What changed in this filing

/stocks — the workspaceLOADING

Item 1A. Risk Factors

2024-03-11 compared with 2023-03-23 · 394 added, 587 removed, 864 unchanged (53% of the section changed)

7 unchanged sentences

We have incurred operating losses and may continue to do so for the near-term future, and we cannot assure you that we will be able to generate sufficient revenue to achieve or sustain profitability.

For the years ended December 31, 2022 and 2021, we had net loss of $32.9 million and $24.8 million, respectively.

For the years ended December 31, 2023 and 2022, we had net losses of $37.7 million and $32.9 million, respectively.

We expect our losses to continue for the foreseeable future, and these losses will continue to have an adverse effect on our financial position.

Because of the numerous risks and uncertainties associated with our commercialization and development efforts, including our ability to obtain FDA clearance for the next generation of our flagship CanGaroo product, CanGaroo RM and successfully commercialize this product, we are unable to predict when we will become profitable.

We cannot make assurances that we will ever generate sufficient revenue from our operations to achieve profitability and, even if we achieve profitability, we cannot be sure that we will remain profitable for any substantial period of time.

Our ability to achieve profitability will depend on our ability to generate sales from existing or new products sufficient to exceed our ongoing operating expenses and capital requirements.

Because of the numerous risks and uncertainties affecting product sales and our ongoing commercialization and product development efforts, including our ability to obtain FDA clearance for the next generation of our flagship CanGaroo product, CanGarooRM, we are unable to predict with any certainty whether we will be able to increase sales of our products or the timing or amount of ongoing expenditures we will be required to incur.

Sales of our products, as well as meaningful reductions, suspensions or discontinuations of such sales, may not offset our operating expenses.

As a result, we expect to continue to incur operating losses in the future and may never achieve profitability.

Furthermore, even if we do achieve profitability, we may not be able to sustain or increase profitability on an ongoing basis.

Our inability to achieve and then maintain profitability would negatively affect our business, financial condition, results of operations and cash flows, negatively affect the value of our securities and our ability to raise capital and continue operations .

We have identified conditions and events that raise substantial doubt regarding our ability to continue as a going concern.

We have incurred net losses since our inception in 2015.

For the year ended December 31, 2023, we had net losses of $37.7 million and as of December 31, 2023, we had an accumulated deficit of $175.6 million.

To date, we have financed our operations primarily through amounts borrowed under our credit facilities, sales of our products, proceeds from offerings and sales of our common stock and more recently, through the sale of our Orthobiologics Business.

We have devoted the majority of our resources to manufacturing costs, research and development, clinical and administrative activity and investing in our commercial infrastructure through our direct sales force and commercial partners in order to expand our presence and to promote awareness and adoption of our products.

As noted above, we cannot assure you that we will achieve profitability or sustain it if we do.

Without sustained profitability, we may not be able to satisfy our obligations as they become due, including our indebtedness or our obligations related to the FiberCel Recall or VBM Recall, which are described in further detail in Part I, Item 3, “Legal Proceedings” and Note 17 to the consolidated financial statements, in this Annual Report.

As a result, we anticipate that we will need additional funding to support our continuing operations and pursue our growth strategy.

In order to mitigate the current and potential future liquidity issues, we may seek to raise capital through the issuance of common stock or pursue asset sale or licensing transactions.

However, such transactions may not be successful and we may not be able to raise additional equity or sell or license assets on acceptable terms, or at all.

As such, there can be no assurance that we will be able to continue as a going concern.

Our indebtedness and our Revenue Interest Obligation to Ligand Pharmaceuticals Incorporated may limit our flexibility in operating our business and adversely affect our financial health and competitive position.

As of December 31, 2023, we had $23.7 million of indebtedness outstanding, consisting of $24.5 million outstanding under our SWK Loan Facility (as defined under Part II, Item 7.

“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Credit Facilities”), net of $0.8 million of unamortized discount and deferred financing costs.

In addition, we are party to a royalty agreement with Ligand Pharmaceuticals Incorporated (“Ligand”) pursuant to a long-term obligation to Ligand, which we amended in January 2024 (the “Revenue Interest Obligation”).

The Revenue Interest Obligation requires us to pay Ligand 5.0% of future sales of our CanGaroo, ProxiCor, Tyke and VasCure products, and substantially similar products, through May 31, 2027, subject to annual minimum payments of $4.4 million.

See Part II, Item 7.

“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Significant Judgment and Estimates — Revenue Interest Obligation.”

In order to service this indebtedness and our Revenue Interest Obligation, and any additional indebtedness or other long-term obligations we may incur in the future, we need to generate sufficient levels of cash from our operating activities.

Our ability to generate cash is subject, in part, to our ability to successfully execute our business strategy, as well as general economic, financial, competitive, regulatory and other factors beyond our control.

We cannot assure you that our business will be able to generate sufficient levels of cash from operations or that future borrowings or other financings will be available to us in an amount sufficient to enable us to service our indebtedness, satisfy our obligations under the Revenue Interest Obligation and fund our other liquidity needs.

To the extent we are required to use cash from operations or the proceeds of any future financing to service our indebtedness and satisfy our obligations under the Revenue Interest Obligation instead of funding working capital, capital expenditures or other general corporate purposes, we will be less able to plan for, or react to, changes in our business, industry and in the economy generally.

This will place us at a competitive disadvantage compared to our competitors that have less indebtedness.

In addition, the agreements governing our SWK Loan Facility contains, and any agreements evidencing or governing other future indebtedness may also contain, certain covenants that limit our ability to engage in certain transactions that may be in our long-term best interests.

