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 fully-integrated, commercial-stage biopharmaceutical company and is a leader in advanced therapies for sports medicine and severe burn care markets. We currently market two FDA-approved autologous cell therapy products in the U.S. MACI® is an autologous cellularized scaffold product indicated for the repair of symptomatic, single or multiple full-thickness cartilage defects of the knee with or without bone involvement in adults. Epicel® is a permanent skin replacement 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 for North American rights to NexoBrid®, a registration-stage biological orphan product for the debridement of severe thermal burns. In 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 accepted the BLA for filing and assigned a PDUFA target date of June 29, 2021. Thereafter, on June 29, 2021, MediWound received a complete response letter from the FDA regarding the BLA through which the FDA communicated to MediWound that it had completed its review of the BLA, as amended, and had determined that it could not approve the BLA in its present form. We continue to work with MediWound, BARDA and the FDA to address the issues identified by the FDA, to prepare and submit a BLA resubmission to the FDA, and to seek the potential approval of NexoBrid.

See “Risk Factors - NexoBrid’s approval in the U.S. for the treatment of severe burns may be further delayed, or it may not be approved for use in the U.S. and other North American markets at all.”

COVID-19

The ongoing 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 pandemic has fluctuated since early 2020. At times, 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 infection rates in the U.S. have risen and fallen, as new virus variants have emerged, as vaccines have been distributed and administered, and as world health leaders learn more about

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the virus, its transmission pathway and who is most at risk. Because Vericel is deemed an essential business, we were exempted from government orders requiring the closure of workplaces and the cessation of business operations.

Notwithstanding being an essential business, our business and operations at times have been adversely impacted by the ongoing effects of the COVID-19 pandemic. For example, as a result of periodic restrictions placed on the performance of elective surgical procedures, Vericel experienced a significant increase in cancellations of scheduled MACI procedures, as well as a slowdown in new MACI orders during March and April of 2020. The widespread suspension of surgical procedures impacted our business and operations during the first and second quarters of 2020. The level and degree of restriction on elective surgeries, on the ability of patients to seek treatment and on U.S. business operations generally fluctuated throughout 2020 as COVID-19 infection rates rose and fell during the summer months and into the autumn. By the first quarter of 2021, the pandemic’s effects on our MACI business had largely dissipated. During the summer of 2021, however, the pandemic’s direct and ancillary effects again began to cause some disruption to our MACI business. Following the cessation of COVID-19-related travel restrictions in many parts of the U.S. and the availability of vaccinations in May and June 2021, some MACI patients postponed or delayed treatment – opting instead to take vacation and/or travel. Further, surges of new COVID-19 cases during the second half of 2021 caused by the spread of the “Delta” and “Omicron” variants again caused disruptions to health care networks including restrictions on the performance of elective surgical procedures, the availability of physicians and/or their treatment prioritizations, the level of healthcare facility staffing and, in some instances, the willingness or ability of patients to seek treatment. Consequently, and notwithstanding the widespread distribution of vaccines, these factors contributed to a slowdown of MACI procedures during the third and fourth quarters of 2021. 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 if the number of COVID-19 infections in the U.S. were to continue to rise, or if new or existing COVID-19 variants render current vaccine treatments ineffective.

Because 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.

At the outset of the pandemic, we put in place a comprehensive workplace protection plan, which instituted protective measures in response to COVID-19. Our workplace protection plan has closely followed guidance issued by the Centers for Disease Control and Prevention (“CDC”) and has complied with applicable federal and state law. To date, Vericel has been successful in sustaining its operations and providing MACI and Epicel to patients in need. We continue to review our policies and procedures regularly, including our workplace protection plan, as the pandemic evolves and we may take additional actions to the extent required.

We continue to manufacture MACI and Epicel and we 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 48 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. At this time, we are not aware of COVID-19-related impacts on our distributors, operations or third-party service providers’ ability to manage patient cases.

We believe it is possible that we could continue to experience variable impacts on our business, should the current resurgence of COVID-19 in various areas of the U.S. continue for an extended period, or should a new resurgence occur in the future. Measures taken to limit the impact of COVID-19 at the international, national and local levels, including the availability and effectiveness of COVID-19 vaccines, shelter-in-place orders, social distancing measures, travel bans and restrictions, and business and government shutdowns, may again create significant negative economic impacts on a global basis. Given that uncertainty, we cannot reliably estimate the extent to which the ongoing COVID-19 pandemic may continue to impact utilization and revenue of our products in 2022 and beyond.

For a discussion of additional risks associated with the ongoing COVID-19 pandemic, please see Part I, Item 1A. “Risk Factors”.

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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 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 and Epicel, a permanent skin replacement for the treatment of adult and pediatric patients with deep-dermal or full-thickness burns comprising greater than or equal to 30 percent of TBSA. Both products are currently marketed in the U.S. In addition, we have entered into exclusive license and supply agreements with MediWound to commercialize NexoBrid in North America, if approved. As previously mentioned, MediWound has submitted a BLA to the FDA, seeking commercial approval of NexoBrid. On June 29, 2021, we announced that MediWound had received a complete response letter from the FDA regarding the BLA, through which the FDA communicated to MediWound that it had completed its review of the BLA, as amended, and had determined that it could not approve the BLA in its present form. We continue to work with MediWound, BARDA and the FDA to address the issues identified by the FDA, to prepare and submit a BLA resubmission to the FDA, and to seek the potential approval of NexoBrid.

MACI

MACI is a third-generation ACI product indicated for the repair of symptomatic, single or multiple full-thickness cartilage defects of the knee with or without bone involvement in adults.

Our 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 subpopulation of general orthopedic surgeons who perform a high volume of cartilage repair procedures. As of the date of this report, we have 76 MACI sales representatives to enable the sales force to reach our target audience. 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. With respect to private commercial payers that have not yet approved a medical policy for MACI, we often obtain approval on a case-by-case basis for medically appropriate cases.

