Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Safe Harbor Statement under The Private Securities Litigation Reform Act of 1995

Our reports, filings and other public announcements contain certain statements that describe our management’s beliefs concerning future business conditions, plans and prospects, growth opportunities and the outlook for our business and the biopharmaceutical industry based upon information currently available. Such statements are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. Wherever possible, we have identified these forward-looking statements by words such as “will,” “may,” “anticipates,” “believes,” “intends,” “estimates,” “expects,” “plans,” “projects,” “trends,” “opportunity,” “current,” “intention,” “position,” “assume,” “potential,” “outlook,” “remain,” “continue,” “maintain,” “sustain,” “seek,” “target,” “achieve,” “continuing,” “ongoing,” and similar words or phrases, or future or conditional verbs such as “would,” “should,” “could,” “may,” or similar expressions. These forward-looking statements are based upon assumptions our management believes are reasonable. Such forward-looking statements are subject to risks and uncertainties which could cause our actual results, performance and achievements to differ materially from those expressed in, or implied by, these statements, including, among others, the risks and uncertainties listed in this report under “Item 1A Risk Factors” and in our other reports filed with the SEC from time-to-time.

Because our forward-looking statements are based on estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond our control or are subject to change, actual results could be materially different and any or all of our forward-looking statements may turn out to be wrong. Forward-looking statements speak only as of the date made and can be affected by assumptions we might make or by known or unknown risks and uncertainties. Many factors mentioned in our discussion in this report will be important in determining future results. New factors emerge from time-to-time, and it is not possible for us to predict which factors will arise. Consequently, we cannot assure you that our expectations or forecasts expressed in such forward-looking statements will be achieved. Except as required by law, we undertake no obligation to publicly update any of our forward-looking or other statements, whether as a result of new information, future events, or otherwise.

Overview

Vericel Corporation is a leader in advanced cell therapies and specialty biologics for the sports medicine and severe burn care markets. We currently market two FDA-approved autologous cell therapy products in the United States. MACI® (autologous cultured chondrocytes on porcine collagen membrane) is an autologous cellularized scaffold product indicated for the repair of symptomatic, single or multiple full-thickness cartilage defects of the knee with or without bone involvement in adults. Epicel® (cultured epidermal autografts) is a permanent skin replacement HUD for the treatment of adult and pediatric patients with deep-dermal or full-thickness burns comprising greater than or equal to 30 percent of TBSA. We also hold an exclusive license from MediWound Ltd. for North American rights to NexoBrid®, (concentrate of proteolytic enzymes enriched in bromelain), a registration-stage biological orphan product. On June 30, 2020, MediWound submitted to the FDA a BLA seeking the approval of NexoBrid for eschar removal (debridement) in adults with deep partial-thickness and/or full-thickness thermal burns. The FDA subsequently accepted the BLA for filing and has assigned a Prescription Drug User Fee Act (PDUFA) target date of June 29, 2021.

COVID-19

Throughout 2020, the pandemic caused by the spread of a novel strain of coronavirus (COVID-19) has created significant disruptions to the U.S. and global economy and has contributed to significant volatility in financial markets. The global impact of the outbreak is continually evolving and, as the virus spreads and infection rates surge in various locations, many state, local and national governments – including those in Massachusetts and Michigan, where our operations are located – have responded by issuing, extending and supplementing orders requiring quarantines, restrictions on travel, and the mandatory closure of certain non-essential businesses, among other actions. In the U.S., the status and application of these orders have varied on a state-by-state basis since the early days of the pandemic.Many of the restrictions have been periodically updated as infections rates in the U.S. have risen and fallen and as world health leaders learn more about the virus, its transmission pathway and who is most at risk.Because Vericel is deemed an essential business, we continue to be exempt fromgovernment orders, in their current form, requiring the closure of workplaces and the cessation of business operations.

Notwithstanding being an essential business, Vericel’s business and operations have been adversely impacted by the effects of COVID-19. After the COVID-19 pandemic began directly affecting the U.S., in March 2020, the American College of Surgeons and United States Surgeon General recommended that each hospital, health system, and surgeon minimize, postpone, or cancel electively scheduled surgeries. These recommendations were followed by numerous state level executive orders either

restricting or partially restricting elective surgeries. Because MACI is an elective surgical procedure, as a result of these restrictions, beginning in mid-March 2020, we began to experience a significant increase in cancellations of scheduled MACI procedures as well as a slowdown in new MACI orders. The widespread suspension of elective procedures impacted our business and operations during the first and second quarters of 2020. These restrictions began to ease in May and by the end of September 2020 there were no state orders in place that directly impacted a surgeon’s or patient’s ability to move forward with a MACI surgery. Consequently, MACI procedure and order volumes recovered throughout the third and fourth quarter of 2020, and the majority of MACI cases that had previously been canceled as a result of COVID-19 factors were rescheduled. The COVID-19 pandemic remains unpredictable, however, and in late September and October 2020, the number of COVID-19 infections began to increase markedly in various geographies and by late December 2020 the rolling seven-day average of new daily coronavirus cases in the United States reached the highest level at any point during the pandemic. As a result, the scheduling of MACI pipeline cases during the last two weeks of December slowed compared to historical trends and there was an increase in case cancellations during that period. Although hospitals are now better prepared for subsequent surges in COVID-19 patients, the risk remains that regional or local restrictions could again be placed on the performance of elective surgical procedures, or that patients may choose to postpone or be unable to appear for a MACI procedure if the number of COVID-19 infections in the United States continues to rise.

Though Epicel is used almost exclusively in an emergent setting by burn centers and surgeons throughout the country, Epicel revenue and procedure volumes have been less affected by the pandemic.Nevertheless, large burns and burn admissions can be affected by restrictions on human activity resulting from more severe government lockdown orders.Epicel procedure volumes did experience a slow-down during the second quarter of 2020, however, the reduction was less pronounced than that observed with MACI.Further reductions could be observed in the future, based on the degree of restrictions imposed.

At the outset of the pandemic, Vericel put in place a comprehensive workplace protection plan, which institutes protective measures in response to COVID-19. These measures include mandatory employee training on social distancing and hygiene protocols, conducting daily health screenings of all employees, vendors and visitors entering our facilities, canceling all international business travel, limiting domestic business travel to essential purpose travel only, requesting that employees limit non-essential personal travel, enhancing our facilities’ janitorial and sanitary procedures, making certain physical modifications and enhancements to our facilities to enable effective social distancing among employees, providing certain personal protective equipment to employees working in our offices, encouraging employees to work from home to the extent their job function enables them to do so, limiting third-party access to our facilities, encouraging the use of virtual employee meetings, modifying the manner and schedule of on-site production activities, and providing guidance to our field-based commercial teams concerning their communications and contact with customers and healthcare professionals. In addition, we put certain expense reduction measures in place including a reduction of discretionary spending. We are reviewing these measures regularly as the pandemic evolves and may take additional actions to the extent required.

We continue to manufacture MACI and Epicel and are maintaining a significant safety stock of all key raw materials. We do not expect current supply chain interruptions will impact our ongoing manufacturing operations. With respect to customer delivery, MACI final product has an established shelf life of six (6) days and established shipping shelf life of three (3) days. Currently, MACI is picked up by courier and shipped by commercial air or ground transportation to customer surgical sites. Epicel final product has an established shelf life of 24 hours and is hand carried to customer hospitals by courier. Transportation is primarily by commercial or charter airline. Although we have not experienced material shipping delays or materially increased costs to date, significant disruption of air travel could result in the inability to deliver MACI or Epicel final products to customer sites within appropriate timeframes, which could further adversely impact our business. There is no expected impact of COVID-19 on our distributors, operations or third-party service providers’ ability to manage patient cases.

We believe it is likely that we will continue to experience variable impacts on our business, based on the resurgence of COVID-19 in various areas of the United States. Measures taken to limit the impact of COVID-19 at the international, national and local levels, including shelter-in-place orders, social distancing measures, travel bans and restrictions, and business and government shutdowns, may continue to create significant negative economic impacts on a global basis. Given that uncertainty, we cannot reliably estimate the extent to which the COVID-19 pandemic may continue to impact utilization and revenues of our products in 2021 and beyond.

For a discussion of additional risks associated with COVID-19, please see Item 1A. Risk Factors.

Manufacturing

We have a cell-manufacturing facility in Cambridge, Massachusetts which is used for U.S. manufacturing and distribution of MACI and Epicel.

Product Portfolio

Our marketed products include two FDA-approved autologous cell therapies. MACI, a third-generation autologous implant for the repair of symptomatic, full-thickness cartilage defects of the knee in adult patients and Epicel, a permanent skin replacement for adult and pediatric patients with deep dermal or full-thickness burns greater than or equal to 30% of TBSA. Both products are currently marketed in the U.S. In addition, we have entered into exclusive license and supply agreements with MediWound to commercialize NexoBrid in North America.As previously mentioned, MediWound has submitted a BLA to the FDA seeking commercial approval of NexoBrid. On September 16, 2020, we announced that the FDA accepted the BLA for review and has assigned a PDUFA target date of June 29, 2021.

MACI and Carticel

Carticel®, an earlier generation ACI product for the treatment and repair of cartilage defects in the knee, was the first FDA-approved autologous cartilage repair product. Carticel was replaced at the end of the second quarter of 2017 by MACI, which the FDA approved on December 13, 2016 by the FDA. MACI is a third-generation product for ACI, a class of methods for the repair of symptomatic, single or multiple full-thickness cartilage defects of the knee with or without bone involvement in adults.

The target audience of U.S. physicians is approximately 5,000 orthopedic surgeons and is divided into two segments - a group of orthopedic surgeons who self-identify and/or have a formal specialty as sports medicine physicians, and a sub-population of general orthopedic surgeons who perform a high volume of cartilage repair procedures. As of December 31, 2020, we have increased the number of MACI sales representatives to 76 Clinical Account Specialists and expanded their reach to over nine geographical regions to enable the sales force to call on 2,000 of the general orthopedic surgeons. Most private payers have a medical policy that covers treatment with MACI with the top 30 largest commercial payers having a formal medical policy for MACI or ACI in general. Even for private payers that have not yet approved a medical policy for MACI, for medically appropriate cases, we often obtain approval on a case-by-case basis. For the year ended December 31, 2020, MACI net revenues totaled $94.4 million.

Epicel

Epicel is a permanent skin replacement for deep dermal or full-thickness burns greater than or equal to 30% of TBSA. Epicel is regulated by the Center for Biologics Evaluation and Research, or CBER of the FDA under medical device authorities, and is the only FDA-approved cultured epidermal autograft product available for large total surface area burns. Epicel was designated as a HUD in 1998 and a HDE application for the product was submitted in 1999. HUDs are devices that are intended for diseases or conditions that affect fewer than 8,000 individuals annually in the U.S. Under an HDE approval, a HUD cannot be sold for an amount that exceeds the cost of research and development, fabrication and distribution unless certain conditions are met.