Subject to certain limited exceptions, these covenants limit our ability to, among other things:

● incur additional indebtedness;

● incur certain liens;

● pay dividends or make other distributions on equity interests;

● enter into agreements restricting their subsidiaries’ ability to pay dividends;

● redeem, repurchase or refinance subordinated indebtedness;

● consolidate, merge or sell or otherwise dispose of their assets;

● make investments, loans, advances, guarantees and acquisitions;

● enter into transactions with affiliates;

● amend or modify their governing documents;

● amend or modify certain material agreements;

● alter the business conducted by them and their subsidiaries;

● enter into sale and leaseback transactions.

In addition to these covenants, the agreement governing our SWK Loan Facility also contains two financial covenants, the first of which is measured quarterly, and requires us to achieve a specified minimum aggregate revenue (as defined therein) for the preceding 12-month period, and the second of which requires us to maintain a minimum liquidity (as defined therein) of the greater of $5.0 million and the sum of the operating burn (as defined therein) for the two prior consecutive fiscal quarters then ended.

While we were in compliance with all covenants under the agreement as of December 31, 2023, there can be no guarantee that we will not breach these covenants in the future.

Our ability to comply with these covenants may be affected by events and factors beyond our control.

In the event that we breach one or more covenants, our lenders may choose to declare an event of default and require that we immediately repay all amounts outstanding, terminate any commitment to extend further credit and foreclose on the collateral granted to them to collateralize such indebtedness.

The occurrence of any of these events could have a material adverse effect on our business, financial condition and results of operations.

In addition, we may incur significant additional indebtedness in the future.

Although the agreement governing our SWK Loan Facility contains restrictions on the incurrence of additional indebtedness by us, such restrictions are subject to a number of qualifications and exceptions, and the indebtedness incurred in compliance with these restrictions could be substantial.

Also, these restrictions do not prohibit us from incurring obligations that do not constitute indebtedness as defined therein.

To the extent that we incur additional indebtedness or such other obligations, the risks associated with our substantial indebtedness described above will increase.

Various events permit the lender under the SWK Loan Facility to terminate the agreement, following a cure period.

Such events include, without limitation, a failure to timely pay interest or principal, insolvency, or an action by the FDA or such other material adverse event impacting the operations of Elutia.

If the lender were to terminate either the SWK Loan Facility, the lender may declare all or any portion of these obligations to become immediately due and payable.

Our future results depend upon the success a smaller suite of established products than has historically been the case in the past, and upon the success of our CanGarooRM product, which has not yet been approved for sale.

On November 8, 2023, we sold our Orthobiologics Business for consideration of approximately $14.6 million up front, as adjusted, and up to $20 million payable in the form of earn-out payments over the five years following the closing.

The purchaser did not assume any liabilities related to the FiberCel or VBM Recalls, or any claims or lawsuits related thereto.

Our former Orthobiologics segment accounted for 52% and 39% of our consolidated net sales and gross profit, respectively in the year ended December 31, 2022.

Our future results depend on the success of our Device Protection, Women’s Health and Cardiovascular businesses.

There can be no guarantee, however, that we will be able to increase the sales or profitability of the remaining businesses sufficiently to replace or exceed the financial contribution from the Orthobiologics Business.

Moreover, the Company has focused much of its attention recently on a version of its established CanGaroo product known as CanGarooRM, a biomatrix that combines the CanGaroo envelope with antibiotics.

CanGarooRM will require FDA clearance of a 510(k) submission to be marketed in the United States.

We submitted the required 510(k) premarket notification in April 2022 and, in March 2023, received a Not Substantially Equivalent letter from FDA requiring us to address questions relating to drug testing.

On December 18, 2023, the Company submitted a 510(k) notification to address the FDA’s questions.

Although the Company anticipates a favorable approval decision in the first half of 2024 and is preparing for a commercial launch of CanGarooRM, there is no assurance that the FDA will approve the new product on our anticipated timeline, or at all.

See the risk factors captioned “ Our long-term growth depends on our ability to enhance our products, expand our product indications and develop, acquire and commercialize additional product offerings ” and “ The regulatory approval, certification and clearance processes of the FDA and comparable foreign authorities and notified bodies are lengthy, time consuming and inherently unpredictable, and if we are ultimately unable to obtain regulatory approval or other marketing authorizations or certifications for our products and product candidates, our business will

be substantially harmed ” below for further information.

Delays and other adverse developments in the approval process for CanGarooRM and other future products may adversely delay or change the Company’s plans and its future success.

Our enhanced reliance in the wake of the disposition of the Orthobiologics Business on a smaller suite of existing products and on future products may pose risks to the Company’s growth.

If the financial contribution from remaining legacy products and the future contribution from planned products like CanGarooRM fail to replace lost contribution from the Orthobiologics Business, or otherwise fail to meet expectations, the Company’s business and financial condition may be materially adversely affected.

We face significant litigation related to FiberCel.

In June of 2021, the Company announced the FiberCel Recall.

Our FiberCel products were included in the sale of our former Orthobiologics Business to Berkeley, but Berkeley did not assume any liabilities related to the FiberCel Recall, our market withdrawal of all of our viable bone matrix products, or any claims or lawsuits related thereto.

We have been named in multiple lawsuits alleging that the plaintiffs contracted tuberculosis and are suffering substantial adverse symptoms following the implantation of FiberCel during spinal fusion operations, which are described in further detail in Part I, Item 3, “Legal Proceedings” and Note 17 to the consolidated financial statements included elsewhere in this Annual Report.

We have incurred and will continue to incur costs to defend these lawsuits.