Epicel

Epicel is a permanent skin replacement for deep-dermal or full-thickness burns greater than or equal to 30 percent of TBSA. Epicel is regulated by 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 an 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 the pediatric eligibility criteria, the FDA has determined the ADN number for Epicel to be 360,400 which is approximately 30 times larger than the volume of grafts sold in 2021. We currently have a thirteen-person burn field force comprised of seven account managers and six burn clinical specialists, led by a regional and a national sales director.

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NexoBrid

Our development portfolio includes NexoBrid, a registration-stage, topically-administered biological product that enzymatically removes nonviable burn tissue, or eschar, in patients with deep partial and full-thickness thermal burns. We have entered into exclusive license and supply agreements with MediWound to commercialize NexoBrid and any improvements to the product in North America, if approved. On September 16, 2020, we announced the acceptance of MediWound’s submission of a BLA for review by the FDA to seek marketing approval for NexoBrid in the U.S. for the treatment of severe burns, and the FDA’s assignment of a Prescription Drug User Fee Act (“PDUFA”) target date for the product of June 29, 2021. Subsequently, on June 29, 2021, we announced that MediWound had received a complete response letter from the FDA regarding the BLA, through which the FDA communicated to MediWound that it had completed its review of the BLA, as amended, and had determined that it could not approve the BLA in its present form. We continue to work with MediWound, BARDA and the FDA to address the issues identified in the agency’s complete response letter, to prepare and submit a BLA resubmission to the FDA and to seek the potential approval of NexoBrid. See also “Risk Factors - NexoBrid’s approval in the U.S. for the treatment of severe burns may be further delayed, or it may not be approved for use in the U.S. and other North American markets at all.”

NexoBrid is approved in the EU and other international markets and has been designated as an orphan biologic in the U.S., EU and other international markets. Pursuant to the terms of our existing license agreement, if the BLA is approved, MediWound will transfer the BLA to us and we will market NexoBrid in the U.S. Both MediWound and Vericel, under the supervision of a Central Steering Committee comprised of members of both companies will continue to guide development of NexoBrid in North America. Under our license agreement with MediWound, NexoBrid is being manufactured for BARDA prior to approval by the FDA under an emergency use authorization.

Results of Operations

The following is a summary of our consolidated results of operations:

Comparison of the Periods Ended December 31, 2021 and 2020

Total Revenue

Revenue by product for the years ended December 31, 2021, 2020 and 2019 are as follows:

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Total revenue increase for the year ended December 31, 2021, compared to 2020, was driven primarily by volume growth for both MACI and Epicel, in addition to $3.1 million, of revenue recognized related to the delivery of NexoBrid to BARDA for emergency response preparedness, compared to $2.2 million in the prior year.

Seasonality. The effects of the ongoing COVID-19 pandemic have disrupted the normal seasonality of our MACI business at times over the past twenty-two months. These effects have included, among others, periodic restrictions on the performance of elective surgical procedures throughout the country, the unavailability of physicians and/or changes to their treatment prioritizations, reductions in the levels of healthcare facility staffing and, in certain instances, the willingness or ability of patients to seek treatment and the inability of our Clinical Account Specialists to call on surgeon customers. Over the last five years, ACI (MACI and Carticel prior to its replacement) sales volumes from the first through the fourth quarter on average represented 19% (16%-21% range), 22% (16%-25% range), 23% (21%-26% range) and 36% (33%-38% range) respectively, of total annual volumes. MACI orders are normally stronger in the fourth quarter due to several factors including the satisfaction by patients of insurance deductible limits and the time of year patients prefer to start rehabilitation. Because of the effects of the COVID-19 pandemic, the MACI business seasonality in 2021 and 2020 did not follow our historical patterns, and seasonality in 2022 could continue to be impacted by COVID-19 related factors, as well - such as patient behavior and vacations and the spread of the COVID-19 “Delta” and “Omicron” variants. 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.

Gross Profit

Gross profit increased for the year ended December 31, 2021, primarily due to continued growth of both products, the impacts of the COVID-19 pandemic in the prior year, and increased units of procured NexoBrid to BARDA that led to higher revenue related to NexoBrid, compared to 2020.

Research and Development Expenses

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

Research and development expenses for the year ended December 31, 2021 were $16.3 million, compared to $13.0 million for 2020. The increase is primarily due to an increase of $2.2 million in stock-based compensation expense.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the year ended December 31, 2021 were $97.6 million, compared to $68.9 million for 2020. The increase in selling, general and administrative expenses during the year ended December 31, 2021, compared to 2020, is primarily due to a $16.5 million increase in stock-based compensation expenses, a $2.6 million increase as a result of additional headcount, a $2.3 million increase in marketing activities, and a $1.9 million increase in patient reimbursement support services as a result of higher MACI sales volume.

Total Other Income (Expense)

The change in total other income (expense) for the year ended December 31, 2021, was primarily due to the decreasing rates of return on our investments in various marketable debt securities.

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Tax Benefit

For the year-ended December 31, 2021, we recorded a state income tax benefit of $0.1 million, as a result of a return to provision adjustment.

Stock-based Compensation Expense

Non-cash stock-based compensation expense is summarized in the following table:

The increase in stock-based compensation expense for the year ended December 31, 2021, 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.

Comparison of the Periods Ended December 31, 2020 and 2019

For a comparison of our results of operations for the fiscal years ended December 31, 2020 and December 31, 2019, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on February 24, 2021.

Liquidity and Capital Resources

Since our acquisition of MACI and Epicel in 2014, 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. We generated $29.0 million in operating cash flows during 2021 and we may finance our commercial business operations through the sales of equity securities or debt financings.

