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 year period, under a graded-vesting methodology, following the date of grant. The Company generally issues new shares upon the exercise of stock options.

For certain non-employee consultants, stock option awards continue to vest post-termination. The guidance for non-employee stock compensation accounting for equity-classified awards was updated, and these awards are now subject to fixed grant date fair value principles which eliminates the variable mark-to-market accounting. The options were valued as of the adoption date July 1, 2018.

The 2017 Omnibus Incentive Plan (2017 Plan) was approved by the Company's shareholders on May 3, 2017 at the annual meeting of shareholders. The 2017 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 2017 Plan shall not be less than the fair market value of the Company’s common stock on the date of grant. The 2017 Plan replaced the 1992 Stock Option Plan, the 2001 Stock Option Plan, the Amended and Restated 2004 Equity Incentive Plan and the 2009 Second Amended and Restated Omnibus 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 2017 Plan.

As of December 31, 2018, there were 2,983,774 shares available for future grant under the 2017 Plan.

Employee Stock Purchase Plan

Employees are able to purchase stock under the Vericel Corporation Employee Stock Purchase Plan (ESPP). The ESPP allows for the issuance of an aggregate of 1,000,000 shares of common stock of which 526,020 have been granted since the inception of the benefit in 2015. Participation in this plan is available to substantially all employees. The ESPP is a compensatory plan accounted for under the expense recognition provisions of the share-based payment accounting standards. Compensation expense is recorded based on the fair market value of the purchase options at the grant date, which corresponds to the first day of each purchase period and is amortized over the purchase period. In January 2019, employees purchased 18,407 shares resulting in proceeds from the sale of common stock of $0.2 million under the ESPP for the fourth quarter of 2018. The total share-based compensation expense for the ESPP for the years ended December 31, 2018, 2017, and 2016 was approximately $0.3 million, $0.2 million, and $0.2 million, respectively.

Service-Based Stock Options

During the year ended December 31, 2018, the Company granted 1,644,160 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 105,000 non-employee director options which vest over one year) and have a term of ten years. The weighted average grant-date fair value of service-based options granted during the years ended December 31, 2018, 2017, and 2016 was $6.96, $1.99 and $2.15, respectively.

The net compensation costs recorded for the service-based stock options related to employees and directors (including the impact of forfeitures) for the years ended December 31, 2018, 2017, and 2016 were $6.9 million, $2.5 million and $2.3 million, respectively.

Stock Compensation Expense

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



	Years Ended December 31,
(in thousands)	2018		2017		2016
Cost of goods sold	$	1,015	$	428	$	427
Research and development	1,672		506		497
General, selling and administrative	4,536		1,746		1,575
Total non-cash stock-based compensation expense	$	7,223	$	2,680	$	2,499

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	2018	2017	2016
Expected dividend rate	—%	—%	—%
Expected stock price volatility	82.3-88.3%	79.7 – 88.2%	78.7 – 92.2%
Risk-free interest rate	2.4-3.1%	1.39 – 2.3%	1.1 – 2.1%
Expected life (years)	5.3 - 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, 2017	4,528,426		$	3.77	8.0	$	10,776,000
Granted	1,644,160		$	9.64
Exercised	(1,180,815	)	$	3.14
Expired	(12,862	)	$	6.84
Forfeited	(188,226	)	$	5.89
Outstanding at December 31, 2018	4,790,683		$	5.85	7.7	$	11,407
Exercisable at December 31, 2018	2,292,065		$	5.40		$	4,840

As of December 31, 2018, 4,481,963 shares are vested and expected to vest. As of December 31, 2018 there was approximately $7.2 million, of total unrecognized compensation cost related to non-vested service-based stock options granted under the 2017 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, 2018, 2017, and 2016 was $10.3 million, $0.7 million and $0.1 million, respectively.