Furthermore, these proceedings are still expected to continue for the reasonably foreseeable future, and we cannot predict the course the proceedings will take or their ultimate outcome.

As discussed below under “ We face the risk of product liability claims and may not be able to obtain or maintain adequate product liability insurance”, we have recorded a total estimated contingent liability of $15.0 million related to the resolution of all FiberCel lawsuits and claims and have recorded insurance receivables of $2.7 million in respect of our insurance coverage for the FiberCel Recall product liability losses, as well as related legal defense costs incurred as of December 31, 2023.

While we believe our estimated liability to be reasonable, the actual loss amounts are highly variable and turn on a case-by-case analysis of the relevant facts.

As such, actual settlement amounts may differ from our estimates and such differences may be material.

In addition, this contingent liability excludes the future costs to defend against the lawsuits and claims.

As of December 31, 2023, the estimated contingent liability for FiberCel lawsuits exceeds the FiberCel insurance receivable by $12.3 million and as such, the excess will be our financial responsibility.

The satisfaction of this net obligation and the future costs incurred are expected to have a material adverse effect on our cash flow, results of operations, financial position and prospects.

We face significant risks related to our Viable Bone Matrix recall.

In July 2023, we announced the VBM Recall, a voluntary recall of a single lot of one of our VBM products and the market withdrawal of all of our VBM products produced after a specified date.

Our VBM products were included in the sale of our former Orthobiologics Business to Berkeley, but Berkeley did not assume any liabilities related to the VBM Recall, our market withdrawal of all of our viable bone matrix products, or any claims or lawsuits related thereto.

Notice of the VBM Recall was issued to centers after we learned of post-surgical MTB infections in two patients treated with product from a single donor lot of our VBM product.

Prior to release, samples from this specific lot had tested negative for MTB by an independent laboratory using a nucleic acid test that is designed to specifically detect the MTB organism.

A total of 36 patients were treated with product from the single donor lot.

At present, two lawsuits and 15 claims have been asserted as a result of the VBM Recall.

We have purchased insurance coverage that, subject to common contract exclusions, is expected to provide full coverage for the VBM Recall as well as legal defense costs.

While unknown at this time, possible losses in connection with the VBM Recall could have a material effect on our financial position and results of operations.

We face the risk of product liability claims and may not be able to obtain or maintain adequate product liability insurance.

Our business exposes us to the risk of product liability claims that are inherent in the manufacturing, processing, investigating and marketing of medical devices and human and animal tissue products.

For example, within our recently divested Orthobiologics Business, in June 2021, the FiberCel Recall occurred and in July 2023, the VBM Recall

S ince September 2021, we have received notice of 109 separate lawsuits or claims related to the FiberCel Recall alleging that the plaintiffs contracted tuberculosis and/or suffered substantial symptoms and complications following the implantation of FiberCel during spinal fusion operations.

As of December 31, 2023, 80 lawsuits or claims related to the FiberCel Recall remain outstanding and unsettled.

Furthermore, with respect to the VBM Recall, we have received notice of two lawsuits and 15 claims, all of which remain unsettled as of December 31, 2023 .

These lawsuits and claims are described in further detail in See Part II, Item 1, “Legal Proceedings” and Note 17 to the consolidated financial statements included elsewhere in this Annual Report.

We are, and may in the future be, subject to product liability claims and lawsuits, including additional claims or lawsuits from the FiberCel and VBM Recalls noted above, and potential class actions or mass tort claims, alleging that our products have resulted or could result in an unsafe condition or injury.

Product liability claims may be made by patients and their families, healthcare providers or others selling our products.

Product liability claims may include, among other things, allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability or a breach of warranties.

Additionally, we may be subject to product liability claims, proceedings and lawsuits, even if the apparent injury is due to the actions of others or the pre-existing health of the patient.

For example, we rely on physicians and other healthcare providers to properly and correctly use our products.

If these physicians or other healthcare providers are not properly trained or are negligent in using our products, the capabilities of our products may be diminished, or the patient may suffer critical injury.

In addition, we may be subject to product liability claims, as well as a number of other risks, as a result of physicians and other healthcare providers using our products “off-label.” See the risk factor entitled “ The misuse or off-label use of our products may harm our reputation in the marketplace, result in injuries that lead to product liability suits or result in costly investigations, fines or sanctions by regulatory bodies if we are deemed to have engaged in the promotion of these uses, any of which could be costly to our business ” included in this Annual Report.

Defending any current or future claims, proceedings or lawsuits, regardless of merit, could be costly, divert management attention and result in adverse publicity, which could result in the withdrawal of, or reduced acceptance of, our products in the market.

If we cannot successfully defend against product liability claims, we could incur substantial liability and costs.

In addition, regardless of merit or eventual outcome, product liability claims may result in:

● harm to our business reputation;

● investigations by regulators;

● significant legal costs;

● distraction of management’s attention from our primary business;

● substantial monetary awards to patients or other claimants;

● loss of revenue;

● exhaustion of any available insurance and our capital resources;

● decreased demand for our products.

Our product liability insurance is subject to deductibles and coverage limitations, and we may not be able to maintain this insurance.

As of December 31, 2023, we have recorded insurance receivables of $2.7 million on our balance sheet in respect of our insurance coverage for the FiberCel Recall product liability losses with such receivable representing the total remaining insurance coverage for the FiberCel Recall as of that date.

As of December 31, 2023, we have recorded insurance receivables of $0.1 on our balance sheet in respect of our insurance coverage for the VBM Recall.