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 ongoing COVID-19 pandemic continue to evolve and may result in irrecoverable losses from customers.

Cash Flows

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

Year Ended December 31,

Net cash provided by (used in) operating activities $ 29,040 $ 17,572 $ (7,183)

Net cash (used in) provided by investment activities (3,501) (17,160) 10,615

For a discussion of our liquidity and capital resources related to our cash flow activities for the fiscal year ended December 31, 2019, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of

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Operations” of our annual report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on February 24, 2021.

Net Cash Provided by Operating Activities

Our cash, cash equivalents and restricted cash totaled $68.5 million, short-term investments totaled $35.1 million and long-term investments totaled $25.7 million as of December 31, 2021. The $29.0 million of net cash provided by operations in 2021, was primarily the result of non-cash charges of $34.3 million related to stock compensation expense, $4.4 million in operating lease amortization and $3.0 million in depreciation and amortization expense, offset by a net loss of $7.5 million and a net decrease of $6.2 million related to movements in our working capital accounts. The overall decreases in cash from our working capital accounts were primarily driven by an increase in accounts receivable due to an increase in sales volume, an increase in inventory due to increased production needs and payments on operating leases, offset by an increase of accounts payable and accrued expenses due to timing of payments.

Our cash, cash equivalents and restricted cash totaled $33.8 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 net cash provided by operations in 2020, was primarily the result of net income of $2.9 million and non-cash charges of $13.8 million in stock compensation expense, $4.4 million in operating lease amortization and $2.4 million in depreciation and amortization expense, offset by a net decrease of $6.4 million related to movements in our working capital accounts. The overall decreases in cash from our working capital accounts were primarily driven by an increase in accounts receivable due to an increase in sales volume, an increase in inventory due to increased production needs, payments on operating leases, offset by an increase of accrued expenses due to timing of payments.

Net Cash Used in Investing Activities

Net cash used in investing activities during the year ended December 31, 2021 was the result of $64.4 million of investment sales and maturities, offset by $60.0 million in investment purchases and $7.9 million of property and equipment purchases primarily for manufacturing upgrades through December 31, 2021.

Net cash used in investing activities during the year ended December 31, 2020 was the result of $63.1 million in investments purchases offset by $48.5 million of sales and maturities and property and equipment purchases of $2.6 million, primarily for manufacturing upgrades and leasehold improvements through December 31, 2020.

Net Cash Provided by Financing Activities

Net cash provided by financing activities is the result of net proceeds from the exercise of stock options and the employee stock purchase plan of $11.2 million, partially offset by the payment of employee withholding taxes related to the vesting of restricted stock units of $1.7 million during the year ended December 31, 2021.

Net cash provided by financing activities during the year ended December 31, 2020 is primarily the result of net proceeds from the exercise of stock options of $6.6 million.

Sources of Capital

On August 27, 2021, we entered into a Sales Agreement with SVB Leerink LLC, as sales agent (“SVB Leerink”), pursuant to which we may offer and sell up to $200.0 million of shares of our common stock, no par value per share (“ATM Shares”). The ATM Shares to be offered and sold under the Sales Agreement will be issued and sold pursuant to an automatically effective shelf registration statement on Form S-3ASR (File No. 333-259119) filed by us on August 27, 2021, which expires three years from the filing date. We also filed a prospectus supplement relating to the offering and sale of the ATM Shares on August 27, 2021. We are not obligated to make any sales of ATM Shares, and SVB Leerink is not required to sell any specific number or dollar amount of the ATM Shares under the Sales Agreement. As of December 31, 2021, we have sold no shares pursuant to the Sales Agreement.

If revenue declines 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 could also adversely impact our ability to access financing 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 any future impacts of the COVID-19 pandemic, the level of future research and development, the scope and results of ongoing and potential clinical trials, the costs

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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 facilities 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. Total remaining obligations related to the operating and finance leases are $66.5 million as of December 31, 2021. In January 2022, we entered into a new lease for approximately 126,000 square feet of to-be-constructed manufacturing, laboratory and office space in Burlington, Massachusetts. See Note 15, “Subsequent Events” in our accompanying consolidated financial statements for further information.

Our purchase commitments consist of minimum purchase amounts of materials used in our cell manufacturing process to manufacture our marketed cell therapy products and total $10.1 million as of December 31, 2021, as well as usage of an offsite warehouse space. In February 2021, the terms of the warehouse operating agreement were extended through March 31, 2027, and the total remaining contractual obligations related to the warehouse agreement are $8.3 million as of December 31, 2021. See Note 14, “Commitments and Contingencies” in our accompanying consolidated financial statements for further information.

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

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. 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.

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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. Changes to the estimate of the amount of consideration that will not be collected could have a material impact to the revenue recognized. A 50 basis points change to the estimated uncollectible percentage could result in approximately $0.3 million decrease or increase in the revenue recognized for the year ended December 31, 2021.

Leases

We determine if an arrangement is a lease at inception, in accordance with ASC Topic 842, Leases. All operating lease commitments with a lease term greater than 12 months are recognized as right-of-use (“ROU”) 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. 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. 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. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

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’s 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.

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Tax Valuation Allowance

A valuation allowance is recorded if it is more likely than not that a deferred tax asset will not be realized based on the weight of available evidence, both positive and negative. Due to our three-year cumulative loss position and history of operating losses, 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.

This 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.

Recent Accounting Pronouncements

Refer to Note 2, “Summary of Significant Accounting Policies” in the accompanying consolidated financial statements located under Item 8 of this Annual Report on Form 10-K for information regarding recently issued accounting standards that may have a significant impact on our business.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

As of December 31, 2021, we held marketable debt securities, which are classified as available-for-sale and carried at fair value in the accompanying consolidated balance sheet included in this 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 $0.4 million and $0.5 million decrease in the fair value of our investment portfolio as of December 31, 2021 and 2020, 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 3 and Note 6 in the accompanying consolidated financial statements located under Item 8 of this Annual Report on Form 10-K for further discussion.

