounts receivable (net) | **$32,168** | **$23,454** | | Inventory | **$6,816** | **$3,558** | | Other current assets | **$2,953** | **$2,847** | | **Total current assets** | **$111,655** | **$112,783** | | Property and equipment, net | **$7,144** | **$5,906** | | Restricted cash | **$89** | — | | Right-of-use assets | **$25,103** | — | | Long term investments | **$9,247** | — | | **Total assets** | **$153,238** | **$118,689** | | **LIABILITIES AND SHAREHOLDERS' EQUITY** | | | | Accounts payable | **$6,345** | **$7,108** | | Accrued expenses | **$7,948** | **$6,930** | | Current portion of operating lease liabilities | **$5,461** | — | | Other liabilities | **$41** | **$754** | | **Total current liabilities** |

SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: September 30, 2019 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 001-35280 VERICEL CORPORATION (Exact name of registrant as specified in its charter) Michigan 94-3096597 (State or other jurisdiction of (I.R.S. employer incorporation or orga ...

SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: June 30, 2019 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 001-35280 VERICEL CORPORATION (Exact name of registrant as specified in its charter) Michigan 94-3096597 (State or other jurisdiction of (I.R.S. employer incorporation or organizat ...

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: March 31, 2019 OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 001-35280 VERICEL CORPORATION (Exact name of registrant as specified in its charter) Michigan 94-3096597 (State or other jurisdiction of (I.R.S. employer incorporation or organiza ...

PART I [Business Overview](index=5&type=section&id=Item%201.%20Business) Vericel Corporation specializes in advanced cell therapies, marketing MACI for cartilage repair and Epicel for severe burns, with a strategy to boost revenue and achieve profitability - Vericel Corporation is a leader in advanced cell therapies for sports medicine and severe burn care markets, with two marketed products: MACI® for cartilage defects and Epicel® for severe burns[16](index=16&type=chunk) - The company's strategy is to become the leading developer in these markets by increasing MACI and Epicel revenue, lowering manufacturing costs, and generating positive operating income[17](index=17&type=chunk)[19](index=19&type=chunk) Key Product Net Revenues (Year Ended December 31, 2018) | Product | Net Revenue (in millions) | | :------ | :------------------------ | | MACI | $67.7 | | Epicel | $23.1 | - MACI sales volumes show significant seasonality, with the **fourth quarter historically representing the highest percentage (35%) of annual sales** due to insurance copay limits and patient rehabilitation preferences[30](index=30&type=chunk)[31](index=31&type=chunk) - Epicel is the only FDA-approved autologous epidermal product for large total surface area burns (≥30% TBSA) in both adult and pediatric patients, with an Annual Distribution Number (ADN) of **360,400 devices**[32](index=32&type=chunk)[35](index=35&type=chunk)[298](index=298&type=chunk) - The company has no current plans to initiate or fund a Phase 3 trial for ixmyelocel-T, its development-stage multicellular therapy for advanced heart failure, due to high development costs and a focus on existing commercial products[41](index=41&type=chunk)[302](index=302&type=chunk) - Vericel operates a single cell-manufacturing facility in Cambridge, Massachusetts, for U.S. manufacturing and distribution of MACI and Epicel, which also houses its research and development function[42](index=42&type=chunk) - The company's intellectual property includes patents for chondrocyte implants and related technologies (expiring between **2023 and 2033**) and trademarks for MACI, Epicel, and Carticel. MACI is entitled to **twelve years of data exclusivity until December 13, 2028**[46](index=46&type=chunk)[47](index=47&type=chunk) - As of December 31, 2018, Vericel employed approximately **216 full-time employees**[112](index=112&type=chunk) [Risk Factors](index=21&type=section&id=Item%201A.%20Risk%20Factors) Vericel faces significant risks from single-facility reliance, sole-source suppliers, reimbursement challenges, intense competition, and the need to manage growth and achieve profitability - The company's commercial manufacturing operations in the U.S. depend on a **single facility in Cambridge, Massachusetts**, posing a significant risk of supply disruption if the facility is damaged or experiences difficulties[118](index=118&type=chunk) - Vericel relies on third-party sole or single-source suppliers for critical components (e.g., Matricel for MACI membrane), and the inability to secure or qualify alternative suppliers could impair manufacturing and commercialization[121](index=121&type=chunk)[122](index=122&type=chunk) - Failure to obtain and maintain adequate reimbursement and favorable rates from third-party payers for MACI and Epicel could materially adversely affect financial condition and operating results[132](index=132&type=chunk)[133](index=133&type=chunk)[134](index=134&type=chunk) - The company has incurred net losses since inception, including **$8.1 million in 2018**, and anticipates continuing losses, with profitability dependent on increasing sales, improving gross margins, and successful commercialization of new products[144](index=144&type=chunk)[145](index=145&type=chunk) - The markets for Vericel's products are highly competitive, with numerous well-established multinational medical device, pharmaceutical, and biotechnology companies possessing greater resources[105](index=105&type=chunk)[197](index=197&type=chunk) - The company has **no patent protection for Epicel**, making it vulnerable to competition from other cultured epidermal autografts[233](index=233&type=chunk) - The market price of Vericel's common stock has been volatile, ranging between **$5.70 and $18.44 in 2018**, and is subject to fluctuations based on various internal and external factors[255](index=255&type=chunk)[258](index=258&type=chunk) [Unresolved Staff Comments](index=44&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company has no unresolved staff comments to report [Properties](index=44&type=section&id=Item%202.%20Properties) Vericel leases facilities in Cambridge, MA (57,000 sq ft) and Ann Arbor, MI (6,000 sq ft) for manufacturing, R&D, and offices, with leases expiring in 2022 and 2023 respectively - Vericel leases a **57,000 sq ft facility in Cambridge, MA** (lease expires Feb 2022, option to extend to Feb 2027) and a **6,000 sq ft facility in Ann Arbor, MI** (lease expires April 2023)[265](index=265&type=chunk) - The Cambridge facility houses clean rooms, laboratories for MACI and Epicel manufacturing, and office space[265](index=265&type=chunk) [Legal Proceedings](index=45&type=section&id=Item%203.