As described above, our future FiberCel Recall litigation costs and obligations now significantly exceed insurance coverage and are expected to have a material adverse effect on our cash flow and financial position.

Additionally, it is possible that future claims related to the VBM Recall or other product liability claims could exceed the limits of, or be excluded from, coverage under our policies, and claims against us could also increase the cost of maintaining our coverage.

If these or other claims are excluded from our coverages, or if we are unable to maintain product liability insurance at an acceptable cost or on acceptable terms with adequate coverage or otherwise protect ourselves against potential product liability claims, or if we underestimate the amount of insurance we need, we could be exposed to significant liabilities, which may harm our business.

One or more product liability claims could have a significant adverse effect on our business, financial condition and results of operations.

Our future capital needs are uncertain and we may need to raise funds in the future, and such funds may not be available on acceptable terms or at all.

Our future capital needs are uncertain and, as such, we may seek to raise additional capital through equity offerings, debt financings, collaborations or other arrangements.

Any future funding requirements will depend on many factors, including, among other things:

● continued patient, physician and market acceptance of our products;

● the scope, rate of progress and cost of our current and future pre-clinical and clinical studies;

● the cost of our research and development activities and the cost of commercializing new products or technologies;

● the cost and timing of expanding our sales and marketing capabilities;

● the cost of filing and prosecuting patent applications and maintaining, defending and enforcing our patent or other intellectual property rights;

● the cost of defending, in litigation or otherwise, any claims that we infringe, misappropriate or otherwise violate third-party patents or other intellectual property rights;

● the costs of defending against or damages payable (to the extent above the applicable insurance coverage), for example, in connection with lawsuits and claims involving the FiberCel Recall or VBM Recall;

● the cost and timing of additional regulatory approvals or certifications;

● costs associated with any product recall;

● the effect of competing technological and market developments;

● the expenses we incur in manufacturing and selling our products;

● the costs of developing and commercializing new products or technologies;

● the extent to which we acquire or invest in products, technologies and businesses, although we currently have no commitments or agreements relating to any of these types of transactions;

● the costs of operating as a public company;

● unanticipated general, legal and administrative expenses.

In addition, our operating plan may change as a result of any number of factors, including those set forth above and other factors currently unknown to us, and we may need additional funds sooner than anticipated.

Any additional equity or debt financing that we raise may contain terms that are not favorable to us or our stockholders.

If we raise additional funds by selling additional shares of our common stock or other securities convertible (directly or indirectly) into or exercisable or exchangeable for shares of our common stock, the issuance of such securities will result in dilution to our stockholders.

The price per share at which we sell additional shares of our common stock, or securities convertible into or exercisable or exchangeable for shares of our common stock, in future transactions may be higher or lower than the price per share paid by you.

Furthermore, investors purchasing any securities we may issue in the future may have rights superior to your rights as a holder of our common stock.

In addition, any future debt financing into which we enter may impose upon us covenants that restrict our operations, including limitations on our ability to incur liens or additional debt, pay dividends, repurchase our common stock, make certain investments and engage in certain merger, consolidation or asset sale transactions.

If we raise additional funds through collaboration and other arrangements with third parties, it may be necessary to relinquish some rights to our technologies or our products, or grant licenses on terms that are not favorable to us.

Furthermore, we cannot be certain that additional funding will be available to us on acceptable terms, if at all.

If we do not have, or are not able to obtain, sufficient funds, we may have to delay development or commercialization of our products or license to third parties the rights to commercialize products or technologies that we would otherwise seek to commercialize.

We also may have to reduce marketing, customer support or other resources devoted to our products or cease operations.

Any of these factors could harm our business, financial condition and results of operations.

Adverse changes in general domestic and global economic conditions and instability and disruption of credit markets could adversely affect our business, financial condition, results of operations and liquidity.

3 unchanged sentences

As a result, hospitals and healthcare systems may curtail and reduce capital and overall spending, which may have a significant adverse effect on our business.

In addition, the current economic downturn related to the COVID-19 pandemic has resulted and may continue to result in, and any economic downturn that may occur in the future may also result in, higher unemployment and a reduction in the number of individuals covered by private insurance, which may result in an increase in the cost of uncompensated care for hospitals.

Higher unemployment may also result in a shift in reimbursement patterns as unemployed individuals switch from private plans to public plans such as U.S.

Medicaid or Medicare.

As economic conditions deteriorate, any significant shift in coverage for the unemployed may have an unfavorable impact on our business.

In addition, we maintain our cash and cash equivalents in accounts with financial institutions that exceed insured limits.

In addition, we maintain our cash in accounts with financial institutions that exceed insured limits.

Market conditions can impact the viability of these institutions.

3 unchanged sentences

All of these factors related to global economic conditions, which are beyond our control, could adversely impact our business, financial condition, results of operations and liquidity.

We have identified conditions and events that raise substantial doubt regarding our ability to continue as a going concern.

We have incurred net losses since our inception in 2015.

For the year ended December 31, 2022, we had net losses of $32.9 million and as of December 31, 2022, we had an accumulated deficit of $138.0 million.

To date, we have financed our operations primarily through private placements of our convertible preferred stock, amounts borrowed under our credit facilities and sales of our products and, more recently, with proceeds from offerings and sales of our Class A common stock.

We have devoted the majority of our resources to acquisition and integration, manufacturing costs, research

and development, clinical activity and investing in our commercial infrastructure through our direct sales force and commercial partners in order to expand our presence and to promote awareness and adoption of our products.

We expect that our operating expenses will continue to increase as we expand our product development and clinical and research activities, and incur additional costs associated with being a public company.