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

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Item 8. Consolidated Financial Statements and Supplementary Data

Page

Report of Independent Registered Public Accounting Firm (PCAOB ID 238) 68

Consolidated Balance Sheets 70

Consolidated Statements of Operations 71

Consolidated Statements of Comprehensive (Loss) Income 72

Consolidated Statements of Shareholders’ Equity 73

Consolidated Statements of Cash Flows 74

Notes to Consolidated Financial Statements 76

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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, 2021 and 2020, and the related consolidated statements of operations, of comprehensive (loss) income, of shareholders' equity and of cash flows for each of the three years in the period ended December 31, 2021, 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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 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, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

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.

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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 consolidated financial 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 3 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, 2021, the allowance for this uncollectible consideration was $7.0 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 also included, 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, 2022

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.

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VERICEL CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands)

December 31,

ASSETS

Current assets:

Other long-term assets 317 —

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Current portion of operating lease liabilities 2,950 4,394

Other current liabilities 41 41

Other long-term liabilities 44 76

COMMITMENTS AND CONTINGENCIES

Shareholders’ equity:

Accumulated other comprehensive (loss) income (154) 14

Total liabilities and shareholders’ equity $ 243,705 $ 205,608

The accompanying notes to consolidated financial statements are an integral part of these statements.

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VERICEL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

Year Ended December 31,

Other income (expense):

Interest expense (4) (6) (8)

Other income (expense) 52 (13) (20)

Income tax (benefit) expense (111) 180 —

Net (loss) income per common share:

Weighted-average common shares outstanding:

The accompanying notes to consolidated financial statements are an integral part of these statements.

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VERICEL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(In thousands)

Year Ended December 31,

Other comprehensive (loss) income:

Unrealized (loss) gain on investments (168) (7) 60

The accompanying notes to consolidated financial statements are an integral part of these statements.

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VERICEL CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands)

Shares Amount Amount Gain (Loss) Deficit Equity

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 tax remittance (14) (163) (163)

Unrealized loss on investments (7) (7)

Shares issued under the Employee Stock Purchase Plan 43 1,256 1,256

Issuance of stock for restricted stock unit vesting 96 —

Restricted stock withheld for employee tax remittance (31) (1,665) (1,665)

Unrealized loss on investments (168) (168)

The accompanying notes to consolidated financial statements are an integral part of these statements.

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VERICEL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Year Ended December 31,

Operating activities:

Amortization of premiums and discounts on marketable securities 949 318 (610)

Changes in operating assets and liabilities:

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

Net cash provided by (used in) operating activities 29,040 17,572 (7,183)

Investing activities:

Expenditures for property and equipment (7,915) (2,626) (2,616)

Net cash (used in) provided by investing activities (3,501) (17,160) 10,615

Financing activities:

Net increase in cash, cash equivalents, and restricted cash 34,710 6,853 8,692

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VERICEL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(In thousands)

Year Ended December 31,

Supplemental disclosure of cash flow information:

Non-cash information:

Warrants exercised for common stock $ — $ — $ 104

Right-of-use asset and lease liability recognized 192 29,573 2,599

Additions to property and equipment included in accounts payable 1,373 531 217

Cash information:

Interest paid $ 4 $ 6 $ 8

Year Ended December 31,

Reconciliation of amounts within the consolidated balance sheets:

The accompanying notes to consolidated financial statements are an integral part of these statements.

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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 U.S., MACI® (autologous cultured chondrocytes on porcine collagen membrane) and Epicel® (cultured epidermal autografts).

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

The ongoing 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 has fluctuated since early 2020. At times, 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 infection rates in the U.S. have risen and fallen, as new virus variants have emerged, as vaccines have been distributed and administered, 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.

Notwithstanding being an essential business, the Company’s business and operations at times have been adversely impacted by the ongoing effects of the COVID-19 pandemic. For example, as a result of periodic restrictions placed on the performance of elective surgical procedures, Vericel experienced a significant increase in cancellations of scheduled MACI procedures, as well as a slowdown in new MACI orders during March and April of 2020. The widespread suspension of surgical procedures impacted the Company’s business and operations during the first and second quarters of 2020. The level and degree of restriction on elective surgeries, on the ability of patients to seek treatment and on U.S. business operations generally fluctuated throughout 2020 as COVID-19 infection rates rose and fell during the summer months and into the autumn. By the first quarter of 2021, the pandemic’s effects on the Company’s MACI business had largely dissipated. During the summer of 2021, however, the pandemic’s direct and ancillary effects again began to cause some disruption to our MACI business. Following the cessation of COVID-19-related travel restrictions in many parts of the U.S. and the availability of vaccinations in May and June 2021, some MACI patients postponed or delayed treatment – opting instead to take vacation and/or travel. Further, surges of new COVID-19 cases during the second half of 2021 caused by the spread of the “Delta” and “Omicron” variants again caused disruptions to health care networks including restrictions on the performance of elective surgical procedures, the availability of physicians and/or their treatment prioritizations, the level of healthcare facility staffing and, in some instances, the willingness or ability of patients to seek treatment. Consequently, and notwithstanding the widespread distribution of vaccines, these factors contributed to a slowdown of MACI procedures during the third and fourth quarters of 2021. 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 if the number of COVID-19 infections in the U.S. were to continue to rise, or if new or existing COVID-19 variants render current vaccine treatments ineffective.