A HUD is eligible to be sold for profit after receiving HDE approval if the device meets certain eligibility criteria, including where the device is intended for the treatment of a disease or condition that occurs in pediatric patients and such device is labeled for use in pediatric patients. If the FDA determines that a HUD meets the eligibility criteria, the HUD is permitted to be sold for profit so long as the number of devices distributed in any calendar year does not exceed the Annual Distribution Number (ADN). The ADN is defined as the number of devices reasonably needed to treat a population of 8,000 individuals per year in the U.S.

On February 18, 2016, the FDA-approved our HDE supplement to revise the labeled indications of use for Epicel to specifically include pediatric patients. The revised product label also now specifies that the probable benefit of Epicel, mainly related to survival, was demonstrated in two Epicel clinical experience databases and a physician-sponsored study comparing outcomes in patients with massive burns treated with Epicel relative to standard care. Because of the change in the label to specifically include use in pediatric patients, Epicel is no longer subject to the HDE profit restrictions. In conjunction with adding the pediatric labeling and meeting pediatric eligibility criteria, the FDA has determined the ADN number for Epicel to be 360,400 which is approximately 45 times larger than the volume of grafts sold in 2019. We currently have an eleven-person sales force comprised of seven (7) account managers and four (4) burn clinical specialists, overseen by a senior sales director.In the year ended December 31, 2020, Epicel net revenues totaled $27.5 million.

NexoBrid

Our portfolio also includes NexoBrid, a topically-administered biological product that enzymatically removes nonviable burn tissue, or eschar, in patients with deep partial and full-thickness thermal burns. On June 30, 2020, we announced the submission of a BLA to the FDA seeking the approval of NexoBrid. Subsequently, on September 16, 2020, we announced that the FDA accepted the BLA for review and assigned a PDUFA target date of June 29, 2021. NexoBrid is approved in the European Union and other international markets and has been designated as an orphan biologic in the United States, European Union and other international markets. Pursuant to the terms of our existing license agreement, if the BLA is approved, MediWound will transfer the BLA to Vericel and Vericel will market NexoBrid in the U.S.Both MediWound and Vericel, under the supervision of a Central Steering Committee comprised of members of both companies will continue to guide development of NexoBrid in North America. Under our license agreement with MediWound, NexoBrid is being manufactured for BARDA prior to approval by the FDA under an emergency use authorization. Vericel recorded revenue of $2.2 million associated with the delivery of NexoBrid to BARDA during the year ended December 31, 2020.

Results of Operations

Net Income

Our net income for the year ended December 31, 2020 totaled $2.9 million. Our net loss for the year ended December 31, 2019 and December 31, 2018 totaled $9.7 million and $8.1 million, respectively, which included a $17.5 million upfront payment to MediWound for the NexoBrid license in 2019 and a loss on extinguishment of debt of $0.8 million in 2018.

Year Ended December 31,

Tax provision 180 — —

Net Revenues

Net revenues increased for the year ended December 31, 2020, compared to December 31, 2019, with both MACI and Epicel growing, in addition to revenue being recognized related to the first deliveries of NexoBrid to BARDA. An increase in demand during the third and fourth quarters of 2020, partially offset the effects of COVID-19 related shutdowns in the first half of 2020.

Net revenues increased for the year ended December 31, 2019, compared to December 31, 2018, primarily due to an increase in MACI volume growth as well as continued growth in demand for Epicel grafts over the prior year.

Net revenues for the years ended December 31, 2020, 2019 and 2018 are shown below.

Year Ended December 31,

Seasonality. During 2020, the effects of the COVID-19 pandemic disrupted the normal seasonality of our MACI business.These effects included, among others, the temporary limitation of elective surgical procedures throughout the country, the

inability of our Clinical Account Specialists to call on surgeon customers and, webelieve, a reduction in the number of patients seeking treatment for cartilage damage.In the four years preceding 2020, ACI sales volumes from the first through the fourth quarter on average represented 19% (16%-24% range), 23% (21%-25% range), 22% (20%-23% range) and 36% (32%-38% range) respectively, of total annual volumes. MACI orders are consistently stronger in the fourth quarter due to several factors including insurance deductible limits and the time of year patients prefer to start rehabilitation. Due to COVID-19 the seasonality in 2020 did not follow a historical patterns, and seasonality in 2021 could be impacted by COVID-19 related factors, as well. Due to the low incidence and variable occurrence of severe burns, Epicel revenue has inherent variability from quarter-to-quarter and does not exhibit significant seasonality. Over the past four years, Epicel revenue in a single quarter has ranged from as high as 38% to as low as 18% of annual revenue.

Gross Profit and Gross Profit Ratio

Year Ended December 31,

Gross profit increased for the year ended December 31, 2020, compared to 2019, as well as for the year ended December 31, 2019, compared to 2018, primarily due to an increase in MACI and Epicel sales combined with our highly fixed manufacturing cost structure which consists mainly of labor and facility costs that do not materially fluctuate with volume increases. The gross profit increase for the year ended December 31, 2020 also includes the impact of the NexoBrid revenue.

Gross profit percentage decreased for the year ended December 31, 2020, compared to 2019, as a result of a reduction in sales in the second quarter of 2020 due to COVID-19 related restrictions on elective surgeries. Due to our highly fixed manufacturing cost structure, we incurred labor and facility costs during a period of little production which decreased the year to date percentage. The increase in gross profit for the year ended December 31, 2019, compared to 2018, was the result of a large increase in revenue as noted above.

Research and Development Costs

Year Ended December 31,

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

Year Ended December 31,

Research and development expenses for the year ended December 31, 2020 were $13.0 million, compared to $30.4 million, for the year ended December 31, 2019. The decrease in research and development costs during the year ended December 31, 2020 is due primarily to the $17.5 million upfront payment to MediWound for the North American rights to NexoBrid made in 2019.

Research and development expenses for the year ended December 31, 2019 were $30.4 million, compared to $13.6 million for the year ended December 31, 2018. The increase is due primarily to the $17.5 million upfront payment to MediWound for the North American rights to NexoBrid, which was partially offset by costs related to the ongoing MACI pediatric trial which decreased compared to the same period a year ago.

Selling, General and Administrative Costs

Year Ended December 31,

Selling, general and administrative expenses for the years ended December 31, 2020 and 2019 increased to $68.8 million from $61.1 million, respectively. The increase in selling, general and administrative expenses in 2020 is primarily due to a $4.4 million increase in MACI sales force expenses, $1.2 million of incremental third-party patient reimbursement support services, a $1.2 million increase in stock-based compensation expenses and $0.9 million increase in Epicel sales force expense.

Selling, general and administrative expenses for the years ended December 31, 2019 and 2018 increased to $61.1 million from $49.0 million, respectively. The increase in selling, general and administrative expenses in 2019 is due primarily to a $4.2 million increase in stock-based compensation expenses, an incremental $2.6 million in MACI sales force expenses driven by the expansion in the second quarter of 2019, a $2.4 million increase in marketing expenses and a $1.8 million increase in patient reimbursement support services.

Other Income (Expense)

Year Ended December 31,

Increase in fair value of warrants $ — $ — $ (2,524)

Loss on extinguishment of debt — — (838)

Interest expense (6) (8) (1,732)

The change in other income and expense for the year ended December 31, 2020 compared to 2019, is due primarily to a drop in interest income due to an overall decrease in market yield related to our short and long-term investments.

The change in other income and expense for the year ended December 31, 2019, compared to 2018, is due primarily to interest income as a result of our investments in various marketable debt securities. The other income and expense in 2018 relate to the increase in our stock price in 2018 resulting in an increase in the fair value of warrants and interest expense related to the then outstanding term loan. For the year ended December 31, 2019, we did not incur interest expense as the term loan was repaid in December 2018 and we did not experience a change in warrant value due to the expiration of the liability classified warrants in 2018.

Tax Provision

For the year-ended December 31, 2020, we recorded income tax expense of $0.2 million as a result of taxable income in certain states where the net operating loss carryforwards and related deferred tax assets have been fully utilized. We did not have material income tax expense in prior periods.

Stock Compensation

Non-cash stock-based compensation expense included in cost of goods sold, research and development expenses and selling, general and administrative expenses is summarized in the following table:

Years Ended December 31,

Total non-cash stock-based compensation expense $ 13,843 $ 13,179 $ 7,223

The increase in stock-based compensation expense is due primarily to fluctuations in stock prices which impacts the fair value of the options and restricted stock units awarded and the expense recognized in the period.

Liquidity and Capital Resources

Since our acquisition in 2014 of MACI, Epicel and Carticel, our primary focus has been to invest in our existing commercial business with the goal of growing revenue. We have raised significant funds in order to complete our product development programs and to market and commercialize our products including NexoBrid. To date, we have financed our operations primarily through cash received through Epicel and MACI sales, debt and public and private sales of our equity securities. Despite the effects of the COVID-19 pandemic, we generated $17.6 million in operating cash flows during 2020 and we may continue to finance our commercial business operations through the sales of equity securities.

Cash Flows

The following table summarizes our sources and uses of cash for each of the periods presented:

Year Ended December 31,

Cash provided by (used for) operating activities $ 17,572 $ (7,183)

Cash provided by (used for) investment activities (17,160) 10,615

Cash provided by financing activities 6,441 5,260

Net increase in cash, cash equivalents and restricted cash $ 6,853 $ 8,692

Our cash and cash equivalents totaled $33.6 million, short-term investments totaled $42.2 million and long-term investments totaled $24.1 million as of December 31, 2020. The $17.6 million of cash generated by operations was the result of a $2.9 million net income, additional noncash charges including $13.8 million in stock compensation expense, $4.4 million in operating lease amortization and $2.4 million in depreciation and amortization expense. Working capital requirements increased due to a $2.3 million increase in accounts receivable and a $2.5 million increase in inventory, as a result of an increase in sales volume, slightly offset by $3.3 million in accrued expenses.

Our cash and cash equivalents totaled $26.9 million, short-term investments totaled $42.8 million and long-term investments totaled $9.2 million at December 31, 2019. The $7.2 million of cash used for operations was the result of an $9.7 million net loss which included a cash outflow of $17.5 million to MediWound for the upfront payment for the NexoBrid license, offset by noncash charges including $13.2 million in stock compensation expense, $2.8 million in operating lease amortization and $1.7 million in depreciation and amortization expense. Working capital requirements increased due to a $8.7 million increase in accounts receivable and a $3.3 million increase in inventory, as a result of the increase in sales volume, slightly offset by $1.0 million in accrued expenses related to timing of payments.

