Vericel Corporation

02/26/2026 | Press release | Distributed by Public on 02/26/2026 08:00

Annual Report for Fiscal Year Ending December 31, 2025 (Form 10-K)

Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
Vericel Corporation is a leading provider of advanced therapies for the sports medicine and severe burn care markets. We have a highly differentiated portfolio of cell therapy and specialty biologic products that combines innovations in biology with medical technologies. We were among the first companies to achieve commercial success in the complex field of cell therapies with treatments that use tissue engineering to regenerate skin and healthy knee cartilage. We currently market two U.S. Food and Drug Administration ("FDA") approved autologous cell therapy products and one FDA-approved specialty biologic product 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. Since MACI's commercial launch, the product's FDA-approved labeling has provided for a treating surgeon to use MACI to treat a patient through an open surgical procedure. In August 2024, the FDA approved a supplemental Biologics License Application ("sBLA") expanding the MACI indication to add instructions for the arthroscopic delivery of MACI to the product's approved labeling. MACI Arthro®allows surgeons to evaluate and prepare the cartilage defect site as well as deliver the MACI implant through small incisions using custom-designed arthroscopic instruments developed by the Company ("MACI Arthro instruments"). MACI Arthro became commercially available in the U.S. during the third quarter of 2024 and the Company began selling MACI Arthro instruments at that time.
Epicel®is a permanent skin replacement Humanitarian Use Device ("HUD") indicated for the treatment of adult and pediatric patients with deep-dermal or full-thickness burns comprising greater than or equal to 30 percent of a patient's total body surface area ("TBSA"). We also hold an exclusive license from MediWound Ltd. ("MediWound") for the North American rights to NexoBrid®(anacaulase-bcdb), a topically-administered biological orphan product containing proteolytic enzymes, which is indicated for the removal of eschar in adult and pediatric patients with deep partial-thickness and/or full-thickness thermal burns.
Manufacturing
We have a cell manufacturing facility in Cambridge, Massachusetts, which is currently used for U.S. manufacturing and distribution of MACI and Epicel. In January 2022, we entered into a lease agreement (as amended, the "Burlington Lease") to lease approximately 126,000 square feet of manufacturing, laboratory and office space in Burlington, Massachusetts. The Burlington facility is complete, and we are currently utilizing the facility's office space. Once validated, the facility's manufacturing component will eventually become the primary manufacturing facility for MACI and Epicel.
The manufacturing process for NexoBrid is conducted by MediWound, primarily at manufacturing locations in Israel. Certain raw materials utilized in NexoBrid's manufacture, including the supply of the active ingredient bromelain, are sourced from Taiwan.
Product Portfolio
Our current marketed products include two FDA-approved autologous cell therapies and one FDA-approved specialty biologic product. MACI is 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. In connection with our MACI product, we sell MACI biopsy kits, which are used by treating surgeons to obtain a sample of cartilage tissue, which is later sent to us. If a patient decides to move forward with MACI treatment, we subsequently use the cartilage sample to manufacture a MACI implant. When an orthopedic surgeon decides to treat a patient by implanting MACI through an arthroscopic approach the surgeon may choose to use our custom MACI Arthro instruments during the procedure, which we sell by way of a separate transaction.
Epicel is a permanent skin replacement indicated for the treatment of adult and pediatric patients with deep-dermal or full-thickness burns comprising greater than or equal to 30 percent of a patient's TBSA. Both autologous cell therapy products, MACI and Epicel, are currently manufactured and marketed in the U.S. NexoBrid is a topically-administered biological orphan product containing proteolytic enzymes that is indicated for eschar removal in adult and pediatric patients with deep partial-thickness and/or full-thickness thermal burns. We hold exclusive license and supply agreements with MediWound to commercialize NexoBrid in North America. The Company operates its business primarily in the U.S. in one reportable segment - the research, product development, manufacture and distribution of cellular therapies and specialty biologics for use in the treatment of specific conditions.
MACI
MACI is a third-generation autologous chondrocyte implantation ("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 audiences are orthopedic surgeons who self-identify and/or have formal specialty training in sports medicine, and a subpopulation of general orthopedic surgeons who perform a high volume of cartilage repair procedures involving the knee. Our MACI commercial team consists of individual sales representatives that regularly engage with our target audience. The team is divided into geographic regions and is managed by a senior sales leadership team. A vast majority of the largest commercial payers in the U.S. have a formal medical policy that provides benefit coverage for treatment with MACI. 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.