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At the outset of the pandemic, the Company put in place a comprehensive workplace protection plan, which instituted protective measures in response to COVID-19. Vericel’s workplace protection plan has closely followed guidance issued by the Centers for Disease Control and Prevention (“CDC”) and has complied with applicable federal and state law. To date, Vericel has been successful in sustaining its operations and providing MACI and Epicel to patients in need. The Company continues to review its policies and procedures regularly, including its workplace protection plan, as the pandemic evolves and the Company may take additional actions to the extent required.

Liquidity

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 the satisfaction of liabilities and commitments in the normal course of business. As of December 31, 2021, the Company had an accumulated deficit of $383.3 million and had a net loss of $7.5 million for the year ended December 31, 2021. The Company had cash and cash equivalents of $68.3 million and investments of $60.8 million as of December 31, 2021. The Company expects that cash from the sales of its 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 these consolidated financial statements. The effects of the COVID-19 pandemic continue to evolve, however. To the extent the U.S. experiences a continued worsening in COVID-19 infections or the emergence of additional virus variants that result in more serious disease or limit the effectiveness of existing vaccines, subsequent healthcare measures – to include the postponement or cessation of elective and other surgical procedures – may cause the Company to experience a reduction in business and resulting revenue. This, consequently, 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. The Company also 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

Basis of Presentation and Principles of Consolidation

The accompanying consolidated financial statements have been prepared in accordance with U.S. GAAP. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and accounts have been eliminated in consolidation.

Use of Estimates

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. The Company is monitoring the potential impact of the ongoing COVID-19 pandemic on its business and the consolidated financial statements. The more significant estimates reflected in the Company’s consolidated financial statements include, but are not limited to, certain judgments regarding revenue recognition, inventory valuation, stock option valuation, deferred tax assets and liabilities and accrued expenses. The Company is not aware of any specific event or circumstance that would require an update to its estimates or judgments reflected in these consolidated financial statements or a revision of the carrying value of its assets or liabilities as of the issuance of these consolidated financial statements. These estimates may change as new events occur and additional information is obtained. Actual results could materially differ from those estimates.

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.

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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) the Company does 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, 2021 and 2020, 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 consolidated statements of shareholders’ equity and a component of total comprehensive (loss) income in the consolidated statements of comprehensive (loss) income, until realized. Unrealized losses are evaluated for impairment under ASC 326, Financial Instruments - Credit Losses (“ASC 326”), 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 (loss) income, net of taxes.

Leases

The Company determines if an arrangement is a lease at inception, in accordance with ASC Topic 842, Leases. 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. Leases with an initial term of 12 months or less are not recorded on the balance sheet. 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. In addition to rent, the leases may require the Company to pay additional amounts for taxes, insurance, maintenance and other expenses, which do not transfer a good or service to the Company and 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. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

The Company has options to renew lease terms for facilities and other assets. 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. 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. Certain lease agreements contain options to purchase the leased property and options to terminate the lease. A portfolio approach is applied to certain lease contracts with similar characteristics.

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 product sales.

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. 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.

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Property and Equipment, net

Property and equipment are initially measured and recognized at acquisition cost, including any directly attributable cost of preparing the asset for its intended use. After initial measurement, property and equipment are carried at cost less accumulated depreciation and impairment. Repair and maintenance costs of property and equipment are expensed as incurred.

The depreciable value of property and equipment 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 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

The Company recognizes product revenue from sales to a customer (whether a distributor, or hospital ) following the five step model in Accounting Standards Codification 606, Revenue Recognition (“ASC 606”): (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) the Company satisfies the performance obligation. Under this revenue standard, the Company recognizes revenue when its customer obtains control of the promised goods, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods. There are no contractual rights of returns, refunds or similar obligations related to MACI, kits, Epicel or NexoBrid; 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. See Note 3, “Revenue” for further discussion on revenues.

Research and Development Expense

Research and development expenses are expensed as incurred. 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.

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 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. Compensation expense is recorded for restricted stock units that are expected to vest over the expected vesting period. The fair value of stock options held by the employees is determined using a Black-Scholes option valuation method. 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’s 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 recognizes 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.

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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 purchased options at the grant date, which corresponds to the first day of each purchase period, and is amortized over the purchase period.

Comprehensive (Loss) Income

Comprehensive (loss) income is the change in shareholders’ 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. 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 (Loss) Income Per Common Share

Basic earnings per common share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per common share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period, plus the potential dilutive effect of other securities if those securities were converted or exercised. During periods in which the Company incurs net losses, both basic and diluted loss per common share is calculated by dividing the net loss by the weighted-average shares of common stock outstanding and potentially dilutive securities are excluded from the calculation because their effect would be antidilutive.

Financial Instruments

The Company’s financial instruments include accounts receivables, accounts payable and accrued expenses 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.

Recent Accounting Pronouncements

Accounting Standards adopted during the year ended December 31, 2021.

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3. 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 ASC 606.

MACI Biopsy Kits

MACI biopsy kits are sold directly to hospitals and ambulatory surgical centers 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 engages 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 patients treated at military treatment facilities. 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 revenue from sales of all MACI implants upon delivery at which time the customer obtains control of the implant and the claim is billable. The total consideration which the Company expects to collect in exchange for MACI implants (the transaction price) may be fixed or variable. Direct sales to hospitals or distributors are recorded at a contracted price, and there are typically no forms of variable consideration.

When the Company sells MACI the patient is responsible for payment; however, the Company is typically reimbursed by a third-party insurer or government payer, subject to a patient co-pay amount. Reimbursements from third-party insurers and government payers vary by patient and payer and are based on either contracted rates, publicly available rates, fee schedules or past payer precedents. Net product revenue is recognized net 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. 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, 2021. The total allowance for uncollectible consideration was $7.0 million and $5.3 million as of December 31, 2021, and 2020, 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 50 basis points change to the estimated uncollectible percentage could result in approximately $0.3 million decrease or increase in the revenue recognized for the year ended December 31, 2021.