Our ability to achieve profitability will depend on our ability to generate sales from existing or new products sufficient to exceed our ongoing operating expenses and capital requirements.

Because of the numerous risks and uncertainties affecting product sales and our ongoing commercialization and product development efforts, we are unable to predict with any certainty whether we will be able to increase sales of our products or the timing or amount of ongoing expenditures we will be required to incur.

Sales of our products, as well as meaningful reductions, suspensions or discontinuations of such sales (such as that involving FiberCel), may not offset our operating expenses.

As a result, we expect to continue to incur operating losses in the future and may never achieve profitability.

Furthermore, even if we do achieve profitability, we may not be able to sustain or increase profitability on an ongoing basis.

As a result, we anticipate that we will need additional funding to support our continuing operations and pursue our growth strategy.

In order to mitigate the current and potential future liquidity issues, we may seek to raise capital through the issuance of common stock, restructure our Revenue Interest Obligation (as defined below) or pursue asset sale or licensing transactions.

However, such transactions may not be successful and we may not be able to raise additional equity, refinance our Revenue Interest Obligation, or sell or license assets on acceptable terms, or at all.

As such, there can be no assurance that we will be able to continue as a going concern.

Our long-term growth depends on our ability to enhance our products, expand our product indications and develop, acquire and commercialize additional product offerings.

4 unchanged sentences

Developing, acquiring and commercializing products is expensive and time-consuming and could divert management’s attention away from our core business.

Even if we are successful in developing additional products, the success of any new product offering or enhancements to any of our existing products will depend on several factors, including our ability to:

Even if we are successful in developing additional

products, the success of any new product offering or enhancements to any of our existing products will depend on several factors, including our ability to:

● properly identify and anticipate physician and patient needs;

6 unchanged sentences

● obtain the necessary regulatory clearances, certifications or approvals for new products, product enhancements and expanded indications;

● maintain full compliance with FDA, European Union (“EU”) medical devices regulations and other regulatory requirements applicable to new devices or products or modifications of existing devices or products;

● maintain full compliance with FDA medical devices regulations and other regulatory requirements applicable to new devices or products or modifications of existing devices or products;

● provide adequate training to potential users of our products;

3 unchanged sentences

In addition, our research and development efforts may require a substantial investment of time and resources before we are adequately able to determine the commercial viability of a new product, technology or other innovation.

On March 16, 2023, we received a NSE determination from the FDA for CanGaroo RM, requiring us to address additional items relating to drug testing in furtherance of potential market clearance.

In March 2023, we received a Not Substantially Equivalent letter from FDA requiring us to address questions relating to drug testing, primarily a request by FDA to modify an in vitro drug release assay employed as a manufacturing control.

In December 2023, we submitted a 510(k) premarket notification to the FDA for our next-generation DEB product, CanGarooRM.

If we are not able to obtain FDA regulatory clearance for this product candidate within our planned timeline, if at all, our ability to commercialize this product and generate sales therefrom will be adversely impacted.

1 unchanged sentence

In addition, we will be required to invest additional time and resources to address the outstanding items and provide the additional data requested to FDA, which could divert management’s attention from core business and result in additional research and development expenses.

Even if we are able to successfully develop and commercialize new product offerings or enhancements, they may be quickly rendered obsolete by changing customer preferences or the introduction by our competitors of products embodying new technologies or features and/or otherwise not produce sales in excess of the costs of development, any of which could also materially and adversely affect our business, financial condition and results of operations.

which could also materially and adversely affect our business, financial condition and results of operations.

Furthermore, to the extent we seek to enhance our products and broaden our product portfolio through acquisitions or other commercial transactions, we will be subject to additional risks.

1 unchanged sentence

These transactions entail significant risks .”

We may not realize all of the potential consideration associated with the sale of our Orthobiologics Business .

On November 8, 2023, we completed the sale of the assets of our former Orthobiologics Business to Berkeley.

In the sale, we received approximately $14.6 million, and we may earn up to an additional $20 million, in the aggregate, in the form of earn-out payments.

The earn-out payments are equal to 10% of the actual revenue earned by Berkeley in each of the five years after the closing of the sale from sales of specified Orthobiologics products under the purchase agreement (including improvements, modifications, derivatives and enhancements related to those products).

Additionally, the purchase agreement provides for a customary indemnity holdback in the amount of $1.5 million to be retained by Berkeley for 24 months after close.

There can be no assurance that we will be able to realize the expected benefits of the transaction, or that we will receive all of the potential consideration associated with the earn-out payments or customary indemnity holdback.

If we are unable to or do not realize the expected strategic, economic, or other benefits of the transaction, it could adversely affect our business and financial position.

Because we depend upon a limited number of third-party suppliers and manufacturers and, in certain cases, exclusive suppliers for products essential to our business, we may incur significant product development costs and experience material delivery delays if we lose any significant supplier, which could materially and adversely affect our business, financial condition and results of operations.

We obtain some of our raw materials from a limited group of suppliers and, for reasons of quality assurance, cost-effectiveness, availability or constraints resulting from regulatory requirements, we rely on a single supplier, Cook Biotech, to source the SIS ECM biomaterial used to manufacture CanGaroo and our cardiovascular products.

Additionally, with the sale of our Orthobiologics Business in November 2023 to Berkeley, we no longer operate our former Richmond, California human tissue processing and distribution facility;

however, we continue to have contract manufacturing relationship with Berkeley under which we receive SimpliDerm.

At present, Berkeley is our single source of supply for SimpliDerm, but we are evaluating additional options for supply redundancy.