MACI consists of autologous cultured chondrocytes, which are human-derived cells that are obtained from the patient's own cartilage, and which are seeded onto resorbable Type I/III collagen membrane. Since MACI's commercial launch, the product's FDA-approved labeling has provided for a treating surgeon to use MACI to treat a patient through an open surgical procedure. In August 2024, the FDA approved a supplemental Biologics License Application ("sBLA") expanding the MACI indication to add instructions for the arthroscopic delivery of MACI to the product's approved labeling, permitting the repair of single or multiple full-thickness cartilage defects of the knee up to 4 cm2 in size via an arthroscopic approach. MACI Arthro provides a less invasive technique compared to the open arthrotomy approach and allows surgeons to evaluate, prepare and treat the cartilage defect and deliver the MACI implant, under direct arthroscopic visualization and, should the surgeon so choose, to use specialized and custom-designed instruments (the "MACI Arthro instruments") through small incisions or portals. The arthroscopic delivery of MACI may increase the ease of MACI's use for physicians and may reduce both the length of the procedure as well as procedure-induced trauma, which may result in a reduction of a patient's post-operative pain and accelerate a patient's recovery. MACI Arthro became commercially available in the U.S. during the third quarter of 2024 and we began selling MACI Arthro instruments at that time. We have experienced strong surgeon interest in the MACI Arthro technique since its launch. To date, more than 900 surgeons have participated in Company-sponsored education and training programs concerning the arthroscopic approach. We believe that the availability of MACI Arthro provides a significant growth opportunity for the overall MACI business, as we have already seen a significant increase in both MACI biopsies and implants from those surgeons who have engaged in MACI Arthro training and education programs. In conjunction with the launch of MACI Arthro, we have expanded our target surgeon base from 5,000 to 7,000 to include orthopedic surgeons that perform high volumes of knee cartilage repair surgeries, predominantly through arthroscopic procedures.
We also are focused on delivering MACI treatment to patients suffering from cartilage damage in the ankle. Following an application to the FDA, we received Investigational New Drug ("IND") clearance for MACI's use in the ankle during the second quarter of 2025, and during the fourth quarter of 2025 initiated a Study of MACI in Patients Aged 17 to 65 with Symptomatic Chondral or Osteochondral Defects of the Talus ("MASCOT"). MASCOT is a two-year prospective, multicenter, two-arm, parallel group open-label trial in which a total of 309 subjects, aged 17 to 65 will be randomized 2:1 to receive a one-time treatment in the talus with MACI or arthroscopic bone marrow stimulation. MASCOT is the first randomized, controlled clinical trial evaluating MACI for the treatment of Osteochondral Lesion of the Talus ("OLT"). There are approximately 165,000 ankle resurfacing procedures conducted in the U.S. each year. Approximately 66,000 of those patients each year are considered clinically appropriate for MACI by surgeons. We estimate that approximately 18,000 of those patients suffer from larger ankle cartilage lesions, resulting in an increase of MACI's addressable market. If approved, we believe MACI's label expansion allowing its use to repair cartilage defects in the ankle will be a significant long-term growth driver for the product in the coming years.
Finally, our Burlington facility, discussed more fully above, is designed to meet both U.S. and global manufacturing requirements, which provides strategic flexibility to potentially commercialize MACI outside the U.S., and we are currently evaluating introducing MACI in additional geographies. We are currently focused on obtaining regulatory and marketing approval for MACI in the United Kingdom through the Medicine and Healthcare products Regulatory Agency ("MHRA") and, if successful, anticipate commercializing MACI in the United Kingdom in 2027.
Epicel
Epicel is a permanent skin replacement for deep-dermal or full-thickness burns comprising greater than or equal to 30 percent TBSA. Epicel is regulated by the FDA's Center for Biologics Evaluation and Research ("CBER") under medical device authorities, and is the only FDA-approved cultured epidermal autograft product available for large total surface area burns in both adult and pediatric patients. 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., and, for certain HUDs, the amount a manufacturer may charge for the product's use is restricted.
Epicel is not price-restricted in this manner because in 2016, the FDA approved our HDE supplement to revise the labeled indications of use for Epicel to specifically include pediatric patients, thus allowing Epicel to be sold for profit. The product label also 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 large burns treated with Epicel relative to standard care.