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 periods are shown in the Revenue by Product and Customer table below and relate primarily to changes in the initial expected reimbursement or collection expectation upon completion of the billing claims process for MACI implants that occurred in a prior year.

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Epicel

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

NexoBrid

The Company entered into exclusive license and supply agreements with MediWound in May 2019, 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 U.S. Biomedical Advanced Research and Development Authority (“BARDA”) has committed to procure NexoBrid from MediWound and, as of December 31, 2021, 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.

Revenue by Product and Customer

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

Year Ended December 31,

MACI implants and kits

Implants sold direct subject to third-party reimbursement (d) 2,821 2,754 1,529

Change in estimates related to prior periods (e) (144) 713 654

Epicel

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Concentration of Credit Risk

The Company’s total revenue concentration from an Epicel customer for the year ended December 31, 2021 was 10%. There was no revenue concentration for the years ended December 31, 2020 or 2019, greater than 10%. For the Company’s total accounts receivable balances, there were no customers for the year ended December 31, 2021, 2020 and 2019, respectively, with a concentration greater than 10%.

4. Selected Balance Sheet Components

Inventory

Inventory as of December 31, 2021 and 2020:

Property and Equipment

Property and Equipment, net as of December 31, 2021 and 2020:

Furniture, fixtures and office equipment 1,551 809

Computer equipment and software 7,769 6,846

Financing right-of-use lease 74 111

Total property and equipment, net $ 13,308 $ 7,633

Depreciation expense for the years ended December 31, 2021, 2020 and 2019 was $3.0 million, $2.4 million and $1.7 million, respectively.

Accrued Expenses

Accrued Expenses as of December 31, 2021 and 2020:

Bonus related compensation $ 6,305 $ 5,721

Insurance reimbursement-related liabilities 3,973 2,016

Other accrued expenses 151 74

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5. Leases

The Company leases facilities in Ann Arbor, Michigan and Cambridge, Massachusetts. The Ann Arbor facility includes office space, and the Cambridge facilities includes clean rooms, laboratories for MACI and Epicel manufacturing and office space. The Company also leases offsite warehouse space, vehicles and computer equipment. See Note 15, “Subsequent Events” for discussion on a material lease entered into in January 2022.

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. At the onset of the lease, the estimated contribution by the landlord toward the cost of tenant improvements is recorded as a reduction of the right-of-use asset and operating lease liability.

For the year ended December 31, 2021 and 2020, lease expense of less than $0.1 million was recorded related to short-term leases. For the years ended December 31, 2021, 2020 and 2019, the Company recognized $7.3 million, $6.3 million and $5.4 million, respectively, of operating lease expense. For the years ended December 31, 2021, 2020 and 2019, the Company recognized less than $0.1 million of financing lease expense.

Operating and finance lease assets and liabilities are as follows:

December 31,

Assets

Finance Property and equipment, net 73 111

Liabilities

Current

Operating Current portion of operating lease liabilities $ 2,950 $ 4,394

Finance Other current liabilities 41 41

Non-current

Operating Operating lease liabilities $ 47,147 $ 48,789

Finance Other long-term liabilities 44 76

Cash paid for amounts included in the measurement of the Company’s operating lease liabilities was $6.0 million, $5.8 million, and $5.0 million for the year ended December 31, 2021, 2020, and 2019, respectively.

Future minimum lease payments under non-cancellable lease as of December 31, 2021 are as follows:

(In thousands) Operating Leases Finance Leases Total

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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.

Lease terms and discount rates as of December 31, 2021 and 2020 are as follows:

December 31,

Weighted-average remaining lease term (years)

Finance leases 1.5 2.5

Weighted-average discount rate

Operating leases 5.4% 5.4%

Finance leases 5.0% 5.0%

6. Investments

Marketable debt securities held by the Company are classified as available-for-sale pursuant to ASC 320, Investments – Debt and Equity Securities, and carried at fair value in the accompanying consolidated balance sheets on a settlement date basis. The following tables summarize the gross unrealized gains and losses of the Company’s marketable securities as of December 31, 2021 and 2020:

Gross Unrealized

(In thousands) Amortized Cost Gains Losses Credit Losses Estimated Fair Value

Classified as:

Short-term investments $ 35,068

Long-term investments 25,687

Gross Unrealized

(In thousands) Amortized Cost Gains Losses Credit Losses Estimated Fair Value

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

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

Classified as:

Short-term investments $ 42,187

Long-term investments 24,099

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As of December 31, 2021, the analysis under ASC 326 and the current macroeconomic impact of the ongoing 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 during the years ended December 31, 2021 or 2020.

7. 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 non-qualified 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 (other than options and restricted stock units awarded annually to non-employee directors, which generally vest over one year, and options and restricted stock units awarded to non-employee directors upon initial appointment to the Vericel Board of Directors, which generally vest over a three 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 Company’s 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 of the 2019 Plan. 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, 2021, there were 2,822,710 shares available for future grant under the 2019 Plan.

Stock Compensation Expense

Non-cash stock-based compensation expense (service-based stock options, restricted stock units and employee stock purchase plan) is summarized in the following table:

Years Ended December 31,

Service-Based Stock Options

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 assumptions noted in the following table:

Year Ended December 31,

Expected dividend rate —% —% —%

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The weighted-average grant-date fair value of service-based options granted during the years ended December 31, 2021, 2020, and 2019 was $32.96, $8.86 and $12.62, respectively.

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

As of December 31, 2021, 5,359,392 shares are vested and expected to vest. As of December 31, 2021, there was approximately $36.0 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 3.0 years.