%20Legal%20Proceedings) Vericel Corporation is not currently involved in any material legal proceedings - The company is not currently party to any material legal proceedings[266](index=266&type=chunk) [Mine Safety Disclosures](index=45&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) Vericel Corporation has no mine safety disclosures to report PART II [Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchase of Equity Securities](index=46&type=section&id=Item%205.%20Market%20for%20Registrant's%20Common%20Equity%2C%20Related%20Shareholder%20Matters%20and%20Issuer%20Purchase%20of%20Equity%20Securities) Vericel's common stock trades on NASDAQ under "VCEL", experiencing volatility, with no cash dividends paid or anticipated, and details on equity compensation and recent unregistered sales - Vericel's common stock is quoted on the NASDAQ Capital Market under the symbol **"VCEL"**[270](index=270&type=chunk) Common Stock Price Range (2017-2018) | Period | High | Low | | :----------------------- | :------ | :------ | | Year ended Dec 31, 2017 | | | | First Quarter | $3.10 | $2.50 | | Second Quarter | $3.45 | $2.55 | | Third Quarter | $6.00 | $3.00 | | Fourth Quarter | $5.98 | $3.65 | | Year ended Dec 31, 2018 | | | | First Quarter | $12.30 | $5.70 | | Second Quarter | $14.60 | $9.60 | | Third Quarter | $14.80 | $9.10 | | Fourth Quarter | $18.44 | $10.77 | - As of February 22, 2019, **43,753,005 shares of Common Stock were outstanding**[5](index=5&type=chunk) - The company has never declared or paid cash dividends on its common stock and does not expect to do so in the foreseeable future, intending to retain all future earnings for business development[272](index=272&type=chunk)[261](index=261&type=chunk) Equity Compensation Plan Information (as of December 31, 2018) | Category | Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights | Weighted Average Exercise Price of Outstanding Options, Warrants and Rights | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans | | :------------------------------------------- | :---------------------------------------------------------------------------------------- | :-------------------------------------------------------------------------- | :------------------------------------------------------------------------------------------- | | Equity compensation plans approved by security holders (employees and directors) | 4,790,683 | $5.85 | 2,983,774 | | Employee stock purchase plan | 18,407 | $11.86 | 473,980 | - In 2017, Innovative Cellular Therapeutics CO., LTD. (ICT) purchased a warrant for **818,424 shares of common stock for $4.0 million**, which was exercised via cashless exercise for **816,850 shares**[279](index=279&type=chunk) - In 2018, Silicon Valley Bank and MidCap Financial Trust exercised warrants via cashless exercise for a total of **115,085 shares of common stock**[280](index=280&type=chunk) - There were **no repurchases of common stock** during the year ended December 31, 2018[281](index=281&type=chunk) [Selected Financial Data](index=48&type=section&id=Item%206.%20Selected%20Financial%20Data) This section provides a five-year summary of Vericel's key financial data, including statements of operations and balance sheets, highlighting net losses, revenue growth, and financial position changes Selected Consolidated Statements of Operations Data (in thousands, except per share amounts) | Metric | 2018 | 2017 | 2016 | 2015 | 2014 | | :---------------------------------------------- | :-------- | :-------- | :-------- | :-------- | :-------- | | Product sales, net | $90,857 | $62,760 | $54,383 | $51,168 | $28,796 | | Total revenue | $90,857 | $63,924 | $54,383 | $51,168 | $28,796 | | Cost of product sales | $32,160 | $30,354 | $28,307 | $26,470 | $17,293 | | Gross profit | $58,697 | $33,570 | $26,076 | $24,698 | $11,503 | | Research and development | $13,599 | $12,944 | $15,295 | $18,890 | $21,263 | | Selling, general and administrative | $49,007 | $35,610 | $27,388 | $22,479 | $13,774 | | Loss on impairment of intangible asset | — | — | $2,638 | — | — | | Total operating expenses | $62,606 | $48,554 | $45,321 | $41,369 | $35,037 | | Loss from operations | $(3,909) | $(14,984) | $(19,245) | $(16,671) | $(23,534) | | Total other (expense) income | $(4,228) | $(2,302) | $(321) | $331 | $3,614 | | Net loss | $(8,137) | $(17,286) | $(19,566) | $(16,340) | $(19,920) | | Net loss per share (Basic and Diluted) | $(0.20) | $(0.52) | $(1.18) | $(0.97) | $(2.23) | Selected Consolidated Balance Sheet Data (in thousands) | Metric | 2018 | 2017 | 2016 | 2015 | 2014 | | :---------------------------------------------- | :-------- | :-------- | :-------- | :-------- | :-------- | | Cash and cash equivalents | $18,286 | $26,862 | $22,978 | $14,581 | $30,343 | | Marketable securities | $64,638 | — | — | — | — | | Total cash, cash equivalents, and marketable securities | $82,924 | $26,862 | $22,978 | $14,581 | $30,343 | | Working capital | $97,991 | $37,416 | $31,870 | $15,235 | $29,661 | | Property and equipment, net | $5,906 | $4,071 | $3,875 | $4,049 | $2,892 | | Total assets | $118,689 | $54,577 | $48,598 | $34,309 | $47,579 | | Total liabilities | $16,458 | $32,037 | $23,890 | $12,179 | $11,938 | | Total shareholders' equity (deficit) | $102,231 | $22,540 | $24,708 | $22,130 | $35,641 | - The **$2.6 million loss on impairment of intangible asset in 2016** was due to the write-off of commercial use rights for Carticel following MACI's approval and replacement[285](index=285&type=chunk) - Loss on extinguishment of debt occurred in **2018 ($0.8 million)** and **2017 ($0.9 million)** due to debt prepayment and modification, respectively[285](index=285&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=48&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses Vericel's financial performance, condition, and outlook, detailing net loss, revenue growth from MACI and Epicel, operating expenses, liquidity, and capital resources - Vericel reported a net loss of **$8.1 million for the year ended December 31, 2018**, an improvement from **$17.3 million in 2017** and **$19.6 million in 2016**[303](index=303&type=chunk)[304](index=304&type=chunk) Net Revenues by Product (in thousands) | Product | 2018 | 2017 | 2016 | | :---------------- | :-------- | :-------- | :-------- | | Carticel and MACI | $67,741 | $43,902 | $38,871 | | Epicel | $23,116 | $18,858 | $15,512 | | License Revenue | — | $1,164 | — | | Total | $90,857 | $63,924 | $54,383 | - Net revenues increased significantly in 2018 to **$90.9 million** (from **$63.9 million in 2017**) primarily due to increased MACI cartilage implants and continued growth in Epicel demand[305](index=305&type=chunk)[308](index=308&type=chunk) Gross Profit and Gross Profit Ratio (in thousands) | Metric | 2018 | 2017 | 2016 | | :--------------- | :-------- | :-------- | :-------- | | Gross profit | $58,697 | $33,570 | $26,076 | | Gross profit % | 64.6% | 52.5% | 47.9% | - Gross profit increased due to higher sales volumes for MACI and Epicel, combined with a highly fixed manufacturing cost structure[309](index=309&type=chunk) Research and Development Costs by Project (in thousands) | Project | 2018 | 2017 | 2016 | | :---------------------- | :-------- | :-------- | :-------- | | Dilated Cardiomyopathy | $1,345 | $4,909 | $8,195 | | ACI | $9,099 | $5,814 | $4,964 | | Epicel | $3,155 | $2,221 | $2,136 | | Total R&D costs | $13,599 | $12,944 | $15,295 | - Selling, general and administrative expenses increased to **$49.0 million in 2018** (from **$35.6 million in 2017**), primarily due to a **$4.4 million increase in employee-related expenses** from MACI sales force expansion, **$4.0 million in selling expenses**, and **$2.7 million in stock-based compensation**[312](index=312&type=chunk) Total Non-Cash Stock-Based Compensation Expense (in thousands) | Category | 2018 | 2017 | 2016 | | :------------------------------ | :------- | :------- | :------- | | Cost of goods sold | $1,015 | $428 | $427 | | Research and development | $1,672 | $506 | $497 | | General, selling and administrative | $4,536 | $1,746 | $1,575 | | Total | $7,223 | $2,680 | $2,499 | - As of December 31, 2018, Vericel had **$18.3 million in cash and cash equivalents** and **$64.6 million in short-term investments**, totaling **$82.9 million**. The company believes these resources are sufficient to sustain operations through at least February 2020[320](index=320&type=chunk)[326](index=326&type=chunk) - In June 2018, the company completed a public offering of **5,750,000 shares of common stock**, generating net proceeds of **$70.1 million**, primarily for general corporate purposes and potential business expansion[318](index=318&type=chunk) - On December 19, 2018, Vericel prepaid and terminated its outstanding debt under the SVB Loan Agreement, paying **$17.1 million in borrowings** plus a **$0.2 million prepayment premium** and a **$0.5 million final payment**[325](index=325&type=chunk) Contractual Obligations (in thousands) | Contractual Obligations | Total | 2019 | 2020 | 2021 | 2022 | 2023 | More than 5 Years | | :---------------------- | :------- | :------ | :------ | :------ | :----- | :----- | :---------------- | | Operating leases | $15,386 | $4,879 | $4,719 | $4,754 | $966 | $68 | — | | Purchase commitments | $2,761 | $741 | $711 | $674 | $635 | — | — | | Capital leases | $205 | $41 | $41 | $41 | $41 | $41 | — | | Total | $18,352 | $5,661 | $5,471 | $5,469 | $1,642 | $109 | — | [Quantitative and Qualitative Disclosures About Market Risk](index=57&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) Vericel's market risks include interest rate risk on marketable debt securities and foreign exchange risk from non-U.S. vendor transactions, managed without hedging or derivatives - Vericel is exposed to interest rate risk on its marketable debt securities (classified as available-for-sale) and manages this risk through short-duration investments[339](index=339&type=chunk)[340](index=340&type=chunk) - The company faces foreign exchange risk primarily from recognized assets and liabilities due to vendors in countries outside the United States, typically paid in Euro[341](index=341&type=chunk) - Vericel does not enter into hedging transactions or purchase derivative instruments to manage market risks[340](index=340&type=chunk)[341](index=341&type=chunk) [Financial Statements and Supplementary Data](index=58&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents Vericel's audited consolidated financial statements, including balance sheets, statements of operations, comprehensive loss, shareholders' equity, cash flows, and detailed notes [Report of Independent Registered Public Accounting Firm](index=59&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm) PricewaterhouseCoopers LLP audited Vericel's consolidated financial statements and internal controls, affirming fair presentation and effectiveness - PricewaterhouseCoopers LLP audited Vericel's consolidated financial statements as of December 31, 2018 and 2017, and for the three years ended December 31, 2018, concluding they present fairly in all material respects[346](index=346&type=chunk)[347](index=347&type=chunk) - The firm also audited and opined that the company maintained effective internal control over financial reporting as of December 31, 2018, based on COSO criteria[347](index=347&type=chunk) [Consolidated Balance Sheets](index=61&type=section&id=Consolidated%20Balance%20Sheets) This section presents Vericel's consolidated balance sheets for 2018 and 2017, detailing assets, liabilities, and shareholders' equity Consolidated Balance Sheets (in thousands) | ASSETS | December 31, 2018 | December 31, 2017 | | :---------------------------------------------- | :---------------- | :---------------- | | Cash and cash equivalents | $18,286 | $26,862 | | Short term investments | $64,638 | — | | Accounts receivable, net | $23,454 | $18,270 | | Inventory | $3,558 | $3,793 | | Other current assets | $2,847 | $1,581 | | Total current assets | $112,783 | $50,506 | | Property and equipment, net | $5,906 | $4,071 | | Total assets | $118,689 | $54,577 | | | | | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | Accounts payable | $7,108 | $5,552 | | Accrued expenses | $6,930 | $5,573 | | Deferred rent (current) | $566 | $420 | | Warrant liabilities | — | $1,014 | | Current portion of term loan credit agreement | — | $350 | | Other current liabilities | $188 | $181 | | Total current liabilities | $14,792 | $13,090 | | Revolving and term loan credit agreement (non-current) | — | $16,888 | | Deferred rent (non-current) | $1,666 | $2,059 | | Total liabilities | $16,458 | $32,037 | | Total shareholders' equity | $102,231 | $22,540 | - Total assets increased from **$54.6 million in 2017 to $118.7 million in 2018**, driven by a significant increase in short-term investments (**$64.6 million in 2018** vs. none in 2017) and accounts