For us to be successful, our suppliers must be able to provide us with products and components in substantial quantities, in compliance with regulatory requirements, in accordance with agreed upon specifications, at acceptable costs and on a timely basis.

Our efforts to maintain a continuity of supply and high quality and reliability may not be successful on a timely basis or at all.

Manufacturing disruptions experienced by our suppliers may jeopardize our supply of finished products.

Due to the stringent regulations and requirements of the FDA and other similar non-U.S.

regulatory agencies regarding the manufacture of our products, we may not be able to quickly establish additional or replacement sources for certain raw materials.

A change in suppliers could require significant effort or investment in circumstances where the items supplied are integral to product performance or incorporate unique technology.

Transitioning to a new supplier could be time-consuming and expensive, may result in interruptions in our operations and product delivery, could affect the performance specifications of our products or could require that we modify the design of those systems.

A reduction or interruption in manufacturing, or an inability to secure alternative sources of raw materials or supplies, could have a material and adverse effect on our business, financial condition, results of operations and cash flows.

One or more of our suppliers may refuse to extend us credit with respect to our purchasing or leasing of equipment, supplies, products or components, or may only agree to extend us credit on significantly less favorable terms or subject to more onerous conditions.

This could significantly disrupt our ability to purchase or lease required equipment, supplies, products and components in a cost-effective and timely manner, and could have a material adverse effect on our business, financial condition and results of operations.

Any casualty, natural disaster or other disruption of any of our sole-source suppliers’ operations, for example due to a COVID-19 infection of employees of the supplier, or any unexpected loss of any existing exclusive supply contract, could have a material adverse effect on our business, financial condition and results

of operations.

In addition, if a change in manufacturer results in a significant change to any product, a new 510(k) clearance from the FDA or similar international regulatory authorization, or certification may be necessary before we implement the change, which could cause substantial delays.

A substantial portion of our net sales is generated through our commercial partners and independent sales agents, which subjects us to various risks.

We currently rely on the efforts of our commercial partners and independent sales agents to generate a substantial portion of our net sales, and we expect to continue to rely on these third parties to generate a substantial portion of our net sales in the future while we work to grow our direct sales force.

For example, we have commercial agreements with major medical device companies, including Boston Scientific, Biotronik and beginning in March 2023, Sientra.

For example, we have commercial agreements with major medical device companies, including Boston Scientific, Sientra and LeMaitre Vascular.

As a result, the impairment or termination of these relationships for any reason, or the failure of these parties to diligently sell our products and comply with applicable laws and regulations, has and could in the future materially and adversely affect our ability to generate revenue and profits.

5 unchanged sentences

In addition, we do not have staff in many of the areas covered by our commercial partners and independent sales agents, which makes it particularly difficult for us to monitor their performance.

While we may take steps to mitigate the risks associated with noncompliance by our commercial partners

and independent sales agents, there remains a risk that they will not comply with regulatory requirements or our requirements and policies.

While we may take steps to mitigate the risks associated with noncompliance by our commercial partners and independent sales agents, there remains a risk that they will not comply with regulatory requirements or our requirements and policies.

Actions by the sales representatives and other employees of our commercial partners and independent sales agents that are beyond our control could adversely impact sales in that territory or result in harm to the reputation of the Company or our products or legal liability, any of which could have a material adverse effect on our business, financial condition and results of operations.

In addition to the risk of losing customers, the operation of local laws and our agreements with our commercial partners and independent sales agents would make it difficult for us to replace a commercial partner or independent sales agent we believe is underperforming.

We are also subject to the risk that any such commercial partner will experience financial difficulties, or seek protection in bankruptcy.

For example, in February 2024, Sientra reported that it had filed for chapter 11 bankruptcy protection in the Bankruptcy Court for the District of Delaware.

If a commercial partner experiences financial difficulties, that could prevent them from making payments to us on a timely basis or at all, and if a commercial partner seeks bankruptcy protection, our contracts with that partner could be rejected or a purchaser of the partner’s business could elect not to assume our contract.

The loss of one or more significant commercial partners, a material reduction in their purchases of our product or their inability to perform their contractual obligations, including, for example, committed purchase requirements could adversely affect our business, financial condition and results of operations.

In order to increase our sales, we intend to develop relationships and arrangements with additional commercial partners and/or independent sales agents, which we may not be able to do on commercially reasonable terms or at all.

If we are unable to establish new commercial partner and independent sales agent relationships and maintain our relationships with our existing commercial partners and independent sales agents, in each case, on commercially reasonable terms, we will be unable to increase sales of our products, which, in turn, could materially and adversely affect our business, financial condition and results of operations.

In addition, certain of our commercial partners may, from time to time, account for a significant portion of our net sales and/or accounts receivable.

Sales to one of our commercial partners accounted for 11% of our net sales during the year ended December 31, 2022 and represented 12% of our accounts receivable as of December 31, 2022.

As previously disclosed, in December 2021, we terminated our distribution agreement with Medtronic, which accounted for 11% of our net sales during the year ended December 31, 2021, as a result of our voluntary recall of our FiberCel product.

The loss of one or more significant commercial partners, a material reduction in their purchases of our products, such as what we have experienced with Medtronic, or their inability to perform their contractual obligations, including, for example, committed purchase requirements, has affected and could continue to adversely affect our business, financial condition and results of operations.

We are also subject to the risk that any such commercial partner will experience financial difficulties that prevent them from making payments to us on a timely basis or at all.

Our revenue and profitability could be materially and adversely affected if we fail to maintain our relationships with our existing contract manufacturing customers or enter into agreements with new contract manufacturing customers, or if existing contract manufacturing customers reduce purchases of our products.