The total intrinsic value of stock options exercised for the years ended December 31, 2021, 2020, and 2019 was $39.5 million, $10.5 million and $16.1 million, respectively.

Restricted Stock Units

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

The weighted-average grant-date fair value of restricted stock units granted during the years ended December 31, 2021, 2020, and 2019 was $52.07, $11.41 and $17.71, respectively.

At December 31, 2021 the total unrecognized compensation cost related to the restricted stock units was $8.8 million, and the weighted-average period over which that cost is expected to be recognized was 2.9 years. The total fair value of restricted stock units vested in the years ended December 31, 2021 and 2020 was $5.3 million and $0.6 million, respectively.

Employee Stock Purchase Plan

Employees are able to purchase stock under the ESPP. The ESPP allows for the issuance of an aggregate of 1.0 million shares of common stock of which 745,655 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.

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8. Net (Loss) Income Per Common Share

A summary of net (loss) income per common share is presented below:

Year Ended December 31,

(Amounts in thousands, except per share amounts) 2021 2020 2019

Effect of dilutive stock options and restricted stock units — 2,061 —

Basic (loss) income per common share $ (0.16) $ 0.06 $ (0.22)

Diluted (loss) income per common share $ (0.16) $ 0.06 $ (0.22)

Anti-dilutive shares excluded from diluted net (loss) income per common share:

Restricted stock units 399 — 157

9. Shareholder’s Equity

At-the-Market Offering

On August 27, 2021, the Company entered into a Sales Agreement with SVB Leerink LLC, as sales agent (“SVB Leerink”), pursuant to which it may offer and sell up to $200.0 million of shares of the Company’s common stock, no par value per share (“ATM Shares”). The ATM Shares to be offered and sold under the Sales Agreement will be issued and sold pursuant to an automatically effective shelf registration statement on Form S-3ASR (File No. 333-259119) filed by the Company on August 27, 2021, which expires three years from the filing date. The Company also filed a prospectus supplement relating to the offering and sale of the ATM Shares on August 27, 2021. The Company is not obligated to make any sales of ATM Shares, and SVB Leerink is not required to sell any specific number or dollar amount of the ATM Shares under the Sales Agreement. The Company capitalizes certain legal, professional accounting and other third-party fees that are directly associated with in-process stock financings as deferred offering costs until such financings are consummated. As of December 31, 2021, the Company has sold no shares pursuant to the Sales Agreement.

10. Fair Value Measurements

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

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

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

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

Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The commercial paper, corporate notes, 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. There were no transfers into or out of Level 3 from December 31, 2019 to December 31, 2021.

The following table summarizes the valuation of the Company’s financial instruments that are measured at fair value on a recurring basis:

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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 securities — — — — 12,842 — 12,842 —

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

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

(a) Approximately $8.0 million of commercial paper has an original maturity of 90 days or less and is recorded as a cash equivalent as of December 31, 2021.

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.

11. Income Taxes

The components of (loss) income before income taxes are summarized as follows:

Year Ended December 31,

(Loss) income before income taxes $ (7,471) $ 2,864 $ (9,665)

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

Year Ended December 31,

(Loss) income before income taxes $ (7,471) $ 2,864 $ (9,665)

Federal statutory rate 21 % 21 % 21 %

Taxes computed at federal statutory rate (1,569) 601 (2,030)

Nondeductible stock-based compensation (4,311) 437 (1,329)

Federal and state rate change 47 249 (164)

Research and orphan drug credits (413) (8,827) —

Reported income taxes $ (111) $ 180 $ —

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Deferred tax assets (liabilities) consist of the following:

Year Ended December 31,

Deferred tax assets:

Net operating loss carryforwards $ 11,571 $ 8,411

Employee benefits and stock-based compensation 11,470 5,692

Research and development costs 5,059 6,411

Deferred tax liabilities:

Property and equipment, net (597) (574)

Total net deferred tax liabilities (12,863) (14,037)

Net deferred tax assets and liabilities $ — $ —

As of December 31, 2021, 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 $44.3 million and $29.3 million, respectively. These net operating loss carryforwards will expire between 2022 and 2039 with the exception of the federal net operating losses generated in 2018 and 2021. The federal net operating losses of $1.5 million generated in 2018 and $6.4 million generated in 2021 can be carried forward indefinitely. The projected annual limitation on the use of the net operating losses that existed prior to September 17, 2014 resulting from the Company’s 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, 2021, the Company’s U.S. federal tax credit carryforwards available to offset future profits are $10.5 million. Based on the research and development and orphan drug credit tax studies performed during 2020, the Company had a sufficient basis to claim the credits and recognized a tax credit carryforward in the 2020 tax year. These credit carryforwards will expire between 2034 and 2040.

In accordance with the accounting guidance for income taxes, the Company estimates 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 sufficient positive evidence exists in future periods to support a release of some or all of the valuation allowance, such a release would likely have a material impact on the Company’s results of operations. The change in the valuation allowance was an increase of $6.6 million and $7.4 million for the years ended December 31, 2021 and 2020, 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 consolidated 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 derecognizes such positions. To the extent the uncertain tax positions meet the “more likely than not” threshold, the Company measures and records the highest probable benefit, and establishes 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.

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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 were 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 is subject to examination in years ranging from incorporation to 2021.

12. 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 $1.0 million, $0.8 million and $0.7 million for the years ended December 31, 2021, 2020 and 2019, respectively.