NexoBrid
Our portfolio of commercial-stage products also includes NexoBrid (anacaulase-bcdb), a topically-administered biological orphan product containing proteolytic enzymes, for which the FDA approved a BLA in December 2022. NexoBrid is indicated for the removal of eschar in adults with deep partial-thickness and/or full-thickness thermal burns. Subsequently, in August 2024, the FDA approved an sBLA expanding NexoBrid's indication to include pediatric patients.
In addition to the U.S., NexoBrid is approved in the European Union ("EU") and other international markets and has been designated as an orphan biologic in the U.S., EU and other international markets. NexoBrid has the potential to change the standard of care for eschar removal with respect to hospitalized burn patients and treat a significant addressable market in the U.S. With respect to NexoBrid, of the approximately 40,000 people that are hospitalized in the U.S. each year for burn-related injuries, the majority, over 30,000, have thermal burns and will likely require some level of eschar removal. NexoBrid's FDA approval expands our burn care franchise's total addressable market, which permits us to treat a significantly larger segment of hospitalized burn patients than with Epicel alone. The expansion of our target addressable market supports a broader commercial footprint, and we believe that this may help drive both increased NexoBrid use as well as increased Epicel awareness throughout the burn care space. Both our Epicel and NexoBrid products are serviced by our burn care field force, which consists of individual sales and clinical representatives that regularly engage with our target audience. The team is divided into geographical regions and is managed by a senior sales leadership team.
In May 2019, we entered into exclusive license and supply agreements with MediWound to commercialize NexoBrid in North America. The manufacturing process for NexoBrid is conducted by MediWound, primarily at manufacturing locations in Israel. Certain raw materials utilized in NexoBrid's manufacture, including the supply of the active ingredient bromelain, are sourced from Taiwan.
Results of Operations
The following is a summary of our consolidated results of operations:
Year Ended December 31, 2025 vs. 2024
(In thousands) 2025 2024 2023 Change $ Change %
Total revenue $ 276,259 $ 237,224 $ 197,516 $ 39,035 16.5 %
Cost of product sales 70,660 65,117 61,940 5,543 8.5 %
Gross profit 205,599 172,107 135,576 33,492 19.5 %
Research and development 27,563 24,797 21,042 2,766 11.2 %
Selling, general and administrative 166,992 142,791 120,998 24,201 16.9 %
Total operating expenses 194,555 167,588 142,040 26,967 16.1 %
Income (loss) from operations 11,044 4,519 (6,464) 6,525 144.4 %
Total other income 6,333 5,991 4,096 342 5.7 %
Income tax expense 859 148 814 711 480.4 %
Net income (loss) $ 16,518 $ 10,362 $ (3,182) $ 6,156 59.4 %
Comparison of the Periods Ended December 31, 2025 and 2024
Total Revenue
Revenue by product is as follows:
Year Ended December 31, 2025 vs. 2024
(In thousands) 2025 2024 2023 Change $ Change %
MACI $ 239,506 $ 197,309 $ 164,800 $ 42,197 21.4 %
Epicel 32,066 36,623 31,574 (4,557) (12.4) %
NexoBrid 4,687 3,292 1,142 1,395 42.4 %
Total revenue $ 276,259 $ 237,224 $ 197,516 $ 39,035 16.5 %
Total revenue increase for the year ended December 31, 2025, compared to 2024, was driven primarily by MACI volume and price growth and NexoBrid volume growth, partially offset by lower Epicel volume.
Seasonality.Sales of MACI implants have historically experienced a level of seasonality throughout the year. In the last five years through 2025, MACI sales volumes from the first through the fourth quarter on average represented 21% (20%-22% range), 23% (22%-24% range), 22% (21%-24% range) and 34% (33%-34% range) respectively, of total annual volumes. Historically, 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. Due to the low incidence and variable occurrence of severe burns, Epicel has inherent variability from quarter-to-quarter and does not exhibit significant seasonality.
Gross Profit
Gross profit increased for the year ended December 31, 2025, compared to the same period in 2024, primarily driven by MACI revenue growth combined with our primarily fixed manufacturing cost structure, which consists mainly of labor and facility costs.
Research and Development Expenses
Research and development expenses for the year ended December 31, 2025 were $27.6 million, compared to $24.8 million for 2024. The increase is primarily related to additional headcount and expenses including to support the technical transfer of MACI to our new manufacturing facility in Burlington, Massachusetts, primarily offset by lower MACI Arthro project costs compared to 2024.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the year ended December 31, 2025 were $167.0 million, compared to $142.8 million for 2024. The increase in selling, general and administrative expenses is primarily due to higher headcount and employee expenses, including stock compensation, an increase in marketing programs and sales activity, and facility costs including depreciation expense for the new facility in Burlington, Massachusetts.