Our relationships with these customers also subject us to certain risks.

Our contract manufacturing operations are an important component of our business, enabling us to utilize as much as possible of the human biological material from which we produce our core orthopedic/spinal repair and soft tissue reconstruction products, leverage our existing overhead and improve our cash flow.

In addition, we have historically generated a significant portion of our total net sales from these sales, with such sales representing approximately 26.1% and 20.7% of our total net sales for the years ended December 31, 2022 and 2021, respectively.

If we are unable to maintain our relationships and contracts with our existing contract manufacturing customers and establish relationships with new contract manufacturing customers on terms that are favorable to us, or if our existing contract manufacturing customers materially reduce their purchases of our products, our sales and profitability may be adversely affected.

In addition, although we have invested, and expect to continue to invest, significant time and resources cultivating our relationships with these customers, these relationships subject us to certain risks.

For example, our contract manufacturing customers may use their experience with our products to develop their own solutions, which they may be able to produce at a lower cost than the price they pay for our products.

This is particularly true given that many of our customers are large, established companies that may be able to achieve greater economies of scale in manufacturing and production and/or experience synergies from vertical integration.

In addition, our contract manufacturing customers routinely audit and inspect our facilities, processes and practices to ensure that our manufacturing process and products meet their internal standards and applicable regulatory standards.

To date, we have passed all such audits and inspections.

However, we may not do so in the future, and any failure to perform to our customers’ satisfaction in these audits could significantly harm our relationships with them and our reputation, which could materially and adversely affect our business, financial condition and results of operations.

Furthermore, the need to comply with our customers’ internal requirements could result in increased development, manufacturing, warranty and administrative costs.

A significant increase in these costs could adversely affect our business, financial condition and results of operations.

There is also a

risk that we may be unable to supply products in the quantities and of the quality required by these customers within their required timeframes, which would also jeopardize our relationships with them.

Disagreements or disputes may also arise from time to time.

Any of these events, to the extent they cause our customers to reduce purchases of our products or terminate their relationships with us, could have a material adverse effect on our business, financial condition and results of operations.

In addition, our sales to these customers may be impacted by changes in their buying habits over which we have no control.

Such changes may be driven by, among other things, changes in market share, cyclicality, inventory reductions, spending patterns, cost-cutting measures, product development activity and timelines and changes in supply chain management, as well as the impact of general economic conditions.

These customers may also experience financial difficulties or other problems that may prevent them from making payments to us on a timely basis or at all.

Any of these events could cause our operating results to fluctuate from period to period, make it more difficult for us to manage our inventory and production schedules and otherwise adversely affect our business, financial condition and results of operations.

Our business has been, and may continue to be, adversely affected by the COVID-19 pandemic, and we may be adversely affected by any future pandemic, epidemic or outbreak of an infectious disease in the United States or worldwide.

The COVID-19 pandemic continues to evolve, with pockets of resurgence and the emergence of variant strains contributing to continued uncertainty about its scope, duration, severity, trajectory, and lasting impact.

The COVID-19 pandemic negatively impacted our business, financial condition and results of operations by intermittently decreasing and delaying the number of procedures performed using our products, as healthcare organizations in the United States prioritized the treatment of patients with COVID-19 or otherwise altered their operations to prepare for and respond to the pandemic.

The COVID-19 pandemic has also adversely impacted the initiation, continuation and completion of our clinical studies by, for example, intermittently delaying procedures using our products or reducing the number of patients, healthcare providers or clinical facilities available or willing to participate in the clinical studies.

These delays have resulted in increased costs, delays in advancing our product development, delays in testing the effectiveness of our technology or termination of the clinical studies altogether.

We have experienced and may in the future experience these or other disruptions from the COVID-19 pandemic or other pandemic, epidemic or outbreak of an infectious disease that could reduce our net sales in the future and negatively impact our business, financial condition and results of operations.

The extent to which the COVID-19 pandemic or any future pandemic, epidemic or outbreak of an infectious disease impacts our business, will depend on future events and developments, which are highly uncertain and cannot be predicted, including the severity and spread of the disease and the effectiveness of actions to contain the disease or treat its impact and the emergence of new variants, among other developments.

Our future growth depends on physician awareness of the distinctive characteristics, benefits, safety, clinical efficacy and cost-effectiveness of our products.

3 unchanged sentences

We also produce and distribute marketing and educational materials, including materials outlining our products, for our sales teams using printed, video and multimedia formats.

However, our efforts to educate physicians, surgeons and other healthcare professionals regarding our products may not be successful, particularly with respect to our orthobiologics products in light of the recent events involving the FiberCel Recall, and in markets where we rely exclusively on the efforts of our commercial partners and independent sales agents.

However, our efforts to educate physicians, surgeons and other healthcare professionals regarding our products may not be successful, particularly in markets where we rely exclusively on the efforts of our commercial partners and independent sales agents.

If we do not adequately educate physicians, surgeons and other healthcare professionals about our products, as well as any adverse events involving these products, our products may not gain or maintain market acceptance, which may adversely affect our business, financial condition and results of operations.

2 unchanged sentences

We believe physicians, surgeons and other healthcare professionals will only adopt our products if they determine, based on experience, clinical data and published peer reviewed journal articles, that the use of our products in a particular procedure is a favorable alternative to other available methods.

In light of the events surrounding the FiberCel Recall, described in Part I, Item 3, “Legal Proceedings” and Note 17 to the consolidated financial statements included elsewhere in this Annual Report, such positive evaluation of our Bone Repair products may become more challenging.

Physicians also are more interested in using cost-effective products as they face increasing cost-containment pressure.