The change in cash used for investing activities in 2020 is the result of $63.1 million in investments purchases, respectively, offset by $48.5 million of investment sales and maturities and property plant and equipment purchases of $2.6 million primarily for manufacturing upgrades and leasehold improvements through December 31, 2020. The change in cash used for investing activities in 2019 is the result of $72.3 million in investments purchases offset by $85.6 million of sales and maturities and property plant and equipment purchases of $2.6 million, primarily for manufacturing upgrades and leasehold improvements through December 31, 2019.

The change in cash provided from financing activities is the result of net proceeds from the exercise of stock options of $6.6 million through December 31, 2020. The change in cash provided from financing activities during the year ended December 31, 2019 compared to the prior period is primarily the result of net proceeds from the exercise of stock options of $5.3 million through December 31, 2019.

We believe that our current cash on hand, cash equivalents and investments will be sufficient to support our current operations through at least 12 months from the issuance of the consolidated financial statements included in this Annual Report on Form 10-K. However, the continuing effects of the COVID-19 pandemic continue to evolve and may result in irrecoverable losses from customers.

If revenues decline for a sustained period, we may need to access additional capital; however, we may not be able to obtain financing on acceptable terms or at all. Market volatility resulting from the COVID-19 pandemic or other factors could also adversely impact our ability to access financing as and when needed. The terms of any financing may adversely affect the holdings or the rights of our shareholders. Actual cash requirements may differ from projections and will depend on many factors, including the ultimate duration of the effects of the COVID-19 pandemic, the level of future research and development, the scope and results of ongoing and potential clinical trials, the costs involved in filing, prosecuting and enforcing patents, the need for additional manufacturing capacity, competing technological and market developments, costs of possible acquisition or development of complementary business activities, and the cost to market our products.

Contractual Obligations

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

In October 2020, we amended our current lease in Cambridge to, among other provisions, extend the term until February 2032. Under the amendment, the landlord will contribute $4.3 million toward the cost of tenant improvements. The previous contributions toward the cost of tenant improvements was recorded as part of the operating lease assets under the leasing guidance, on our consolidated balance sheet.

Our purchase commitments consist of minimum purchase amounts of materials used in our cell manufacturing process to manufacture our marketed cell therapy products. Future minimum payments related to our contractual obligations are as follows:

Payments Due by Period

Critical Accounting Policies and Estimates

The preparation of our Consolidated Financial Statements in accordance with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that could materially impact the Consolidated Financial Statements and disclosures based on varying assumptions. We believe our estimates and assumptions are reasonable; however, actual results and the timing of the recognition of such amounts could differ from these estimates.

The following is a list of accounting policies that are most significant to the portrayal of our financial condition and results of operations and/or that require management’s most difficult, subjective or complex judgments.

Revenue Recognition and Net Product Sales — Revenue from sales to a customer (distributor, hospital or other party) is recognized in accordance with ASC 606, Revenue Recognition, which was adopted January 1, 2018. We recognize product revenue from sales to a customer (distributor or hospital) following the five step model in ASC 606: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) we satisfy the

performance obligation. Under this revenue standard, we recognize revenue when our customer obtains control of the promised goods, in an amount that reflects the consideration which we expect to receive in exchange for those goods.

MACI Implants

We have engaged a third-party services provider to provide the patient support program to manage patient cases and to ensure complete and accurate billing information is provided to the insurers and hospitals, to facilitate reimbursement.

Prior authorization and confirmation of coverage level by the patient’s private insurance plan, hospital or government payer is a prerequisite to the shipment of product to a patient. We recognize product revenues from sales of all MACI implants upon delivery at which time the customer obtains control of the implant and the claim is billable. The total consideration which we expect to collect in exchange for MACI implants (the transaction price) may be fixed or variable. Direct sales to hospitals or distributors are recorded at a contracted price, there are typically no forms of variable consideration.

When we sell MACI the patient is responsible for payment; however, we are typically reimbursed by a third-party insurer or government payer, subject to a patient co-pay amount. Reimbursements from third-party insurers and government payers vary by patient and payer and are based on either contracted rates, publicly available rates or a fee schedule. Net product revenue is recognized net of estimated contractual allowances, which considers historical collection experience from both the payer and patient, denial rates and the terms of our contractual arrangements. We estimate expected collections for these transactions using the portfolio approach. We record a reduction to revenue at the time of sale for the estimate of the amount of consideration that will not be collected. In addition, potential credit risk exposure has been evaluated for our accounts receivable in accordance with ASC 326, Financial Instruments - Credit Losses. We assess risk and determine a loss percentage by pooling account receivables based on similar risk characteristics. The loss percentage is calculated through the use of forecasts that are based on current and historical economic and financial information.

Changes in estimates of the transaction price are recorded through revenue in the period in which such change occurs.

Leases — We primarily enter into lease agreements for manufacturing and office space, warehouses space, vehicle and computer equipment. The leases have varying terms, some of which may include options to extend. We determine if an arrangement is a lease at contract inception. Certain of our lease agreements include lease payments that are adjusted periodically for an index or rate. The leases are initially measured using the present value of the projected payments adjusted for the index or rate in effect at the commencement date such as an estimated incremental borrowing rate. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. All operating lease commitments with a lease term greater than 12 months are recognized as right to use (ROU) assets and liabilities, on a discounted basis on the balance sheet.

ROU assets represent our right to control the use of an explicitly or implicitly identified fixed asset for a period of time and lease liabilities represent our obligation to make lease payments arising from the lease. Control of an underlying asset is conveyed to us if we obtain the rights to direct the use of and to obtain substantially all of the economic benefits from using the underlying asset.

Lease payments included in the measurement of the lease liability are comprised of fixed payments. Our leases contain non-lease components and activities that do not transfer a good or service to us which were not considered to be components of the contract and therefore were not included in the net ROU assets or lease liabilities.

The lease term for all of our leases include the non-cancellable period of the lease plus any additional periods covered by either an option to extend (or not to terminate) the lease that is reasonably certain to exercise, or an option to extend (or not to terminate) the lease controlled by the lessor.

Stock-Based Compensation — The accounting for stock-based compensation requires us to determine the fair value of common stock issued in the form of stock option awards and restricted stock units. The fair value of restricted stock units held by the employees is determined based on the fair value of our common stock on the date of the grant. We use the value of our common stock at the date of the grant in the calculation of the fair value of our share-based awards. The fair value of stock options held by our employees is determined using a Black-Scholes option valuation method, which is a valuation technique that is acceptable for share-based payment accounting. Key assumptions in determining fair value include volatility, risk-free interest rate, dividend yield and expected term. The assumptions used in calculating the fair value of stock options represent our best estimates; however, these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and different assumptions are used, the stock-based compensation expense could be materially different in the future. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those stock

options expected to vest over the service period. We estimate the forfeiture rate considering the historical experience of our stock-based awards. If the actual forfeiture rate is different from the estimate, we adjust the expense accordingly.

Tax Valuation Allowance — A valuation allowance is recorded if it is more likely than not that a deferred tax asset will not be realized. We provided a full valuation allowance on our deferred tax assets that primarily consist of cumulative federal net operating losses. Due to our three year cumulative loss position and history of operating losses prior to the year-ended December 31, 2020, a full valuation allowance against our net deferred tax assets was considered necessary. We will continue to monitor our cumulative loss position and forecasts and reevaluate the need for a valuation allowance as it could be reversed in future periods.

The summary of significant accounting policies should be read in conjunction with our Consolidated Financial Statements and related notes and this discussion of our results of operations.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a material effect on our financial condition.

Recent Accounting Pronouncements

See note 3 to the Consolidated Financial Statements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

During the year ended December 31, 2020, we purchased marketable debt securities, which are classified as available-for-sale and carried at fair value in the accompanying consolidated balance sheet included in this Annual Report on Form 10-K. The fair value of our cash equivalents and marketable securities is subject to changes in market interest rates. Our earnings and cash flows are subject to fluctuations due to changes in interest rates, principally in connection with our investments in marketable debt securities. We do not believe we are materially exposed to changes in interest rates related to our investments, and we do not currently use interest rate derivative instruments or hedging transactions to manage exposure to interest rate changes of our investments. We estimate that a 100 basis point, or 1%, unfavorable change in interest rates would have resulted in approximately a $0.5 million and $0.3 million decrease in the fair value of our investment portfolio as of December 31, 2020 and 2019, respectively.

We have evaluated the potential credit risk exposure for our accounts receivable and available-for sale investment securities in accordance with ASC 326, Financial Instruments - Credit Losses. See note 4 and note 8, for further discussion.

We operate in the United States only. We are primarily exposed to foreign exchange risk with respect to recognized assets and liabilities due to vendors in countries outside the United States which are typically paid in Euro. We do not enter into hedging transactions and do not purchase derivative instruments.

Item 8. Consolidated Financial Statements and Supplementary Data

Page

Report of Independent Registered Public Accounting Firm 69

Consolidated Balance Sheets as of December 31, 2020 and 2019 71

Consolidated Statements of Comprehensive Loss 73

Notes to Consolidated Financial Statements 76

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Vericel Corporation

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Vericel Corporation and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations, comprehensive income (loss), shareholders' equity and cash flows for each of the three years in the period ended December 31, 2020, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Change in Accounting Principle

As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.

Basis for Opinions

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidatedfinancial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Contractual allowances related to MACI sales subject to third party reimbursement

As described in Note 4 to the consolidated financial statements, when the Company sells MACI to patients, the Company records a reduction of revenue at the time of sale for its estimate of the amount of consideration that will not be collected. As of December 31, 2020, the allowance for this uncollectible consideration was $5.3 million. When the Company sells MACI the patient is responsible for payment, however, the Company is typically reimbursed by a third-party insurer or government payer, subject to a patient co-pay amount. Reimbursements from third-party insurers and government payers vary by patient and payer and are based on either contracted rates, publicly available rates, fee schedules or past payer precedents. Net product revenue is recognized net of estimated contractual allowances, which considers historical collection experience from both the payer and patient, denial rates and the terms of the Company’s contractual arrangements.