Total Other Income
The change in total other income for the year ended December 31, 2025, was due primarily to fluctuations in the rates of return on our investments in various marketable debt securities and money market funds.
Income Tax Expense
For the years ended December 31, 2025 and 2024, we recorded $0.9 million and $0.1 million, respectively, of income tax expense as a result of state income taxes. The increase in income tax expense is primarily due to an increase in taxable income. We continue to maintain a full valuation allowance on all of our net deferred tax assets.
Stock-based Compensation Expense
Non-cash stock-based compensation expense is summarized in the following table:
Year Ended December 31, 2025 vs. 2024
(In thousands) 2025 2024 2023 Change $ Change %
Cost of product sales $ 4,217 $ 3,911 $ 2,970 $ 306 7.8 %
Research and development 4,680 4,068 3,705 612 15.0 %
Selling, general and administrative 29,870 28,516 25,650 1,354 4.7 %
Total non-cash stock-based compensation expense $ 38,767 $ 36,495 $ 32,325 $ 2,272 6.2 %
The increase in stock-based compensation expense for the year ended December 31, 2025, is due primarily to fluctuations in stock prices and the mix of service-based options and restricted stock units, 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, 2024 and 2023
For a comparison of our results of operations for the fiscal years ended December 31, 2024 and December 31, 2023, 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, 2024, filed with the SEC on February 27, 2025.
Cash Flows
The following table summarizes our sources and uses of cash for each of the periods presented:
Year Ended December 31,
2025 2024 2023
Net cash provided by operating activities $ 51,910 $ 58,163 $ 35,311
Net cash used in investment activities (43,937) (79,034) (3,130)
Net cash provided by financing activities 7,070 19,054 3,618
Net increase (decrease) in cash, cash equivalents, and restricted cash $ 15,043 $ (1,817) $ 35,799
For a discussion of our liquidity and capital resources related to our cash flow activities for the fiscal year ended December 31, 2023, 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, 2024, filed with the SEC on February 27, 2025.
Net Cash Provided by Operating Activities
Our cash and cash equivalents totaled $100.1 million, short-term investments totaled $37.4 million and long-term investments totaled $61.4 million as of December 31, 2025. The $51.9 million of net cash provided by operations in 2025, was primarily the result of net income of $16.5 million, non-cash charges of $38.8 million related to stock compensation expense, $11.5 million in depreciation and amortization expense and $5.4 million in operating lease amortization, partially offset by a net decrease of $22.4 million related to movements in our working capital accounts. The overall decrease in cash from our working capital accounts was primarily driven by an increase in accounts receivable due to higher sales volume and payments on operating leases, partially offset by an increase in accounts payable and accrued expenses due to timing of payments.
Our cash, cash equivalents, and restricted cash totaled $85.0 million, short-term investments totaled $41.7 million and long-term investments totaled $39.9 million as of December 31, 2024. The $58.2 million of net cash provided by operations in 2024, was primarily the result of net income of $10.4 million, non-cash charges of $36.5 million related to stock compensation expense, $6.7 million in operating lease amortization and $5.5 million in depreciation and amortization expense, partially offset by a net decrease of $0.7 million related to movements in our working capital accounts. The overall decrease in cash from our working capital accounts was primarily driven by an increase in inventory primarily related to supporting NexoBrid commercial
availability and an increase in accounts receivable due to higher sales volume, partially offset by an increase in operating lease liabilities due to receipts of tenant improvement allowances which exceeded payments on operating leases amortization.
Net Cash Used in Investing Activities
Net cash used in investing activities during the year ended December 31, 2025 was the result of $72.4 million in investment purchases, $27.2 million of property and equipment purchases primarily for construction in process related to the Burlington Lease, partially offset by $55.6 million of investment sales and maturities.
Net cash used in investing activities during the year ended December 31, 2024 was the result of $68.2 million in investment purchases, $64.0 million of property and equipment purchases primarily for construction in process related to the Burlington Lease, partially offset by $53.2 million of investment sales and maturities.