receivable[355](index=355&type=chunk) - Total liabilities decreased from **$32.0 million in 2017 to $16.5 million in 2018**, primarily due to the prepayment and termination of the term loan credit agreement[355](index=355&type=chunk) - Total shareholders' equity increased from **$22.5 million in 2017 to $102.2 million in 2018**, largely due to proceeds from a public equity offering[355](index=355&type=chunk) [Consolidated Statements of Operations](index=62&type=section&id=Consolidated%20Statements%20of%20Operations) This section presents Vericel's consolidated statements of operations for 2016-2018, detailing revenue, expenses, and net loss Consolidated Statements of Operations (in thousands, except per share amounts) | Metric | 2018 | 2017 | 2016 | | :---------------------------------------------- | :-------- | :-------- | :-------- | | Total revenue | $90,857 | $63,924 | $54,383 | | Gross profit | $58,697 | $33,570 | $26,076 | | Research and development | $13,599 | $12,944 | $15,295 | | Selling, general and administrative | $49,007 | $35,610 | $27,388 | | Loss on impairment of intangible asset | — | — | $2,638 | | Total operating expenses | $62,606 | $48,554 | $45,321 | | Loss from operations | $(3,909) | $(14,984) | $(19,245) | | Total other (expense) income | $(4,228) | $(2,302) | $(321) | | Net loss | $(8,137) | $(17,286) | $(19,566) | | Net loss per share (Basic and Diluted) | $(0.20) | $(0.52) | $(1.18) | | Weighted average common shares outstanding | 40,242 | 33,355 | 23,093 | - Net loss decreased from **$17.3 million in 2017 to $8.1 million in 2018**, reflecting improved operating performance[357](index=357&type=chunk) - Total revenue increased by **42.1% from $63.9 million in 2017 to $90.9 million in 2018**[357](index=357&type=chunk) - Gross profit increased by **74.8% from $33.6 million in 2017 to $58.7 million in 2018**, with the gross profit margin improving from **52.5% to 64.6%**[357](index=357&type=chunk)[309](index=309&type=chunk) [Consolidated Statements of Comprehensive Loss](index=63&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Loss) This section presents Vericel's consolidated statements of comprehensive loss for 2016-2018, detailing net loss and other comprehensive income components Consolidated Statements of Comprehensive Loss (in thousands) | Metric | 2018 | 2017 | 2016 | | :-------------------------- | :-------- | :-------- | :-------- | | Net loss | $(8,137) | $(17,286) | $(19,566) | | Net change in unrealized loss on investments | $(39) | — | — | | Comprehensive loss | $(8,176) | $(17,286) | $(19,566) | - Comprehensive loss for 2018 was **$(8.176) million**, including a net change in unrealized loss on investments of **$(39) thousand**, which was not present in prior years[360](index=360&type=chunk) [Consolidated Statements of Shareholders' Equity](index=64&type=section&id=Consolidated%20Statements%20of%20Shareholders'%20Equity) This section presents Vericel's consolidated statements of shareholders' equity for 2016-2018, detailing changes in common stock and accumulated deficit - Total shareholders' equity increased from **$22.5 million at December 31, 2017, to $102.2 million at December 31, 2018**[363](index=363&type=chunk)[364](index=364&type=chunk) - This increase was primarily driven by **$70.0 million in net proceeds from a public equity offering** and **$7.2 million in stock-based compensation expense in 2018**[363](index=363&type=chunk)[364](index=364&type=chunk) - In 2017, all **12,308 outstanding shares of Series B preferred stock**, plus **9,570 shares in accumulated dividends**, were converted into **1,093,892 shares of common stock**, eliminating preferred stock from the balance sheet[363](index=363&type=chunk)[443](index=443&type=chunk) [Consolidated Statements of Cash Flows](index=66&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) This section presents Vericel's consolidated statements of cash flows for 2016-2018, categorizing cash flows from operating, investing, and financing activities Consolidated Statements of Cash Flows (in thousands) | Activity | 2018 | 2017 | 2016 | | :---------------------------------------------- | :-------- | :-------- | :-------- | | Net cash used for operating activities | $(412) | $(13,183) | $(19,892) | | Net cash used for investing activities | $(67,027) | $(1,510) | $(1,415) | | Net cash provided by (used in) financing activities | $58,863 | $18,577 | $29,704 | | Net increase (decrease) in cash | $(8,576) | $3,884 | $8,397 | | Cash at end of period | $18,286 | $26,862 | $22,978 | - Net cash used for operating activities significantly decreased to **$(0.4) million in 2018** from **$(13.2) million in 2017**, primarily due to a lower net loss and higher non-cash adjustments[367](index=367&type=chunk)[320](index=320&type=chunk) - Investing activities used **$67.0 million in 2018**, mainly due to **$66.5 million in short-term investment purchases**, compared to **$1.5 million in 2017**[367](index=367&type=chunk)[323](index=323&type=chunk) - Financing activities provided **$58.9 million in 2018**, driven by **$70.0 million from an equity offering**, offset by **$17.5 million in debt payments**[367](index=367&type=chunk)[324](index=324&type=chunk) [Notes to Consolidated Financial Statements](index=67&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) This section provides detailed notes to Vericel's consolidated financial statements, covering accounting policies, pronouncements, and financial components [1. Organization](index=67&type=section&id=1.%20Organization) Vericel Corporation, incorporated in 1989, is a biopharmaceutical company focused on advanced cell therapies for sports medicine and severe burn care - Vericel Corporation, incorporated in March 1989, is a fully integrated, commercial-stage biopharmaceutical company focused on advanced cell therapies for sports medicine (MACI®) and severe burn care (Epicel®) in the U.S.[369](index=369&type=chunk) - The company acquired the Cell Therapy and Regenerative Medicine (CTRM) business from Sanofi on May 30, 2014, which included MACI, Carticel, and Epicel products[369](index=369&type=chunk) - As of December 31, 2018, Vericel had an accumulated deficit of **$369.0 million** and a net loss of **$8.1 million for the year**, but expects existing cash and investments to sustain operations through at least February 2020[370](index=370&type=chunk) [2. Summary of Significant Accounting Policies](index=67&type=section&id=2.