The principal considerations for our determination that performing procedures relating to contractual allowances related to MACI sales subject to third party reimbursement is a critical audit matter are the significant judgment by management due to the measurement uncertainty involved in developing the estimated contractual allowances, as these estimates are based on assumptions developed using historical collection experience from the payer and current contractual arrangement terms, which in turn led to a high degree of auditor judgment, effort and subjectivity in applying procedures to these assumptions and evaluating audit evidence related to these assumptions.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to revenue recognition, including controls relating to MACI sales subject to third party reimbursement and over the assumptions used to estimate the contractual allowance. These procedures alsoincluded, among others, (i) testing management’s process and methodology for determining the contractual allowances; (ii) performing an analysis of the past collection history by payer; and (iii) assessing the reasonableness of management’s contractual allowances. Evaluating the reasonableness of management’s contractual allowances involved assessing management’s ability to reasonably estimate the contractual allowance by performing a comparison of the estimated transaction price to actual consideration received, contracted rates, publicly available rates or government fee schedules.

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts

February 24, 2021

We have served as the Company’s auditor since at least 1996, which is when the Company became subject to SEC reporting requirements. We have not been able to determine the specific year we began serving as auditor of the Company.

VERICEL CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands)

December 31,

ASSETS

Current assets:

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Current portion of operating lease liabilities 4,394 5,461

Other liabilities 41 41

Other long-term liabilities 76 110

COMMITMENTS AND CONTINGENCIES

Shareholders’ equity:

Accumulated other comprehensive income 14 21

Total liabilities and shareholders’ equity $ 205,608 $ 153,238

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

VERICEL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

Year Ended December 31,

Other revenue 2,211 — —

Other income (expense):

Increase in fair value of warrants — — (2,524)

Loss on extinguishment of debt — — (838)

Interest expense (6) (8) (1,732)

Tax provision 180 — —

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

VERICEL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

Year Ended December 31,

Other comprehensive income (loss):

Unrealized gain (loss) on investments (7) 60 (39)

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

VERICEL CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands)

Shares Amount Amount Gain (loss) Deficit Equity

Shares issued under the Employee Stock Purchase Plan 106 656 656

Unrealized loss on investments (39) (39)

Shares issued under the Employee Stock Purchase Plan 69 932 932

Exercise of warrants resulting in issuance of common stock 20 104 (104) —

Unrealized gain on investments 60 60

Shares issued under the Employee Stock Purchase Plan 117 1,050 1,050

Issuance of stock for restricted stock unit vesting 47 —

Restricted stock withheld for employee taxes (14) (163) (163)

Unrealized loss on investments (7) (7)

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

VERICEL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Year Ended December 31,

Operating activities:

Change in fair value of warrants — — 2,524

Loss on extinguishment of debt — — 838

Foreign currency translation loss 63 42 51

Loss on sale of fixed assets 30 — 22

Amortization of premiums and discounts on marketable securities 318 (610) (327)

Changes in operating assets and liabilities:

Operating lease liabilities (3,951) (2,512) —

Other non-current assets and liabilities, net 15 (64) (208)

Net cash provided by (used for) operating activities 17,572 (7,183) (412)

Investing activities:

Expenditures for property, plant and equipment (2,626) (2,616) (2,678)

Net cash provided by (used for) investing activities (17,160) 10,615 (67,027)

Financing activities:

Net proceeds from equity offering — — 70,028

Proceeds from exercise of warrants — — 2,716

Payments on long-term debt — — (17,532)

Fee on long-term debt — — (710)

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

VERICEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.Organization

Vericel Corporation, a Michigan corporation (together with its consolidated subsidiaries referred to herein as the Company, or Vericel), was incorporated in March 1989 and began employee-based operations in 1991. The Company is a fully-integrated, commercial-stage biopharmaceutical company and is a leader in advanced therapies for the sports medicine and severe burn care markets. Vericel currently markets two cell therapy products in the United States, MACI® and Epicel®.

MACI (autologous cultured chondrocytes on porcine collagen membrane) is an autologous cellularized scaffold product indicated for the repair of symptomatic, single or multiple full-thickness cartilage defects of the knee with or without bone involvement in adults. Epicel (cultured epidermal autografts) is a permanent skin replacement for the treatment of adult and pediatric patients with deep-dermal or full-thickness burns comprising greater than or equal to 30 percent of total body surface area (TBSA). The Company also holds an exclusive license from MediWound Ltd. (MediWound) for North American rights to NexoBrid®, a registration-stage biological orphan product for debridement of severe thermal burns. The Company operates its business primarily in the U.S. in one reportable segment — the research, product development, manufacture and distribution of cellular therapies for use in the treatment of specific diseases.

COVID-19

Throughout 2020, the pandemic caused by the spread of a novel strain of coronavirus (COVID-19) has created significant disruptions to the U.S. and global economy and has contributed to significant volatility in financial markets. The global impact of the outbreak is continually evolving and, as the virus spreads and infection rates surge in various locations, many state, local and national governments – including those in Massachusetts and Michigan, where the Company's operations are located – have responded by issuing, extending and supplementing orders requiring quarantines, restrictions on travel, and the mandatory closure of certain non-essential businesses, among other actions. In the U.S., the status and application of these orders have varied on a state-by-state basis since the early days of the pandemic. Many of the restrictions have been periodically updated as infections rates in the U.S. have risen and fallen and as world health leaders learn more about the virus, its transmission pathway and who is most at risk. Because Vericel is deemed an essential business, the Company has been exempted from government orders requiring the closure of workplaces and the cessation of business operations, as they have existed from time-to-time during the pandemic.

Notwithstanding being an essential business, the Company’s business and operations have been adversely impacted by the effects of COVID-19. In mid-March, the American College of Surgeons and United States Surgeon General recommended that each hospital, health system, and surgeon minimize, postpone, or cancel electively scheduled surgeries. These recommendations were followed by numerous state level executive orders either restricting or partially restricting elective surgeries. Because MACI is an elective surgical procedure, as a result of these restrictions, beginning in mid-March 2020, the Company began to experience a significant increase in cancellations of scheduled MACI procedures as well as a slowdown in new MACI orders. The widespread suspension of elective procedures impacted the Company’s business and operations during the first and second quarters of 2020. These restrictions began to ease in May and, by the end of September 2020, there were no state orders in place that directly impacted a surgeon’s or patient’s ability to move forward with a MACI surgery. However, in late September and October 2020, the number of COVID-19 infections began to increase markedly in various geographies and by late December 2020 the rolling seven-day average of new daily coronavirus cases in the United States reached the highest level at any point during the pandemic. Because Epicel is used almost exclusively in the emergent setting by burn centers and surgeons throughout the country, Epicel revenue and procedure volumes have been less affected by the pandemic. Although hospitals are now better prepared for a subsequent surge in COVID-19 patients, the risk remains that regional or local restrictions could again be placed on the performance of elective surgical procedures if the number of COVID-19 infections in the United States continues to rise.

At the outset of the pandemic, the Company put in place a comprehensive workplace protection plan, which institutes protective measures in response to COVID-19. These measures include mandatory employee training on social distancing and hygiene protocols, conducting daily health screenings of all employees, vendors and visitors entering our facilities, canceling all international business travel, limiting domestic business travel to essential purposes, requesting that employees limit non-essential personal travel, enhancing our facilities’ janitorial and sanitary procedures, making certain physical modifications and enhancements to our facilities to enable effective social distancing among employees, providing certain personal protective equipment to employees working in our offices, encouraging employees to work from home to the extent their job function

enables them to do so, limiting third-party access to the Company’s facilities, encouraging the use of virtual employee meetings, modifying the manner and schedule of on-site production activities, and providing guidance to our field-based commercial teams concerning their communications and contact with customers and healthcare professionals. In addition, we put certain expense reduction measures in place including a reduction of discretionary spending. The Company is reviewing these measures regularly as the pandemic evolves and may take additional actions to the extent required.

The accompanying Consolidated Financial Statements have been prepared on a basis which assumes that the Company will continue as a going concern and contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. As of December 31, 2020, the Company had an accumulated deficit of $375.8 million and had net income of $2.9 million for the year ended December 31, 2020. The Company had cash and cash equivalents of $33.6 million and investments of $66.3 million as of December 31, 2020. The Company expects that cash from the sales of our products and existing cash, cash equivalents and investments will be sufficient to support the Company’s current operations through at least 12 months from the issuance of the Consolidated Financial Statements. However, the effects of the COVID-19 pandemic continue to evolve and may result in irrecoverable losses of customers and significantly impact long-term liquidity requiring the Company to engage in layoffs, furloughs and/or reductions in salaries. To the extent the United States experiences a resurgence in COVID-19 infections and elective surgery restrictions are reinstated on a widespread basis and significantly impact the Company’s business, the Company may need to access additional capital; however, the Company may not be able to obtain financing on acceptable terms or at all, particularly in light of the impact of COVID-19 on the global economy and financial markets. The terms of any financing may adversely affect the holdings or the rights of the Company’s shareholders.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The Consolidated Financial Statements include the accounts of Vericel and its wholly-owned subsidiaries, Vericel Denmark ApS, in Kastrup, Demark and Vericel Security Corporation (collectively, the Company). All inter-company transactions and accounts have been eliminated in consolidation. Vericel Denmark ApS ceased operations in 2015.

Use of Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of expenses during the reported period. The Company is monitoring the potential impact of the COVID-19 pandemic on its business and financial statements. The Company is not aware of any specific event or circumstance that would require an update to its estimates or judgments reflected in these financial statements or a revision of the carrying value of its assets or liabilities as of the issuance of these financial statements. These estimates may change as new events occur and additional information is obtained. Actual results could differ from those estimates.

Consolidated Statement of Cash Flows

The following table presents certain supplementary cash flows information for the years ended December 31, 2020, 2019 and 2018:

Year Ended December 31,

Supplementary Cash Flows information:

Non-cash information:

Warrants exercised for common stock $ — $ 104 $ 3,538

Right-of-use asset and lease liability recognized 29,573 2,599 —

Additions to property and equipment included in accounts payable 531 217 606

Cash information:

Interest paid (net of interest capitalized) $ 6 $ 8 $ 2,230

Year Ended December 31,

Restricted cash, included in other long-term assets 211 89 —

Cash Equivalents

Cash equivalents consist of short-term, highly liquid investments with original maturities of three months or less from the date of purchase and consist primarily of demand deposits, money market funds, overnight repurchase agreements and short duration agency bonds and commercial paper.

Restricted cash

Amounts included in restricted cash represent those required to be set aside to meet contractual terms of a lease agreement held by the Company.

Investments

Investments classified as short-term have maturities of less than one year. Investments classified as long-term are those that: (i) have a maturity of greater than one year, and (ii) we do not intend to liquidate within the next twelve months, although these funds are available for use and, therefore, are classified as available-for-sale. The Company’s investment strategy is to buy short-duration marketable securities with a high credit rating. As of December 31, 2020 and 2019, all marketable securities held by the Company had remaining contractual maturities of three years or less.

