Stock-Based Compensation

Stock Option and Equity Incentive Plans

The Company has historically had various stock incentive plans and agreements that provide for the issuance of nonqualified and incentive stock options as well as other equity awards. Such awards may be granted by the Company’s Board of Directors to certain of the Company’s employees, directors and consultants. Options granted under these plans expire no later than ten years from the date of grant, and other than those granted to non-employee directors, generally become exercisable over a four period, under a graded-vesting methodology, following the date of grant. The Company generally issues new shares upon the exercise of stock options.

The 2009 Second Amended and Restated Omnibus Incentive Plan (2009 Plan) 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 2009 Plan shall not be less than the fair market value of the Company’s common stock on the date of grant. The 2009 Plan replaced the 1992 Stock Option Plan, the 2001 Stock Option Plan and the Amended and Restated 2004 Equity Incentive Plan (Prior Plans), and no new awards have been granted under the Prior Plans. However, the expiration or forfeiture of options previously granted under the Prior Plans will increase the awards available for issuance under the 2009 Plan.

As of December 31, 2016, there were 1,090,645 shares available for future grant under the 2009 Plan.

Employee Stock Purchase Plan

Employees are able to purchase stock under the Vericel Corporation Employee Stock Purchase Plan (ESPP), which was implemented effective October 1, 2015. The ESPP allows for the issuance of an aggregate of 1,000,000 shares of common stock. Participation in this plan is available to substantially all employees. The ESPP is a compensatory plan accounted for under the expense recognition provisions of the share-based payment accounting standards. Compensation expense is recorded based on the fair market value of the purchase options at the grant date, which corresponds to the first day of each purchase period and is amortized over the purchase period. In January 2017, employees purchased 34,392 shares resulting in proceeds from the sale of common stock of $0.1 million under the ESPP for the first offering period. The total share-based compensation expense for the ESPP for the year ended December 31, 2016 was approximately $0.2 million.

Service-Based Stock Options

During the year ended December 31, 2016, the Company granted 1,110,530 service-based options to purchase common stock. The exercise price of the options is the fair market value per share of common stock on the grant date, generally vest over four years (other than 90,000 non-employee options which vest over one year) and have a term of ten years. The weighted average grant-date fair value of service-based options granted during the years ended December 31, 2016, 2015, and 2014 was $2.15, $2.22 and $2.85, respectively.

The net compensation costs recorded for the service-based stock options related to employees and directors (including the impact of the forfeitures) for the years ended December 31, 2016, 2015, and 2014 were $2.3 million, $2.7 million and $0.8 million, respectively.

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



	Year Ended December 31,
Service-Based Stock Options	2016	2015	2014
Expected dividend rate	—%	—%	—%
Expected stock price volatility	78.7 – 92.2%	77.4 – 88.1%	82.4 – 88.2%
Risk-free interest rate	1.1 – 2.1%	1.5 – 2.0%	1.7 – 2.2%
Expected life (years)	5.5 – 6.3	5.5 – 6.3	5.5 – 6.3

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



Service-Based Stock Options	Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at December 31, 2014	477,530		$	21.74	8.0	$	—
Granted	2,216,600		$	3.11
Exercised	(3,566	)	$	3.02		$	1,000
Expired	(17,791	)	$	40.02
Forfeited	(149,373	)	$	3.35
Outstanding at December 31, 2015	2,523,400		$	36.43	8.7	$	5,000
Granted	1,110,530		$	3.01
Exercised	(39,231	)	$	3.06
Expired	(85,700	)	$	35.76
Forfeited	(153,307	)	$	3.61
Outstanding at December 31, 2016	3,355,692		$	4.66	8.2	$	610
Exercisable at December 31, 2016	1,339,675		$	6.99		$	106

As of December 31, 2016 there was approximately $2.4 million, of total unrecognized compensation cost related to non-vested service-based stock options granted under the 2009 Plan and the Prior Plans. That cost is expected to be recognized over a weighted-average period of 2.8 years.

The total fair value of stock options vested for the years ended December 31, 2016, 2015, and 2014 was $2.2 million, $1.7 million and $1.5 million, respectively.