Net Cash Provided by Financing Activities
Net cash provided by financing activities during the year ended December 31, 2025 was the result of net proceeds from the exercise of stock options and the employee stock purchase plan of $13.9 million, partially offset by the payment of employee withholding taxes related to the vesting of restricted stock units of $6.8 million.
Net cash provided by financing activities during the year ended December 31, 2024 was the result of net proceeds from the exercise of stock options and the employee stock purchase plan of $24.5 million, partially offset by the payment of employee withholding taxes related to the vesting of restricted stock units of $5.5 million.
Liquidity
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 advance and complete our product development and product life-cycle management programs and to market and commercialize our products, including NexoBrid. To date, we have financed our operations primarily through cash received through MACI, Epicel and NexoBrid sales, debt, and public and private sales of our equity securities. In the future, we may finance our operations through sales of equity securities, revolver borrowings or other debt financings, in addition to cash generated from operations.
We believe that our current cash on hand, cash equivalents, investments, and available borrowing capacity 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. Our actual cash requirements may differ from projections and will depend on many factors, including the level and pace of future research and development efforts, the scope and results of ongoing and potential clinical trials, the costs involved in filing, prosecuting and enforcing patents, the need for additional manufacturing capacity, competing technological and market developments, global macroeconomic conditions, costs associated with possible acquisitions or development of complementary business activities, and the cost to market our products.
Sources of Capital
On July 29, 2022, we entered into a $150.0 million five-year senior secured revolving credit agreement by and among the Company, the other loan parties thereto, the lenders party thereto, and JPMorgan Chase Bank, N.A., as the administrative agent (the "Revolving Credit Agreement"). We have no immediate plans to borrow under the Revolving Credit Agreement, but we may use the facility for working capital needs and other general corporate purposes. As of December 31, 2025, there are no outstanding borrowings under the Revolving Credit Agreement, and we are in compliance with all applicable covenant requirements. See Note 8, "Revolving Credit Agreement" in the accompanying consolidated financial statements for further details.
Contractual Obligations
We lease facilities in Ann Arbor, Michigan, Cambridge, Massachusetts and Burlington, Massachusetts. The Cambridge facility includes clean rooms, laboratories for MACI and Epicel manufacturing and office space. We also pay for use of two offsite warehouse spaces and lease equipment. Total remaining obligations related to operating and finance leases are $132.3 million as of December 31, 2025.
On July 1, 2023, we renewed our long-term supply agreement with Matricel for the supply of ACI-Maix collagen membranes used in the manufacture of MACI. Under the terms of the Matricel Supply Agreement, we have committed to annual minimum purchase values totaling approximately €12.5 million over the eight-year term.
Our total purchase commitments consist of minimum purchase amounts of raw materials and finished goods used in our cell manufacturing process to manufacture our marketed cell therapy products and total $15.8 million as of December 31, 2025, as well as usage of offsite warehouse space. The total remaining contractual obligations related to the warehouse agreement are $0.7 million as of December 31, 2025. 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 is recognized in accordance with ASC 606, Revenue Recognition. We recognize product revenue from sales to a customer 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 contract with two specialty pharmacies, Orsini Pharmaceutical Services, Inc. ("Orsini") and AllCare Plus Pharmacy, Inc. ("AllCare") to distribute MACI in a manner in which we retain the credit and collection risk from the end customer. We pay each specialty pharmacy a fee in each instance when it dispenses MACI for use in treating a patient. Both Orsini and AllCare perform collection activities to collect payment from customers. In addition, we sell MACI directly to hospitals pursuant to an agreed upon purchase order and to a distributor, DMS Pharmaceutical Group, Inc. ("DMS") at a contracted rate for the treatment of patients at military facilities throughout the U.S. We engage a third party to provide services in connection with a patient support program to manage patient cases and to ensure that complete and correct billing information is provided to the insurers and hospitals.
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 a MACI implant to a patient. We recognize 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 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, and there are typically no forms of variable consideration related to warranties to customers.
When we sell MACI through specialty pharmacies, 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, 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 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 accounts receivable 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. They 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. A 50 basis points change to the estimated uncollectible percentage could result in approximately $0.7 million decrease or increase in the revenue recognized for the year ended December 31, 2025.
Leases
We determine if an arrangement is a lease at inception, in accordance with ASC Topic 842, Leases. 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, warehouse space, and certain 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 employees and non-employee directors 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 and non-employee directors 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 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. We record the expense for stock options and restricted stock units using a graded-vesting attribution method.
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.
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