Unrealized gains are included as a component of accumulated other comprehensive income in the consolidated balance sheets and statements of stockholders’ equity and a component of total comprehensive income (loss) in the consolidated statements of comprehensive income (loss), until realized. Unrealized losses are evaluated for impairment under ASC 326, Financial Instruments - Credit Losses, to determine if the impairment is credit-related or non credit-related. Credit-related impairment is recognized as an allowance on the balance sheet with a corresponding adjustment to earnings, and non credit-related impairment is recognized in other comprehensive income (loss), net of taxes.

Inventory

Inventories are measured at the lower of cost or net realizable value. Cost is calculated based upon standard-cost which approximates costs determined on the first-in, first-out method. The Company periodically reviews its inventories for excess or obsolescence and writes down obsolete or other unmarketable inventory to its estimated net realizable value. If the actual net realizable value is less than that estimated by the Company, or if it is determined that inventory utilization will further diminish based on estimates of demand, additional inventory write-downs may be required. In all cases, product inventory is carried at the lower of cost or its estimated net realizable value. Amounts written down are charged to cost of sales.

Leases

The Company adopted the new leasing standards using the modified retrospective transition approach, as of January 1, 2019, with no restatement of prior periods. Upon adoption all operating lease commitments with a lease term greater than 12 months that were previously assessed under the prior lease guidance, were recognized as right-of-use assets and liabilities, on a discounted basis on the balance sheet. Leases with an initial term of 12 months or less are not recorded on the balance sheet.

Certain lease agreements include rental payments that are adjusted periodically for inflation or other variables. The leases are initially measured using the projected payments adjusted for the index or rate in effect at the commencement date. In addition to rent, the leases may require the Company to pay additional amounts for taxes, insurance, maintenance and other expenses, which are generally referred to as non-lease components. Variable non-lease components are not measured as part of the right-of-use asset and liability. Only when lease components and their associated non-lease components are fixed are they accounted for as a single lease component and are recognized as part of a right-of-use asset and liability.

Some leases contain clauses for renewal at the Company’s option with renewal terms that generally extend the lease term from 1 to 5 years. Certain lease agreements contain options to purchase the leased property and options to terminate the lease. Payments to be made in option periods are recognized as part of the right-of-use lease assets and lease liabilities when it is reasonably certain that the option to extend the lease will be exercised or the option to terminate the lease will not be exercised, or is not at the Company’s option. The Company determines whether the reasonably certain threshold is met by considering contract-, asset-, market-, and entity-based factors.

A portfolio approach is applied to certain lease contracts with similar characteristics. The Company’s lease agreements do not contain any significant residual value guarantees or material restrictive covenants imposed by the leases.

Accounts Receivable

Accounts receivable are initially recorded at the contractual amount owed by the customer or based on expected payments from the insurance provider, hospital or patient. Allowances for doubtful accounts are established when the facts and circumstances indicate that a receivable may not be collectible. Potential credit risk exposure has been evaluated for the Company’s accounts receivable in accordance with ASC 326, Financial Instruments - Credit Losses.The Company assesses risk and determines a loss percentage by pooling account receivables based on similar risk characteristics. The loss percentage is calculated through the use of forecasts that are based on current and historical economic and financial information.

Property, Plant and Equipment

Property, plant and equipment are initially measured and recognized at acquisition cost, including any directly attributable cost of preparing the asset for its intended use or, in the case of assets acquired in a business combination, at fair value as at the date of the combination. After initial measurement, property, plant and equipment are carried at cost less accumulated depreciation and impairment. Repair and maintenance costs of property, plant and equipment are expensed as incurred.

The depreciable value of property, plant and equipment, net of any residual value, is depreciated on a straight line basis over the useful life of the asset. The useful life of an asset is usually equivalent to its economic life. The useful lives of property, plant and equipment are as follows:

•Machinery and Equipment: 5 years

•Furniture, fixtures, and office equipment: 3 to 5 years

•Computer equipment and software: 3 years

•Building improvements and leasehold improvements: Shorter of the remaining life of the lease or 10 years

The costs of assets retired or otherwise disposed of and the accumulated depreciation thereon are removed from the accounts, with any gain or loss realized upon sale or disposal credited or charged to operations.

Revenue Recognition and Net Product Sales

MACI, MACI Biopsy Kits, Epicel and NexoBrid

The Company recognizes product revenue from sales to a customer (whether a distributor, or hospital ) following the five step model in ASC 606: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) the Company satisfies the performance obligation. Under this revenue standard, the Company recognizes revenue when its customer obtains control of the promised goods, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods. There are no contractual rights of returns, refunds or similar obligations related to MACI, kits, Epicel or NexoBrid as of December 31, 2020; however, in certain limited cases the Company will accept a product return if a surgery is canceled. Revenue is not recognized in certain canceled cases.

For MACI, MACI kits and Epicel there are no variable pricing arrangements related to warranties or rebates offered to customers. The majority of orders are due within 60 to 90 days of delivery. Shipping and handling fees are included as a component of revenue. The Company recognizes any commission fees as an expense when incurred. These fees are included in selling, general, and administrative expenses.

NexoBrid

The U.S. Biomedical Advanced Research and Development Authority (BARDA) has committed to procure NexoBrid from MediWound, under which MediWound will manufacture and supply NexoBrid on a unit price basis, which may be increased pursuant to the terms of the agreement. The Company does not hold a direct contract or distribution agreement with BARDA, or take title to the product. The Company recognizes income from sales of NexoBrid to BARDA upon delivery, at which time BARDA is in control of the product. The Company does not control the specified goods or services before they are transferred to the customer. MediWound has promised to provide the goods to BARDA and has completed all significant compliance aspects of being a contractor for BARDA and continue to be responsible for all compliance. The Company records the NexoBrid revenue based on a specified percentage of the gross profit MediWound recognizes on the sale in accordance with the license agreement.

Research and Development Expense

Research and development activities represent a significant part of the Company’s business. These expenditures relate to the development of new products, improvement of existing products, technical support of products and compliance with governmental regulations for the protection of consumers and patients. Research and development expenses are expensed as incurred.

Stock-Based Compensation

The Company’s accounting for stock-based compensation requires it to determine the fair value of common stock issued in the form of stock option awards and restricted stock units. The Company uses the value of its common stock at the date of the grant in the calculation of the fair value of its share-based awards. The fair value of restricted stock units held by the employees is determined based on the fair value of the Company’s common stock on the date of the grant. The fair value of stock options held by the employees is determined using a Black-Scholes option valuation method, which is a valuation technique that is acceptable for share-based payment accounting. Key assumptions in determining fair value include volatility, risk-free interest rate, dividend yield and expected term. The assumptions used in calculating the fair value of stock options represent the Company’s best estimates; however, these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and different assumptions are used, the stock-based compensation expense could be materially different in the future. In addition, the Company estimates the expected forfeiture rate and only recognize expense for those stock options expected to vest over the service period. The estimated forfeiture rate considers the historical experience of the Company’s stock-based awards. If the actual forfeiture rate is different from the estimate, expense is adjusted accordingly. For certain non-employee consultants, stock option awards continue to vest post-termination.

The Company also has an Employee Stock Purchase Plan (ESPP) which is a compensatory plan. Compensation expense is recorded based on the fair value of the purchase options at the grant date, which corresponds to the first day of each purchase period, and is amortized over the purchase period.

Comprehensive Loss

Comprehensive loss is the change in stockholders’ equity during a period arising from any gain or loss unrealized related to the Company’s investments.

Income Taxes

Deferred tax assets are recognized for deductible temporary differences and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized based on the weight of available evidence, that a portion or all of the deferred tax assets will not be realized. When evaluating the realizability of the deferred tax assets, all evidence, both positive and negative, is considered. Items considered when evaluating the need for a valuation allowance include the ability to carry back losses, future reversals of existing temporary differences, tax planning strategies, and expectations of future earnings.

The Company records uncertain tax positions in the consolidated financial statements only if it is more likely than not that the uncertain tax position will be sustained upon examination by the taxing authorities. The Company records interest and penalties related to uncertain tax positions in income tax expense.

Net Income (Loss) Per Share Attributable to Common Shareholders

Basic and diluted earnings (loss) per share is calculated using the two-class method. Basic earnings (loss) per share which is based on an earnings allocation formula that determines earnings (loss) per share for the holders of the Company’s common shares. There were no undeclared dividends for the year ended December 31, 2020 or 2019. Diluted earnings (loss) per share includes convertible securities or common equivalent share (stock options and warrants) in addition to the Company’s common shares. Common equivalent shares and treasury stock are not included in the diluted per share calculation where the effect of their inclusion would be anti-dilutive.

Financial Instruments

The Company’s financial instruments include receivables for which the current carrying amounts approximate market value, based upon their short-term nature and marketable debt securities which are classified as available-for-sale and carried at fair value on a settlement date basis.

Warrants

Warrants that could be cash settled or have anti-dilution price protection provisions are recorded as liabilities at their estimated fair value at the date of issuance, with subsequent changes in estimated fair value recorded in other income (expense) in our statement of operations in each subsequent period. Warrants that meet the requirements for equity classification are recorded at fair value with no subsequent remeasurement. In general, warrants are measured using the Black-Scholes valuation model. The methodology is based, in part, upon inputs for which there is little or no observable market data, requiring the Company to develop its own assumptions. The assumptions used in calculating the estimated fair value of the warrants represent our best estimates; however, these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and different assumptions are used, the change in estimated fair value of the warrant liability for those warrants that could be cash settled or have anti-dilution price protection provisions, could be materially different. As of December 31, 2019 and 2020, there were no outstanding warrants.

3. Recent Accounting Pronouncements

Measuring Credit Losses on Financial Instruments

The FASB issued updated guidance on measuring credit losses on financial instruments. The guidance removes the thresholds that companies apply to measure credit losses on financial instruments measured at amortized cost, such as loans, receivables, and held-to-maturity debt securities. Prior to the updated guidance, credit losses were recognized when it was probable that the loss had been incurred. The revised guidance removes all recognition thresholds and requires companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that a company expected to collect over the instrument’s contractual life. The Accounting Standard Update (ASU) 2016-13, Financial Instruments-Credit Losses (Topic 326), became effective for the Company January 1, 2020. See note 4 and note 8 for further discussion.

Fair Value Measurement Disclosure

The FASB issued updated guidance through ASU 2018-13, Fair Value Measurement (Topic 820) Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The revised guidance created a more consistent disclosure framework that increased clarity and removed, modified and added certain fair value disclosures to improve the effectiveness of the Company’s disclosures in the notes of the Consolidated Financial Statements. This guidance became effective for the Company January 1, 2020 and had no impact on its Consolidated Financial Statements.