%20Summary%20of%20Significant%20Accounting%20Policies) This section outlines Vericel's significant accounting policies, including consolidation, revenue recognition, R&D, deferred tax assets, and warrant valuation - The consolidated financial statements include Vericel and its wholly-owned subsidiaries, with all inter-company transactions eliminated[371](index=371&type=chunk) - Key accounting policies include recognizing product revenue under ASC 606, expensing research and development costs as incurred, and valuing stock-based compensation using the Black-Scholes model[332](index=332&type=chunk)[387](index=387&type=chunk)[388](index=388&type=chunk) - A full valuation allowance is maintained on deferred tax assets due to historical and expected operating losses, indicating that realization is not more likely than not[335](index=335&type=chunk)[456](index=456&type=chunk) - Warrants that could be cash settled or have anti-dilution price protection are recorded as liabilities at fair value, with changes recognized in other income (expense)[396](index=396&type=chunk) [3. Recent Accounting Pronouncements](index=72&type=section&id=3.%20Recent%20Accounting%20Pronouncements) This section details Vericel's adoption of recent accounting pronouncements, including ASC 606, new lease guidance, and non-employee share-based payments - Vericel adopted ASC 606, Revenue Recognition, on January 1, 2018, using the modified retrospective method, with no material cumulative adjustment or change in revenue timing/amount[397](index=397&type=chunk) - The company evaluated new lease accounting guidance (effective after December 15, 2018) and expects to recognize material right-to-use assets and liabilities for operating leases, with no material impact on the income statement[398](index=398&type=chunk) - New guidance for non-employee share-based payment arrangements was adopted early on July 1, 2018, shifting to fixed grant date fair value principles, with no material impact[399](index=399&type=chunk) [4. Revenue](index=72&type=section&id=4.%20Revenue) This section details Vericel's revenue recognition for MACI and Epicel, distribution agreement changes, customer concentration, and license revenue - Revenue from MACI kits is recognized upon delivery to hospitals, as the kit order does not obligate implant manufacture[402](index=402&type=chunk)[403](index=403&type=chunk) - MACI implant revenue is recognized upon delivery, contingent on prior authorization or coverage confirmation, with net revenues based on contracted or estimated payer rates[404](index=404&type=chunk) - In July/August 2018, amendments to the distribution agreement with Orsini Pharmaceutical Services, Inc. eliminated exclusivity and shifted credit and collection risk for implants after June 15, 2018, to Vericel[405](index=405&type=chunk) - Vericel also entered a non-exclusive dispensing agreement with AllCare Plus Pharmacy, Inc. in July 2018, retaining credit and collection risk for all implants dispensed through them[407](index=407&type=chunk) - Epicel revenue is recognized upon delivery to hospitals, based on contracted rates, as there is no obligation to manufacture grafts upon biopsy receipt[408](index=408&type=chunk) Revenue by Product (in thousands) | Revenue by product (in thousands) | 2018 | 2017 | 2016 | | :-------------------------------- | :-------- | :-------- | :-------- | | Implants - based on contracted rate | $40,830 | $30,366 | $17,027 | | Implants - based on third party reimbursement | $25,096 | $12,122 | $20,299 | | Biopsy kits - direct bill | $1,997 | $1,764 | $1,545 | | Change in estimates related to prior periods | $(182) | $(350) | — | | Epicel - Direct bill (hospital) | $23,116 | $18,858 | $15,512 | | License Revenue | — | $1,164 | — | - In 2017, Vericel recognized **$1.2 million in license revenue** from an agreement with Innovative Cellular Therapeutics CO., LTD. (ICT) for product development and commercialization in Greater China and other Asian countries[412](index=412&type=chunk)[413](index=413&type=chunk) - The ICT license agreement includes future milestone and sales-based royalty payments, but these are not included in the current transaction price due to uncertainty of achievement and transfer of funds[414](index=414&type=chunk)[415](index=415&type=chunk) Revenue and Accounts Receivable Concentration from Largest Customers | Product | Revenue Concentration (2018) | Revenue Concentration (2017) | Revenue Concentration (2016) | Accounts Receivable Concentration (2018) | Accounts Receivable Concentration (2017) | | :---------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------------------- | :--------------------------------------- | | Carticel and MACI | 16% | 35% | 31% | 2% | 46% | | Epicel | 7% | 10% | 11% | 4% | 3% | [5. Selected Balance Sheet Components](index=77&type=section&id=5.%20Selected%20Balance%20Sheet%20Components) This section provides detailed breakdowns of Vericel's inventory, property and equipment, and accrued expenses Inventory (in thousands) | Category | 2018 | 2017 | | :-------------- | :------- | :------- | | Raw materials | $2,872 | $3,532 | | Work-in-process | $638 | $226 | | Finished goods | $48 | $35 | | Total Inventory | $3,558 | $3,793 | Property and Equipment, net (in thousands) | Category | 2018 | 2017 | | :------------------------------ | :-------- | :-------- | | Machinery and equipment | $1,536 | $1,249 | | Furniture, fixtures and office equipment | $775 | $872 | | Computer equipment and software | $3,712 | $3,536 | | Leasehold improvements | $4,587 | $4,213 | | Construction in process | $2,801 | $822 | | Total | $13,411 | $10,692 | | Less accumulated depreciation | $(7,505) | $(6,621) | | Property and Equipment, net | $5,906 | $4,071 | - Depreciation expense was **$1.4 million in 2018**, **$1.6 million in 2017**, and **$1.6 million in 2016**[418](index=418&type=chunk) Accrued Expenses (in thousands) | Category | 2018 | 2017 | | :---------------------- | :------- | :------- | | Bonus | $5,161 | $2,693 | | Employee related accruals | $1,559 | $2,389 | | Other accrued expenses | $210 | $491 | | Total Accrued Expenses | $6,930 | $5,573 | [6. Debt](index=77&type=section&id=6.%20Debt) This section details Vericel's debt activities, including the prepayment and termination of its Loan and Security Agreement in December 2018 - On December 19, 2018, Vericel prepaid in full and terminated its Loan and Security Agreement with Silicon Valley Bank and MidCap Financial Trust, paying **$17.1 million in outstanding borrowings**[420](index=420&type=chunk)[421](index=421&type=chunk) - The termination included an additional prepayment premium of **$0.2 million (1.5%)** and a final payment of **$0.5 million (3.6%)**[421](index=421&type=chunk) - The prepayment in 2018 and debt modification in 2017 were accounted for as debt extinguishments, resulting in a loss of **$0.8 million in 2018** and **$0.9 million in 2017**[422](index=422&type=chunk) [7. Cash Equivalents and Investments](index=78&type=section&id=7.