13. 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, in patients with deep partial and full-thickness thermal burns. On September 16, 2020, the Company announced acceptance of MediWound’s submission of a biologics license application (“BLA”) for review by the U.S. Food and Drug Administration (“FDA”) to seek marketing approval for NexoBrid in the U.S. for the treatment of severe burns, and the FDA’s assignment of a Prescription Drug User Fee Act (“PDUFA”) target date for the product of June 29, 2021. Subsequently, on June 29, 2021, the Company announced that MediWound received a complete response letter from the FDA regarding the BLA, through which the FDA communicated to MediWound that it had completed its review of the BLA, as amended, and had determined that it cannot approve the BLA in its present form. The Company continues to work with MediWound, BARDA and the FDA to address the issues identified in the agency’s complete response letter, to prepare and submit a BLA resubmission to the FDA and to seek the potential approval of NexoBrid.

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 U.S., European Union and other international markets.

In May 2019, the Company paid MediWound $17.5 million in consideration for the license, which was recorded as research and development expense during 2019. The Company is also obligated to pay MediWound $7.5 million, which is contingent upon U.S. regulatory approval of the BLA for NexoBrid and up to $125.0 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 $75.0 million. As of December 31, 2021, 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, 2021, the Company does not hold a direct contract or distribution agreement with BARDA.

14. Commitments and Contingencies

Manufacturing and Supply Agreements

Matricel — In October 2015, the Company signed a long-term supply agreement with Matricel GmbH (“Matricel”) 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 each of the years ended December 31, 2021, 2020 and 2019, respectively. The

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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. In addition, the Company also pays for usage of an offsite warehouse space. In February 2021, the terms of the warehouse operating agreement were extended through March 31, 2027.

Future minimum purchase commitments related to the Company’s contractual obligations are as follows:

Payments Due by Period

15. Subsequent Events

On January 28, 2022, the Company entered into a Lease Agreement (the “Lease”) to lease approximately 126,000 square feet of to-be-constructed manufacturing, laboratory and office space in Burlington, Massachusetts (the “Premises”). Once constructed, the Premises will serve as the Company’s new corporate headquarters and primary manufacturing facility.

The term of the Lease is scheduled to begin 12 months following the landlord’s commencement of construction of the core and shell of the building in which the Premises are located, which is currently expected to be February 28, 2023 (the “Commencement Date”). The Company’s obligation to pay rent for the Premises will begin on the earlier of: 13 months from the Commencement Date; or the date on which the Company first occupies the Premises to conduct operations (the “Rent Commencement Date”). The initial term of the Lease is 144 months following the Rent Commencement Date. The Company has a one-time option to extend the term of the Lease for an additional 10 years, exercisable under certain conditions and at a market rate determined in accordance with the Lease.

The annual base rent of the Lease is initially $57 per square foot per year, subject to annual increases of 2.5%. Monthly contractual payments are expected to range from $0.6 million to $0.8 million. Additionally, the Company is responsible for reimbursing the landlord for the Company’s share of the Premises’ property taxes and certain other operating expenses. The Lease also provides for a tenant improvement allowance from the landlord in an amount equal to $200 per square foot of the Premises, or approximately $25.1 million, towards the design and construction of certain tenant improvements made to the Premises, subject to the terms set forth in the Lease.

In January 2022, in connection with the execution of this Lease, the Company issued a letter of credit collateralized by cash deposits of approximately $6.0 million. Such letter of credit shall be reduced to approximately $4.2 million and $1.8 million at the conclusion of the third and sixth Lease years, respectively, provided certain conditions set forth in the Lease are satisfied.

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

None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Management of the Company, with the participation of the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), has evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). Based on that evaluation, the Company’s CEO and CFO (its “Certifying Officers”) concluded that the Company’s disclosure controls and procedures (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)) were effective as of the period covered by this report.

Management’s Report on Internal Control over Financial Reporting

Management of the Company 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 CEO and CFO 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 of the Company 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 in Internal Control - Integrated Framework (2013). Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2021.

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2021 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, 2021, 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).

Due to the ongoing COVID-19 pandemic, a number of employees and consultants have been working remotely, either part-or full-time. The design of processes, systems, and controls allows for remote execution with accessibility to secure data. The Company is continually monitoring and assessing the evolution and severity of the pandemic to determine any potential impact on the design and operating effectiveness of its internal controls over financial reporting.

Item 9B. Other Information

Not applicable.

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.

Not applicable.

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PART III

Item 10. Directors, Executive Officers and Corporate Governance

The information required by this item (other than the information set forth in the next paragraph in this Item 10) will be included in our Definitive Proxy Statement with respect to our 2022 Annual Meeting of Shareholders to be filed with the SEC no later than 120 days after the close of our year ended December 31, 2021, and is incorporated herein by reference.

Pursuant to Section 406 of the Sarbanes-Oxley Act of 2002, the Company has adopted a code of business conduct and ethics that applies to our officers, directors, and employees. The full text of our code of business conduct and ethics can be found on our website (http://www.vcel.com) under the “Corporate Governance” heading on the “Investor Relations” page. The information on our web site is not part of, and is not incorporated into, this Annual Report on Form 10-K. The Company may satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding an amendment to, or a waiver from, a provision of our code of business conduct and ethics that applies to our CEO, CFO and other senior financial officers, or persons performing similar functions, by posting such information on our website where it is accessible through the same link noted above.

Item 11. Executive Compensation

The information required with respect to this item will be incorporated herein by reference to our Definitive Proxy Statement for our 2022 Annual Meeting of Shareholders or an amendment of this report to be filed with the SEC no later than 120 days after the close of our year ended December 31, 2021.

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

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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

None.

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EXHIBIT INDEX

Exhibit No. Description

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Exhibit No. Description

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Exhibit No. Description

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Exhibit No. Description

21.1** Subsidiaries of Registrant.

101.INS** Inline XBRL Instance Document

101.SCH** Inline XBRL Taxonomy Extension Schema Document

101.CAL** Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB** Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE** Inline XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF** Inline 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.

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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, 2022 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

VCEL US Equity

VCEL · 10-K · period ended 2021-12-31

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 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.

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 2021-12-31

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 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.

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