Simplifying the Accounting for Income Taxes

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (ASC 740). The ASU enhances and simplifies various aspects of the income tax accounting guidance in ASC 740, including requirements related to hybrid tax regimes, the tax basis step-up in goodwill obtained in a transaction that is not a business combination, separate financial statements of entities not subject to tax, the intra-period tax allocation exception to the incremental approach, ownership changes in investments, changes from a subsidiary to an equity method investment, interim-period accounting for enacted changes in tax law, and the year-to-date loss limitation in interim-period tax accounting. This guidance is effective for the Company for annual and interim periods beginning after December 31, 2020; however, early adoption is permitted. The Company is currently in the process of evaluating the impact on its Consolidated Financial Statements.

4. Revenue

Revenue Recognition and Net Product Sales

As disclosed in note 2, the Company recognizes product revenue from sales of MACI biopsy kits, MACI implants, Epicel grafts and other sources following the five-step model in Accounting Standards Codification 606, Revenue Recognition, (ASC 606).

MACI Biopsy Kits

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

MACI Implants

The Company contracts with two specialty pharmacies, Orsini Pharmaceutical Services, Inc. (Orsini) and AllCare Plus Pharmacy, Inc. (AllCare) to distribute MACI in a manner in which the Company retains the credit and collection risk from the end customer. The Company pays both specialty pharmacies a fee for each patient to whom MACI is dispensed. Both Orsini and AllCare perform collection activities to collect payment from customers. The Company has engaged a third-party to provide services in connection with a patient support program to manage patient cases and to ensure complete and correct billing information is provided to the insurers and hospitals. In addition, the Company also sells MACI directly to DMS Pharmaceutical (DMS) for military patients. The sales directly to DMS are made at a contracted rate.

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

When the Company sells MACI the patient is responsible for payment; however, the Company is typically reimbursed by a third-party insurer or government payer, subject to a patient co-pay amount. Reimbursements from third-party insurers and government payers vary by patient and payer and are based on either contracted rates, publicly available rates, fee schedules or past payer precedents. Net product revenue is recognized net of estimated contractual allowances, which considers historical collection experience from both the payer and patient, denial rates and the terms of the Company’s contractual arrangements. The Company estimates expected collections for these transactions using the portfolio approach. The Company records a reduction to revenue at the time of sale for its estimate of the amount of consideration that will not be collected. In addition, potential credit risk exposure has been evaluated for the Company’s accounts receivable in accordance with ASC 326, Financial Instruments - Credit Losses.The Company assesses risk and determines a loss percentage by pooling account receivables based on similar risk characteristics. The loss percentage is calculated through the use of forecasts that are based on current and historical economic and financial information. This loss percentage was applied to the accounts receivables as of December 31, 2020. The total allowance for uncollectible consideration was $5.3 million and $3.9 million as of December 31, 2020, and 2019, respectively. Changes to the estimate of the amount of consideration that will not be collected could have a material impact to the revenue recognized. A 0.5% change to the estimated uncollectible percentage could result in approximately a $0.3 million decrease or increase in the revenue recognized for the year ended December 31, 2020.

Changes in estimates of the transaction price are recorded through revenue in the period in which such change occurs. Changes in estimates related to prior period sales resulted in an increase to revenue of $0.7 million, increase of $0.7 million and decrease of $0.2 million for the years ended December 31, 2020, 2019, and 2018, respectively.

Epicel

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

NexoBrid

The Company entered into exclusive license and supply agreements with MediWound, under which MediWound will manufacture and supply NexoBrid on a unit price basis, which may be increased pursuant to the terms of the agreement. BARDA has committed to procure NexoBrid from MediWound and, as of December 31, 2020, the Company did not hold a direct contract or distribution agreement with BARDA, or take title to the product. The Company recognizes revenue based on a percentage of gross profits for sales of NexoBrid to BARDA upon delivery, at which time BARDA is in control of the product. For the year ended December 31, 2020, the first orders of NexoBrid were delivered and the Company recognized $2.2 million of revenue. See note 16 for further discussion of the NexoBrid license and supply agreements.

Revenue by Product and Customer

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

Year Ended December 31,

MACI and Carticel implants and kits

Implants sold direct subject to third-party reimbursement (d) 2,754 1,529 2,257

Change in estimates related to prior periods (e) 713 654 (182)

Epicel

NexoBrid (f) 2,211 — —

Concentration of Credit Risk

For the year ended December 31, 2018, MACI revenue concentration from its largest customer was 16%. The Company’s total revenue and accounts receivable balances for the years ended December 31, 2020 and 2019 from its largest customer of MACI and Epicel did not exceed 10%.

5. Selected Balance Sheet Components

Inventory

Inventory as of December 31, 2020 and 2019:

Property and Equipment

Property and Equipment, net as of December 31, 2020 and 2019:

Furniture, fixtures and office equipment 809 775

Computer equipment and software 6,846 6,174

Financing right-of-use lease 111 148

Less accumulated depreciation (11,386) (9,220)

Depreciation expense for the years ended December 31, 2020, 2019 and 2018 was $2.4 million, $1.7 million and $1.4 million, respectively.

Accrued Expenses

Accrued Expenses as of December 31, 2020 and 2019:

Bonus related compensation $ 5,721 $ 5,116

6. Debt

On December 19, 2018, the Company prepaid in full all outstanding indebtedness under, and terminated, the Loan and Security Agreement dated as of September 9, 2016, by and between the Company, Silicon Valley Bank as Agent and Silicon Valley Bank, MidCap Financial Trust, MidCap Funding III Trust and other lenders listed therein as lenders (SVB Loan Agreement), as amended December 30, 2016, May 9, 2017 and December 6, 2017, which termination was effective December 19, 2018. Warrants were issued to SVB and MidCap in conjunction with the modified debt agreement. On the date of termination, the Company paid in full $17.1 million in outstanding borrowings at the time of termination. In connection with the termination of the SVB Loan Agreement, the Company paid an additional prepayment premium of 1.5% in the amount of $0.2 million and a final payment of 3.6% in the amount of $0.5 million.

The prepayment of the debt in 2018 was accounted for as a debt extinguishment. The Company considered whether creditors remained the same or changed and whether the changes in debt terms were substantial. After performing the assessment in accordance with accounting guidance for the modification of debt arrangements the repayment of both the term loans and revolving credit agreement was accounted for as a debt extinguishment. As a result, the unamortized deferred financing costs, prepayment penalty and the accelerated payment of the final payment was recognized as a loss on extinguishment of debt of $0.8 million for the year ended December 31, 2018.

7. Leases

The Company leases facilities in Ann Arbor, Michigan and Cambridge, Massachusetts. The Ann Arbor facility includes office space, and the Cambridge facility includes clean rooms, laboratories for MACI and Epicel manufacturing and office space. The Company also leases offsite warehouse space, vehicles and computer equipment. Certain of the Company’s lease agreements include lease payments that are adjusted periodically for an index or rate. The leases are initially measured using the present value of the projected payments adjusted for the index or rate in effect at the commencement date. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. All operating lease commitments with a lease term greater than 12 months are recognized as right-of-use assets and liabilities, on a discounted basis on the balance sheet. Effective October 21, 2020 the Company entered into an agreement with one of its Cambridge, Massachusetts facility leases. The agreement extended the terms of the lease to expire on February 29, 2032, with monthly contractual lease payments ranging from $0.4 million to $0.6 million. The agreement also provides a tenant improvement allowance of approximately $4.3 million, available through December 31, 2023.

Leases with an initial term of 12 months or less are not recorded on the balance sheet and for the year ended December 31, 2020 and 2019, lease expense of less than $0.1 million was recorded related to short-term leases. The contribution toward the cost of tenant improvements is recorded as a reduction of the operating lease assets. For the years ended December 31, 2020, 2019, the Company recognized $6.3 million and $5.4 million, respectively, and in 2018 (under the prior leasing guidance) the Company recognized $5.2 million of operating lease expense. For the years ended December 31, 2020, 2019 and 2018, the Company recognized less than $0.1 million of financing lease expense. The Company’s leases contain non-lease components and activities that do not transfer a good or service to the Company. The Company elected not to combine lease and non-lease components and therefore non-lease costs were not included in the net lease assets or lease liabilities.

Total leased assets and liabilities classified on the balance sheet as of December 31, 2020 and 2019 are as follows:

December 31,

Assets

Finance Property and equipment, net 111 148

Liabilities

Current

Operating Current portion of operating lease liabilities $ 4,394 $ 5,461

Finance Other liabilities 41 41

Non-current

Operating Operating lease liabilities $ 48,789 $ 22,242

Finance Other long-term liabilities 76 110

Cash paid for amounts included in the measurement of the Company’s operating lease liabilities was $5.8 million and $5.0 million for the year ended December 31, 2020 and 2019, respectively.

Maturity of lease liabilities as of December 31, 2020 are as follows:

(In thousands) Operating Leases Finance Leases Total

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

The Company has options to renew lease terms for facilities and other assets. The exercise of lease renewal options is generally at the Company’s sole discretion. The Company evaluates renewal and termination options at the lease commencement date to determine if it is reasonably certain to exercise the option on the basis of economic factors. For certain leases, the Company’s exercise of the renewal option was determined to be probable and the renewal period was accordingly included in the lease term and related calculations. Lease terms and discount rates as of December 31, 2020 are as follows:

December 31,

Weighted-average remaining lease term (years)

Finance leases 2.5 3.5

Weighted-average discount rate

8. Cash Equivalents and Investments

Marketable debt securities held by the Company are classified as available-for-sale pursuant to ASC 320, Investments – Debt and Equity Securities, and carried at fair value in the balance sheets on a settlement date basis. The following tables summarize the gross unrealized gains and losses of the Company’s marketable securities as of December 31, 2020 and December 31, 2019:

Gross Unrealized

Amortized Cost Gains Losses Credit Losses Estimated Fair Value

Money market funds $ 3,698 $ — $ — $ — $ 3,698

U.S. government agency bonds 5,000 1 — — 5,001

U.S. asset-backed securities 3,534 4 — — 3,538

Classified as:

Cash equivalents $ 3,698

Short-term investments 42,187

Long-term investments 24,099

Gross Unrealized

(In thousands) Amortized Cost Gains Losses Estimated Fair Value

Money market funds $ 5,381 $ — $ — $ 5,381

Classified as:

Cash equivalents $ 5,381

Short-term investments 42,829

Long-term investments 9,247

As of December 31, 2020, the analysis under ASU 326 and the current macroeconomic impact of the COVID-19 pandemic did not result in material allowances for credit losses. There have been no impairments of the Company’s assets measured and carried at fair value as of December 31, 2020.