%20Cash%20Equivalents%20and%20Investments) This section defines Vericel's cash equivalents and short-term investments, detailing their classification, fair value, and maturities - Cash equivalents consist of short-term, highly liquid investments with original maturities of three months or less, including demand deposits, money market funds, and repurchase agreements[375](index=375&type=chunk) - Short-term investments are debt securities classified as available-for-sale, carried at fair value, with maturities greater than 90 days but less than one year[376](index=376&type=chunk) Marketable Securities (as of December 31, 2018, in thousands) | Category | Amortized Cost | Gross Unrealized Gains | Gross Unrealized 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 | | Total | $75,515 | — | $(39) | $75,476 | - All marketable securities held as of December 31, 2018, had remaining contractual maturities of **one year or less**, and none were considered other-than-temporarily impaired[424](index=424&type=chunk)[425](index=425&type=chunk) [8. Stock-Based Compensation](index=78&type=section&id=8.%20Stock-Based%20Compensation) This section details Vericel's stock-based compensation plans, including the 2017 Omnibus Incentive Plan and Employee Stock Purchase Plan - Vericel's 2017 Omnibus Incentive Plan, approved by shareholders, provides for stock options, stock appreciation rights, restricted stock awards, and restricted stock units, with **2,983,774 shares available for future grant** as of December 31, 2018[429](index=429&type=chunk)[430](index=430&type=chunk) - The Employee Stock Purchase Plan (ESPP) allows employees to purchase stock, with **$0.3 million, $0.2 million, and $0.2 million in compensation expense** recorded for 2018, 2017, and 2016, respectively[431](index=431&type=chunk) - In 2018, **1,644,160 service-based options were granted** with a weighted average grant-date fair value of **$6.96**, generally vesting over four years[432](index=432&type=chunk) Total Non-Cash Stock-Based Compensation Expense (in thousands) | Category | 2018 | 2017 | 2016 | | :------------------------------ | :------- | :------- | :------- | | Cost of goods sold | $1,015 | $428 | $427 | | Research and development | $1,672 | $506 | $497 | | General, selling and administrative | $4,536 | $1,746 | $1,575 | | Total | $7,223 | $2,680 | $2,499 | - Total unrecognized compensation cost related to non-vested service-based stock options was approximately **$7.2 million** as of December 31, 2018, expected to be recognized over a weighted-average period of **3.0 years**[436](index=436&type=chunk) [9. Shareholders' Equity](index=80&type=section&id=9.%20Shareholders'%20Equity) This section details changes in Vericel's shareholders' equity, including proceeds from a public equity offering and dividend policy - In June 2018, Vericel sold **5,750,000 shares of common stock** in a public offering at **$13.00 per share**, generating net proceeds of **$70.1 million**[439](index=439&type=chunk) - The company terminated its at-the-market sales agreement with Cowen on May 29, 2018, under which **2,340,879 shares were sold for $8.0 million (net)** in prior periods[438](index=438&type=chunk) - No cash dividends have been declared or paid by the company since its inception[440](index=440&type=chunk) [10. Preferred Stock](index=80&type=section&id=10.%20Preferred%20Stock) This section details the mandatory conversion of all outstanding Series B preferred stock into common stock on March 9, 2017 - On March 9, 2017, Vericel mandatorily converted all **12,308 outstanding shares of Series B-1 and B-2 preferred stock**, plus **9,570 shares in accumulated dividends**, into **1,093,892 shares of common stock**[442](index=442&type=chunk)[443](index=443&type=chunk) - Following this conversion, no shares of preferred stock remain outstanding[443](index=443&type=chunk) [11. Net Loss Per Common Share](index=81&type=section&id=11.%20Net%20Loss%20Per%20Common%20Share) This section presents Vericel's net loss per common share calculation for 2016-2018, including anti-dilutive common equivalent shares Net Loss Per Common Share (in thousands, except per share amounts) | Metric | 2018 | 2017 | 2016 | | :---------------------------------------------- | :-------- | :-------- | :-------- | | Net loss | $(8,137) | $(17,286) | $(19,566) | | Less: earnings attributable to convertible preferred stock | — | — | $7,579 | | Numerator of basic and diluted EPS | $(8,137) | $(17,286) | $(27,145) | | Weighted-average common shares outstanding | 40,242 | 33,355 | 23,093 | | Net loss per share (Basic and Diluted) | $(0.20) | $(0.52) | $(1.18) | - Common equivalent shares (options, warrants, preferred stock) of **4.8 million, 5.4 million, and 5.3 million** were excluded from diluted EPS calculations for 2018, 2017, and 2016, respectively, due to their anti-dilutive effect[444](index=444&type=chunk) [12. Stock Purchase Warrants](index=81&type=section&id=12.%20Stock%20Purchase%20Warrants) This section details Vericel's outstanding stock purchase warrants, including exercise prices, expiration dates, and fair value measurement Outstanding Warrants (as of December 31, 2018) | Warrant Category | December 2017 Warrants | | :--------------------- | :--------------------- | | Exercise price | $4.27 | | Expiration date | December 6, 2023 | | Total shares issuable on exercise | 26,951 | - During 2018, **565,895 shares were issued upon exercise of August 2013 Warrants**, which subsequently expired. SVB and MidCap also exercised **117,074 September 2016 Warrants** and **26,951 December 2017 Warrants** via cashless exercise[446](index=446&type=chunk) - The fair value of warrants is measured using the Black-Scholes valuation model, considering expected stock-price volatility, expected life, risk-free interest rate, and dividend yield[447](index=447&type=chunk) - In December 2017, ICT purchased a warrant for **818,424 shares for $4.0 million**, which was exercised via cashless exercise for **816,850 shares**, with no ICT warrants outstanding as of December 31, 2017[449](index=449&type=chunk) [13. Fair Value Measurements](index=82&type=section&id=13.%20Fair%20Value%20Measurements) This section describes Vericel's fair value measurement classifications for assets and liabilities, detailing marketable securities and warrant liabilities - Vericel classifies fair value measurements into three levels: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[450](index=450&type=chunk) - As of December 31, 2018, money market funds were classified as Level 1, while repurchase agreements, commercial paper, corporate notes, U.S. government securities, and U.S. asset-backed securities were classified as Level 2[450](index=450&type=chunk)[451](index=451&type=chunk) Fair Value Measurement Categories (as of December 31, 2018, in thousands) | Category | Total | Level 1 | Level 2 | Level 3 |\n| :------------------------ | :------- | :------- | :------- | :------ |\n| Assets: | | | | |\n| Money market funds | $5,838 | $5,838 | — | — |\n| Repurchase agreements | $5,000 | — | $5,000 | — |\n| Commercial paper | $30,710 | — | $30,710 | — |\n| Corporate notes | $13,144 | — | $13,144 | — |\n| U.S. government securities | $10,166 | — | $10,166 | — |\n| U.S. asset-backed securities | $10,618 | — | $10,618 | — |\n| Total Assets | $75,476 | $5,838 | $69,638 | — |\n| Liabilities: | | | | |\n| Warrant liabilities | — | — | — | — | - Warrant liabilities, which were **$1.014 million at December 31, 2017**, were reduced to zero by December 31, 2018, due to an increase in fair value and warrant exercises[450](index=450&type=chunk)[452](index=452&type=chunk) [14. Income Taxes](index=83&type=section&id=14.%20Income%20Taxes) This section details Vericel's income (loss) before taxes, tax reconciliation, deferred tax assets, and the impact of the 2017 Tax Act Income (Loss) Before Income Taxes (in thousands) | Category | 2018 | 2017 | 2016 | | :-------------- | :-------- | :-------- | :-------- | | U.S. loss | $(8,056) | $(17,066) | $(19,302) | | Non U.S. loss | $(81) | $(220) | $(264) | | Total | $(8,137) | $(17,286) | $(19,566) | Reconciliation of Income Taxes (in thousands) | Item | 2018 | 2017 | 2016 | | :---------------------------------- | :-------- | :-------- | :-------- | | Loss before income taxes | $(8,137) | $(17,286) | $(19,566) | | Federal statutory rate | 21% | 34% | 34% | | Taxes computed at federal statutory rate | $(1,709) | $(5,877) | $(6,652) | | State taxes (net of federal benefit) | $(385) | $(1,106) | $(1,016) | | Nondeductible stock compensation | $(605) | $563 | $549 | | Federal and State Rate Change | $839 | $11,749 | $(614) | | Other | $172 | $116 | $56 | | Change in valuation allowance | $1,688 | $(5,445) | $7,677 | | Reported income taxes | — | — | — | Deferred Tax Assets (in thousands) | Category | 2018 | 2017 | | :-------------------------------- | :-------- | :-------- | | Net operating loss carryforwards | $10,969 | $10,487 | | Employee benefits and stock compensation | $2,798 | $2,128 | | Research and development costs | $9,067 | $8,275 | | Fixed assets | $418 | $508 | | Inventory reserve | $2,339 | $2,568 | | Other, net | $345 | $282 | | Total deferred tax assets | $25,936 | $24,248 | | Valuation allowance | $(25,936) | $(24,248) | | Net deferred tax assets | — | — | - As of December 31, 2018, U.S. federal and state net operating loss carryforwards were **$44.6 million and $25.2 million**, respectively, with a projected annual limitation of **$0.8 million** due to a 2014 change in control[455](index=455&type=chunk) - A full valuation allowance is maintained against net deferred tax assets due to historical and expected operating losses, indicating that realization is not more likely than not[456](index=456&type=chunk) - The Tax Cuts and Jobs Act of 2017 reduced the corporate tax rate to **21%**, resulting in an **$11.7 million increase to tax expense in 2017**, offset by a valuation allowance reversal[459](index=459&type=chunk) [15. Employee Savings Plan](index=85&type=section&id=15.%20Employee%20Savings%20Plan) This section reports Vericel's consistent annual contributions of $0.6 million to its 401(k) savings plan for employees - Vericel contributed **$0.6 million** to its 401(k) savings plan for participating employees in each of the years ended December 31, 2018, 2017, and 2016[460](index=460&type=chunk) [16. Commitments and Contingencies](index=85&type=section&id=16.%20Commitments%20and%20Contingencies) This section outlines Vericel's contractual obligations, including a supply agreement with Matricel GmbH and future minimum payments for leases and purchase commitments - Vericel has a long-term supply agreement with Matricel GmbH for the ACI-Maix collagen membrane used in MACI manufacturing, committing to purchase approximately **$0.6 million annually until December 31, 2022**, with renewal options[461](index=461&type=chunk)[462](index=462&type=chunk) Future Minimum Payments for Contractual Obligations (in thousands) | Contractual Obligations | Total | 2019 | 2020 | 2021 | 2022 | 2023 | More than 5 Years | | :---------------------- | :------- | :------ | :------ | :------ | :----- | :----- | :---------------- | | Operating leases | $15,386 | $4,879 | $4,719 | $4,754 | $966 | $68 | — | | Purchase commitments | $2,761 | $741 | $711 | $674 | $635 | — | — | | Capital leases | $205 | $41 | $41 | $41 | $41 | $41 | — | | Total | $18,352 | $5,661 | $5,471 | $5,469 | $1,642 | $109 | — | - Rent expense for the years ended December 31, 2018, 2017, and 2016, was **$5.5 million, $5.6 million, and $4.8 million**, respectively[465](index=465&type=chunk) [17. Supplementary Quarterly Financial Information (unaudited)](index=86&type=section&id=17.%20Supplementary%20Quarterly%20Financial%20Information%20(unaudited)) This section provides unaudited quarterly financial information for 2017-2018, detailing revenues, gross profit, and net profit/loss Unaudited Quarterly Financial Information (in thousands, except per share data) | Metric (2018) | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Year | | :------------------------ | :------------ | :------------- | :------------ | :------------- | :-------- | | Revenues | $18,027 | $19,011 | $22,484 | $31,335 | $90,857 | | Gross profit | $10,361 | $11,284 | $14,346 | $22,706 | $58,697 | | Profit (loss) from operations | $(4,322) | $(4,246) | $(1,336) | $5,995 | $(3,909) | | Net (loss) profit | $(7,659) | $(4,651) | $(1,069) | $5,242 | $(8,137) | | Net (loss) profit per share (Basic) | $(0.21) | $(0.12) | $(0.02) | $0.12 | $(0.20) | | Net (loss) profit per share (Diluted) | $(0.21) | $(0.12) | $(0.02) | $0.11 | $(0.20) | | | | | | | | | Metric (2017) | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Year | | :------------------------ | :------------ | :------------- | :------------ | :------------- | :-------- | | Revenues | $9,361 | $16,953 | $14,260 | $23,350 | $63,924 | | Gross profit | $2,252 | $9,283 | $7,074 | $14,961 | $33,570 | | Loss from operations | $(9,623) | $(2,521) | $(4,031) | $1,191 | $(14,984) | | Net loss | $(9,778) | $(2,388) | $(5,407) | $287 | $(17,286) | | Net (loss) profit per share (Basic and Diluted) | $(0.31) | $(0.07) | $(0.16) | $0.01 | $(0.52) | - Quarterly revenues for 2018 showed a strong upward trend, culminating in **$31.3 million in Q4**, compared to **$23.4 million in Q4 2017**[467](index=467&type=chunk) - Net profit was achieved in **Q4 2018 ($5.2 million)** and **Q4 2017 ($0.3 million)**, contrasting with losses in earlier quarters of both years[467](index=467&type=chunk) [Changes in and Disagreements With Accountants on Accounting and Financial Disclosure](index=87&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20With%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) Vericel Corporation reports no changes in or disagreements with its accountants on accounting and financial disclosure matters - There are no changes in or disagreements with accountants on accounting and financial disclosure to report[468](index=468&type=chunk) [Controls and Procedures](index=87&type=section&id=Item%209A.%20Controls%20and%20Procedures) Vericel's management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2018 - As of December 31, 2018, Vericel's certifying officers concluded that the company's disclosure controls and procedures were effective[469](index=469&type=chunk) - Management assessed and concluded that internal control over financial reporting was effective as of December 31, 2018, a conclusion audited by PricewaterhouseCoopers LLP[471](index=471&type=chunk)[472](index=472&type=chunk) - There were no material changes in internal control over financial reporting during the three months ended December 31, 2018[473](index=473&type=chunk) [Other Information](index=87&type=section&id=Item%209B.%20Other%20Information) Vericel Corporation has no other information to report under this item PART III [Directors, Executive Officers and Corporate Governance](index=88&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information regarding Vericel's directors, executive officers, and corporate governance practices is incorporated by reference from the company's definitive Proxy Statement for the 2019 Annual Meeting of Shareholders - Information on directors, executive officers, and corporate governance is incorporated by reference from the Proxy Statement for the Annual Meeting of Shareholders scheduled for May 1, 2019[7](index=7&type=chunk)[478](index=478&type=chunk) [Executive Compensation](index=88&type=section&id=Item%2011.%20Executive%20Compensation) Details on executive compensation are incorporated by reference from the company's definitive Proxy Statement - Information relating to executive compensation is incorporated by reference to the Proxy Statement under the caption "Executive Compensation and Related Information"[479](index=479&type=chunk) [Security Ownership of Certain Beneficial Owners and Management, and Related Shareholder Matters](index=88&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%2C%20and%20Related%20Shareholder%20Matters) Information concerning security ownership by certain beneficial owners and management, as well as related shareholder matters, is incorporated by reference from the company's definitive Proxy Statement - Information relating to ownership of equity securities by certain beneficial owners and management is incorporated by reference to the Proxy Statement under the caption "Stock Ownership of Certain Beneficial Owners and Management"[479](index=479&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=88&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information regarding certain relationships, related person transactions, and director independence is incorporated by reference from the company's definitive Proxy Statement - Information relating to certain relationships and related person transactions, and director independence is incorporated by reference to the Proxy Statement under the caption "Certain Relationships and Related Party Transactions"[480](index=480&type=chunk) [Principal Accountant Fees and Services](index=88&type=section&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services) Information concerning principal accountant fees and services is incorporated by reference from the company's definitive Proxy Statement - Information relating to principal accountant fees and services is incorporated by reference to the Proxy Statement under the caption "Ratification of Appointment of Independent Registered Public Accounting Firm"[480](index=480&type=chunk) PART IV [Exhibits and Financial Statement Schedules](index=89&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists the documents filed as part of the Annual Report on Form 10-K, including financial statements, schedules, and a comprehensive exhibit index - The section includes financial statements, all information within the financial statements or notes, and a list of exhibits[484](index=484&type=chunk) [Form 10-K Summary](index=89&type=section&id=Item%2016.%20Form%2010-K%20Summary) The Annual Report on Form 10-K does not include a summary - This Annual Report on Form 10-K does not include a summary[483](index=483&type=chunk) [Exhibit Index](index=90&type=section&id=Exhibit%20Index) This index provides a detailed list of all exhibits filed with the Form 10-K, including corporate documents, agreements, and certifications, many of which are incorporated by reference from previous SEC filings - The Exhibit Index lists various corporate documents, agreements, and certifications, including Restated Articles of Incorporation, Bylaws, Equity Incentive Plans, Lease Agreements, and Distribution Agreements[486](index=486&type=chunk)[487](index=487&type=chunk)[488](index=488&type=chunk)[489](index=489&type=chunk)[490](index=490&type=chunk) - Many exhibits are incorporated by reference from prior SEC filings, and some portions have been granted confidential treatment[486](index=486&type=chunk)[490](index=490&type=chunk) [Signatures](index=96&type=section&id=Signatures) The report is duly signed on behalf of Vericel Corporation by its President and Chief Executive Officer, Dominick C. Colangelo, and Chief Financial Officer, Gerard J. Michel, along with other directors, as of February 26, 2019 - The report is signed by Dominick C. Colangelo (President and CEO), Gerard J. Michel (CFO and VP of Corporate Development), and other directors, dated February 26, 2019[494](index=494&type=chunk)[495](index=495&type=chunk)