9.Stock-Based Compensation

Stock Option, Restricted Stock Units and Equity Incentive Plans

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

Options and restricted stock units granted to employees and non-employees under these plans expire no later than ten years from the date of grant. Options and restricted stock units generally become exercisable or vest over a four year period, under a graded-vesting methodology for stock options and annually on the anniversary grant date for restricted stock units, following the date of grant. The Company generally issues new shares upon the exercise of stock options or vesting of restricted stock units.

The Amended and Restated 2019 Omnibus Incentive Plan (2019 Plan) was approved on April 29, 2020 and provides incentives through the grant of stock options, stock appreciation rights, restricted stock awards and restricted stock units. The exercise price of stock options granted under the 2019 Plan shall not be less than the fair market value of the Company’s common stock on the date of grant. The 2019 Plan replaced the 1992 Stock Option Plan, the 2001 Stock Option Plan, the Amended and Restated 2004 Equity Incentive Plan, the 2009 Second Amended and Restated Omnibus Incentive Plan and the 2017 Omnibus Incentive Plan (Prior Plans), and no new grants have been granted under the Prior Plans after approval. However, the expiration or forfeiture of options previously granted under the Prior Plans will increase the number of shares available for issuance under the 2019 Plan.

As of December 31, 2020, there were 4,544,084 shares available for future grant under the 2019 Plan.

Employee Stock Purchase Plan

Employees are able to purchase stock under the ESPP. The ESPP allows for the issuance of an aggregate of 1,000,000 shares of common stock of which 708,452 have been issued since the inception of the benefit in 2015. Participation in this plan is available to substantially all employees. The ESPP is a compensatory plan accounted for under the expense recognition provisions of the share-based payment accounting standards. Compensation expense is recorded based on the fair market value of the purchase options at the grant date, which corresponds to the first day of each purchase period and is amortized over the purchase period. In January 2021, employees purchased 14,954 shares resulting in proceeds from the sale of common stock of $0.2 million under the ESPP for the fourth quarter of 2020. The total share-based compensation expense for the ESPP for the years ended December 31, 2020, 2019, and 2018 was approximately $0.4 million, $0.3 million, and $0.3 million, respectively.

Service-Based Stock Options

During the year ended December 31, 2020, the Company granted 1,356,540 service-based options to purchase common stock. The exercise price of the options is the fair market value per share of common stock on the grant date, generally vest over four years (other than 78,750 non-employee director options which vest over one year) and have a term of ten years. The weighted-average grant-date fair value of service-based options granted during the years ended December 31, 2020, 2019, and 2018 was $8.86, $12.62 and $6.96, respectively.

The net compensation costs recorded for the service-based stock options related to employees and directors (including the impact of forfeitures) for the years ended December 31, 2020, 2019, and 2018 were $12.1 million, $11.8 million and $6.9 million, respectively.

The fair value of each service-based stock option grant for the reported periods is estimated on the date of the grant using the Black-Scholes option-pricing model using the weighted-average assumptions noted in the following table:

Year Ended December 31,

Expected dividend rate —% —% —%

The following table summarizes the activity for service-based stock options for the indicated periods:

As of December 31, 2020, 4,949,912 shares are vested and expected to vest. As of December 31, 2020, there was approximately $13.1 million, of total unrecognized compensation cost related to non-vested service-based stock options granted under the 2019 Plan and the Prior Plans. That cost is expected to be recognized over a weighted-average period of 2.7 years.

The total intrinsic value of stock options exercised for the years ended December 31, 2020, 2019, and 2018 was $10.5 million, $16.1 million and $11.4 million, respectively.

Restricted Stock Units

The restricted stock units vest annually over four years in equal installments commencing on the first anniversary of the grant date (other than non-employee director options which vest over one year from the grant date). The Company issues new shares upon the vesting of restricted stock units. Restricted stock awards are recorded at fair value at the date of grant, which is based on the closing share price on the grant date. Compensation expense is recorded for restricted stock units that are expected to vest based on their fair value at the grant date and is amortized over the expected vesting period.

As restricted stock units vest, a portion of the shares awarded are withheld and net settled by the Company to cover employee tax obligations. As a result of 46,712 units vesting during the year ended December 31, 2020, 13,872 shares were withheld for payment of taxes on the employees’ behalf and retired from the 2019 Plan. No shares were withheld for payment of taxes on 10,500 of the vested units, as no shares are withheld at vesting for shares awarded to the Company’s Board of Directors.

The following table summarizes the activity for restricted stock awards for the indicated periods:

The total grant-date fair value of restricted stock units granted in the year ended December 31, 2020 and 2019 was $2.2 million and $3.3 million, respectively. The net compensation costs recorded for the service-based restricted stock units related to employees and directors (including the impact of forfeitures) for the year ended December 31, 2020, and 2019 was $1.4 million and $1.0 million, respectively.

At December 31, 2020 and 2019, the total unrecognized compensation cost related to the restricted stock awards was $2.1 million and $1.8 million, respectively, and the weighted-average period over which that cost is expected to be recognized was 2.7 and 3.1 years for the same periods, respectively. The total fair value of restricted stock awards vested in the year ended December 31, 2020 was $0.6 million and no awards were vested in the year ended December 31, 2019.

Stock Compensation Expense

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

Years Ended December 31,

Total non-cash stock-based compensation expense $ 13,843 $ 13,179 $ 7,223

10. Net Income (Loss) Per Common Share

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

Year Ended December 31,

(Amounts in thousands, except per share amounts) 2020 2019 2018

Numerator:

Denominator:

Restricted stock unit awards — 0.2 —

11. Shareholder's Equity

Public Equity Offering

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

12. Stock Purchase Warrants

The Company has historically issued warrants to purchase shares of the Company’s common stock in connection with certain of its common stock offerings. The fair value of warrants previously issued were measured using the Black-Scholes valuation model. Inherent in the Black-Scholes valuation model are assumptions related to expected stock-price volatility, expected life, risk-free interest rate and dividend yield. The Company estimates the volatility of its common stock-based on historical volatility that matches the expected remaining life of the warrants. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield curve on the grant date for a maturity similar to the expected remaining life of the warrants. The expected life of the warrants is assumed to be equivalent to their remaining contractual term. The dividend rate is based on the historical rate, which the Company anticipates will remain at zero.

During the year ended December 31, 2019, the Company issued 19,808 shares of common stock upon the exercise of warrants with an exercise price of $4.27. There were no warrants outstanding as of December 31, 2020 or 2019.

13. Fair Value Measurements

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

•Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

•Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability;

•Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

There was no movement between Level 1 and Level 2 or between Level 2 and Level 3 from December 31, 2019 to December 31, 2020. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The commercial paper, corporate notes, U.S. government securities, U.S. government agency bonds and U.S. asset-backed securities are classified as Level 2 as they were valued based upon quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets. The following table summarizes the valuation of the Company’s financial instruments that are measured at fair value on a recurring basis:

Fair value measurement category Fair value measurement category

(In thousands) Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3

Assets:

U.S. government agency bonds 5,001 — 5,001 — — — — —

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

14. Income Taxes

Loss before income taxes for U.S and non-U.S operations was as follows:

Year Ended December 31,

Non U.S. income (loss) 97 (33) (81)

A reconciliation of income taxes computed using the federal statutory rate to the taxes reported in the consolidated statements of operations is as follows:

Year Ended December 31,

Income (loss) before income taxes $ 2,864 $ (9,665) $ (8,137)

Federal statutory rate 21 % 21 % 21 %

Taxes computed at federal statutory rate 601 (2,030) (1,709)

Nondeductible share-based compensation 437 (1,329) (605)

Research and orphan drug credits (8,827) — —

Reported income taxes $ 180 $ — $ —

Deferred tax assets (liabilities) consist of the following:

Year Ended December 31,

Deferred tax assets:

Net operating loss carryforwards $ 8,411 $ 10,542

Employee benefits and stock compensation 5,692 4,329

Research and development costs 6,411 7,851

Tax credit carryforward 10,085 —

Deferred tax liabilities:

Total net deferred tax liabilities (14,037) (7,748)

Net deferred tax assets and liabilities $ — $ —

For the year-ended December 31, 2020, we recorded income tax expense as a result of taxable income in certain states where the net operating loss carryforwards and related deferred tax assets have been fully utilized. As of December 31, 2020, the Company’s U.S. federal and state tax net operating loss carryforwards available to offset future profits, after considering the annual Section 382 limit described below, are $32.3 million and $21.3 million, respectively. These net operating loss carryforwards will expire between 2021 and 2039 with the exception of the federal net operating loss generated in 2018. The federal net operating loss of $1.5 million generated in 2018 can be carried forward indefinitely. The projected annual limitation on the use of the net operating losses that existed prior to September 17, 2014 as a result of our change in control in 2014 per Section 382 of the Internal Revenue Code is $0.8 million. As a result, a significant portion of the net operating losses and tax credit carryforwards will expire prior to their utilization, regardless of the level of future profitability. As of December 31, 2020, the Company’s U.S. federal tax credit carryforwards available to offset future profits are $10.1 million. During 2020, the Company determined to pursue certain available tax credits and performed a research and development and orphan drug credit tax studies. As a result of completion of these studies it was determined that the Company now has a sufficient basis to claim the credits and has recognized a tax credit carryforward in the current period. These credit carryforwards will expire between 2034 and 2040.

In accordance with the accounting guidance for income taxes, the Company estimated whether recoverability of its deferred tax assets is “more likely than not,” based on forecasts of taxable income in the related tax jurisdictions. In this estimate, the Company uses historical results, projected future operating results based upon approved business plans, eligible carry forward periods, tax planning opportunities and other relevant considerations. Based on these factors, including historical losses incurred by the Company, a full valuation allowance for the deferred tax assets, including the deferred tax assets for the aforementioned net operating losses and credits, has been provided since they are not more likely than not to be realized. If the Company continues to achieve profitability, these deferred tax assets may be available to offset future income taxes and the valuation could be released. The change in the valuation allowance was an increase of $7.4 million and $4.1 million for the years ended December 31, 2020 and 2019, respectively.

The Company assesses uncertain tax positions in accordance with the guidance for accounting for uncertain tax positions. This pronouncement prescribes a recognition threshold and measurement methodology for recording within the financial statements uncertain tax positions taken, or expected to be taken, in the Company’s income tax returns. To the extent the uncertain tax positions do not meet the “more likely than not” threshold, the Company has derecognized such positions. To the extent the uncertain tax positions meet the “more likely than not” threshold, the Company has measured and recorded the highest probable benefit, and have established appropriate reserves for benefits that exceed the amount likely to be sustained

upon examination. The Company currently has not recorded any uncertain tax positions and does not anticipate that the unrecognized tax benefits will significantly increase or decrease within the next twelve months.

The Company files U.S. federal and state income tax returns with varying statute of limitations. During the year-ended December 31, 2020 examinations by U.S. tax authorities have been completed for 2017 and 2018. Due to the Company’s net operating loss carryforwards, federal income tax returns from incorporation are still subject to examination. The Company files in several state tax jurisdictions and are subject to examination in years ranging from incorporation to 2020.

15. Employee Savings Plan

The Company has a 401(k) savings plan that allows participating employees to contribute a portion of their salary, subject to annual limits and minimum qualifications. The Board may, at its sole discretion, approve Company matching contributions to the plan. The Company made contributions of $0.8 million, $0.7 million and $0.6 million for the years ended December 31, 2020, 2019 and 2018, respectively.

16. NexoBrid License and Supply Agreements

On May 6, 2019, the Company entered into exclusive license and supply agreements with MediWound to commercialize NexoBrid and any improvements to NexoBrid in North America. NexoBrid is a topically-administered biological product that enzymatically removes nonviable burn tissue, or eschar. On June 30, 2020, the Company announced the submission of a BLA to the FDA seeking the approval of NexoBrid for eschar removal (debridement) in adults with deep partial-thickness and/or full-thickness thermal burns. Subsequently, on September 16, 2020, the Company announced that the FDA accepted the BLA for review and has assigned a Prescription Drug User Fee Act (PDUFA) target date of June 29, 2021. Pursuant to the terms of the license agreement, if the BLA is approved, MediWound will transfer the BLA to Vericel and Vericel will market NexoBrid in the U.S. Both MediWound and Vericel, under the supervision of a Central Steering Committee comprised of members of both companies will continue to guide the development of NexoBrid in North America. NexoBrid is approved in the European Union and other international markets and has been designated as an orphan biologic in the United States, European Union and other international markets.

In May 2019, the Company paid MediWound $17.5 million in consideration for the license. The $17.5 million upfront payment was recorded to research and development expense during 2019, as the license was considered in process research and development. The Company is also obligated to pay MediWound $7.5 million, which is contingent upon U.S. regulatory approval of the BLA for NexoBrid and up to $125 million contingent upon meeting certain sales milestones. The first sales milestone of $7.5 million would be triggered when annual net sales of NexoBrid or improvements to it in North America exceed $75 million. As of December 31, 2020, the milestone payments are not yet probable and therefore, not considered a liability. The Company also will pay MediWound tiered royalties on net sales ranging from mid-high single-digit to mid-teen percentages, subject to customary reductions. The Company also entered into a supply agreement with MediWound under which MediWound will manufacture NexoBrid for the Company on a unit price basis which may be increased based on a published index. MediWound is obligated to supply the Company with NexoBrid for sale in North America on an exclusive basis for the first five years of the term of the supply agreement. After the exclusivity period or upon supply failure, the Company will be permitted to establish an alternate source of supply.

BARDA has committed to procure NexoBrid directly from MediWound under an emergency use authorization, and under such commitment the Company will receive a percentage of gross profit for sales directly to BARDA. If BARDA procures NexoBrid directly from Vericel, the Company will pay a percentage of gross profits to MediWound on initial committed amounts and a royalty on any additional BARDA purchases of NexoBrid beyond the initial committed amount. As of December 31, 2020, the Company does not hold a direct contract or distribution agreement with BARDA. In 2020, BARDA accepted the first shipments of NexoBrid for emergency use preparedness per the agreement between BARDA and MediWound. As a result, the Company recognized $2.2 million of revenue for the year ended December 31, 2020; see note 4 for further information.

17. Commitments and Contingencies

Manufacturing and Supply Agreements

Matricel — In October 2015, the Company signed a long-term supply agreement with Matricel GmbH for the ACI-Maix collagen membrane used in the manufacture of MACI. The Company and Matricel amended the agreement on March 17, 2018. Under the agreement, the Company has committed to purchase annually approximately $0.6 million per year, the Company has fulfilled this commitment for the years ended December 31, 2020, 2019 and 2018, respectively. The agreement is effective until December 31, 2022 and contains a 5-year renewal option by the Company and an additional 5-year automatic renewal, unless otherwise terminated.

Manufacture, Supply and Other Agreements — The Company has entered into various agreements relating to the manufacture of its products and the supply of certain components. If the manufacturing or supply agreements expire or are otherwise terminated, the Company may not be able to identify and obtain ancillary materials that are necessary to develop its products and such expiration and termination could have a material effect on the Company’s business.

The Company’s purchase commitments consist of minimum purchase amounts of materials used in the Company's cell manufacturing process to manufacture its marketed cell therapy products. Future minimum purchase commitments related to our contractual obligations are as follows:

Payments Due by Period

Purchase commitments $ 7,864 $ 7,182 $ 682 $ — $ — $ — $ —

18. Supplementary Quarterly Financial Information (unaudited)

Quarterly earnings per share amounts may not sum to the totals for each of the years, since quarterly computations are based on weighted-average common shares outstanding during each quarter.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

There are none to report.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Management of the Company, with the participation of its certifying officers, evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on the evaluation as of December 31, 2020, the Company’s Chief Executive Officer and Chief Financial Officer (its “Certifying Officers”) concluded that the Company’s disclosure controls and procedures were effective.

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

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed under the supervision of our Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our Consolidated Financial Statements for external purposes in accordance with generally accepted accounting principles. Management evaluated the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013). Management concluded our internal control over financial reporting was effective as of December 31, 2020.

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2020 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as attested to in their report which appears in Item 8 of this Form 10-K.

Changes in Internal Control over Financial Reporting

During the three months ended December 31, 2020, there were no material changes made in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act).

Item 9B. Other Information

Not applicable.

PART III

Certain information required by Part III is omitted from this Annual Report on Form 10-K, and is incorporated by reference to our definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A in connection with our 2021 Annual Meeting of Shareholders, scheduled for April 28, 2021.

Item 10. Directors, Executive Officers and Corporate Governance

The information relating to our directors is incorporated by reference to the Proxy Statement as set forth under the caption “Election of Directors.” Information relating to our executive officers is set forth in Part I of this Report under the caption “Executive Officers.”

Information with respect to delinquent filings pursuant to Item 405 of Regulation S-K is incorporated by reference to the Proxy Statement as set forth under the caption “Section 16(a) Beneficial Ownership Reporting Compliance.”

Item 11. Executive Compensation

The information relating to executive compensation is incorporated by reference to the Proxy Statement as set forth under the caption “Executive Compensation and Related Information.”

Item 12. Security Ownership of Certain Beneficial Owners and Management, and Related Shareholder Matters

The information relating to ownership of our equity securities by certain beneficial owners and management is incorporated by reference to the Proxy Statement as set forth under the caption “Stock Ownership of Certain Beneficial Owners and Management.”

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information relating to certain relationships and related person transactions is incorporated by reference to the Proxy Statement as set forth under the caption “Certain Relationships and Related Party Transactions.”

Item 14. Principal Accountant Fees and Services

The information relating to principal accountant fees and services is incorporated by reference to the Proxy Statement as set forth under the caption “Ratification of Appointment of Independent Registered Public Accounting Firm.”

PART IV

Item 15. Exhibits and Financial Statement Schedules

(a) The following documents are filed as part of this Annual Report on Form 10-K:

1. Consolidated Financial Statements (see Item 8).

2. All information is included in the Consolidated Financial Statements or Notes thereto.

3. Exhibits:

See Exhibit Index.

Item 16. Form 10-K Summary

This Annual Report on Form 10-K does not include a summary.

EXHIBIT INDEX

Exhibit No. Description

100

Exhibit No. Description

101

Exhibit No. Description

21.1** Subsidiaries of Registrant.

101.INS** XBRL Instance Document

101.SCH** XBRL Taxonomy Extension Schema Document

101.CAL** XBRL Taxonomy Extension Calculation Linkbase Document

102

Exhibit No. Description

101.LAB** XBRL Taxonomy Extension Label Linkbase Document

101.PRE** XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF** XBRL Taxonomy Extension Definition Linkbase Document

# Management contract or compensatory plan or arrangement covering executive officers or directors of Vericel.

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

* Furnished herewith.

** Filed herewith.

103

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Vericel Corporation

/s/ DOMINICK C. COLANGELO

Dominick C. Colangelo

President and Chief Executive Officer

(Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed on behalf of the registrant on February 24, 2021 by the following persons in the capacities indicated.

Signature Title

/s/ DOMINICK C. COLANGELO President and Chief Executive Officer, Director

Dominick C. Colangelo (Principal Executive Officer)

/s/ JOSEPH A. MARA Chief Financial Officer

Joseph A. Mara (Principal Financial Officer)

/s/ SANDRA L. PENNELL Vice President and Corporate Controller

Sandra L. Pennell (Principal Accounting Officer)

/s/ ROBERT L. ZERBE, M.D. Chairman of the Board of Directors

Robert L. Zerbe, M.D.

/s/ ALAN L. RUBINO Director

Alan L. Rubino

/s/ HEIDI M. HAGEN Director

Heidi M. Hagen

/s/ STEVEN C. GILMAN Director

Steven C. Gilman

/s/ KEVIN F. MCLAUGHLIN Director

Kevin F. McLaughlin

/s/ PAUL K. WOTTON Director

Paul K. Wotton

104

VCEL US Equity

VCEL · 10-K · period ended 2020-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 8. Consolidated Financial Statements and Supplementary Data

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 9A. Controls and Procedures

Item 9B. Other Information

Item 10. Directors, Executive Officers and Corporate Governance

Item 11. Executive Compensation

Item 12. Security Ownership of Certain Beneficial Owners and Management, and Related Shareholder Matters

Item 13. Certain Relationships and Related Transactions, and Director Independence

Item 14. Principal Accountant Fees and Services

Item 15. Exhibits and Financial Statement Schedules

Item 16. Form 10-K Summary

VCEL US Equity☆

VCEL · 10-K · period ended 2020-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 8. Consolidated Financial Statements and Supplementary Data

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 9A. Controls and Procedures

Item 9B. Other Information

Item 10. Directors, Executive Officers and Corporate Governance

Item 11. Executive Compensation

Item 12. Security Ownership of Certain Beneficial Owners and Management, and Related Shareholder Matters

Item 13. Certain Relationships and Related Transactions, and Director Independence

Item 14. Principal Accountant Fees and Services

Item 15. Exhibits and Financial Statement Schedules

Item 16. Form 10-K Summary

VCEL US Equity