10 unchanged sentences

● clinical data and the clinical indications for which our products are approved or certified;

● product labeling or product insert requirements of the FDA, the EU or other regulatory authorities, including any limitations or warnings contained in approved labeling;

● product labeling or product insert requirements of the FDA or other regulatory authorities, including any limitations or warnings contained in approved labeling;

● the cost of using our products relative to the use of our competitors’ products or alternative treatment modalities;

9 unchanged sentences

If we do not receive this support (e.g., because we are unable to demonstrate favorable long-term clinical data or otherwise), physicians and hospitals may not use our products, which would significantly impair our ability to increase our sales and prevent us from achieving and sustaining profitability.

Unfavorable results from any of our pre-clinical or clinical studies, comparative effectiveness, economic or other studies, or from similar studies conducted by others, may negatively affect the use or adoption of our products by physicians, hospitals and payors, which could have a negative impact on the market acceptance of our products and their profitability.

We regularly conduct a variety of pre-clinical and clinical studies, comparative effectiveness studies and economic and other studies of our products in an effort to generate clinical and real-world outcomes and cost effectiveness data in order to obtain product approval and drive further penetration in the markets we serve.

If a clinical study conducted by us or a third party fails to demonstrate statistically significant results supporting performance, use benefits or compelling health or economic outcomes from using our products, physicians may elect not to use our products.

Furthermore, in the event of an adverse clinical study outcome, our products may not achieve “standard-of-care” status, where they exist, for the conditions in question, which could deter the adoption of our products.

Also, if serious adverse events are reported during the conduct of a study, it could affect continuation of the study, product approval, certification or clearance and product adoption.

In addition, U.S.

and foreign regulatory authorities routinely conduct audits of clinical studies and such audits may result in adverse regulatory actions.

If we are unable to develop a body of statistically significant evidence from our clinical study program, whether due to adverse results or the inability to complete properly designed studies, domestic and international public and private payors could refuse to cover procedures using our products, limit the manner in which they cover our products or reduce the price they are willing to pay or reimburse for procedures using our products.

Any of these events could have a negative impact on market acceptance of procedures using our products and their profitability, which could have a material adverse effect on our business, financial condition and results of operations.

We may need to continue to expand our organization and managing growth may be more difficult than we expect.

10 unchanged sentences

Accordingly, although we have no current commitments with respect to any acquisition or investment, we regularly review potential acquisitions of, investments in, and licenses or other commercial arrangements involving, complementary businesses, products or technologies instead of developing them ourselves.

In addition, in regularly evaluating our financial and operating performance, we may decide to sell one or more of our product lines or another portion of our business.

Opportunities to engage in these transactions may not be readily available to us at commercially reasonable prices, on other terms acceptable

to us or at all.

In addition, in regularly evaluating our financial and operating performance, we may decide to sell one or more of our product lines or another portion of our business as we did with our Orthobiologics Business.

Opportunities to engage in these transactions may not be readily available to us at commercially reasonable prices, on other terms acceptable to us or at all.

Even if such opportunities are available, these transactions involve significant risks.

6 unchanged sentences

● be unable to realize the anticipated benefits, such as increased revenues, cost savings or synergies from additional sales of existing or newly acquired products;

● experience dissynergies in shared functions following a divestment of any portion of our business;

● experience dis-synergies in shared functions following a divestment of any portion of our business;

● be unable to successfully integrate, operate, maintain and manage any newly acquired operations;

17 unchanged sentences

Our competitors have historically dedicated, and will continue to dedicate, significant resources to promote their products and to develop new products that compete with ours.

Customers in our target markets consider many factors when selecting a product, including product efficacy, ease of use, price, availability of payor coverage and adequate third-party reimbursement for procedures using the product, customer support services for technical-, clinical- and reimbursement-related matters and customer preference for, and loyalty to, particular products or a particular manufacturer.

Customers in our target markets consider

many factors when selecting a product, including product efficacy, ease of use, price, availability of payor coverage and adequate third-party reimbursement for procedures using the product, customer support services for technical-, clinical- and reimbursement-related matters and customer preference for, and loyalty to, particular products or a particular manufacturer.

We expect competition to remain intense as competitors introduce additional competing products and enhancements to their existing products, and continue expanding into geographic markets where we currently operate or plan to expand.

14 unchanged sentences

● better product support and service;

● superior product safety, reliability and durability, particularly in light of the events involving the FiberCel Recall;

● superior product safety, reliability and durability, particularly in light of the events involving the FiberCel and VBM Recalls;

● more effective pricing and revenue strategies.

procedures using our products, and are safer and more effective than their alternatives, as well as our ability to otherwise compete effectively on the factors listed above.

Our ability to achieve and maintain profitability will depend, in part, on our ability to develop or acquire proprietary products that reach the market in a timely manner, receive adequate coverage and reimbursement for procedures using our products, and are safer and more effective than their alternatives, as well as our ability to otherwise compete effectively on the factors listed above.

If we are unable to do so, our sales and/or margins will decrease, which could have a material adverse effect on our business, financial condition and results of operations.

19 unchanged sentences

If we are forced to lower the price we charge for our products, our margins will decrease, which could impair our ability to grow our business and have a material adverse effect on our business, financial condition and results of operations and impair our ability to grow our business.

Outside of the United States, centralized governmental healthcare authorities may exert pricing pressures in an effort to lower healthcare costs.

Implementation of healthcare reforms and competitive bidding contract tenders may limit the price or the level at which reimbursement is provided for our products and adversely affect both our pricing flexibility and the demand for our products.

Healthcare providers may respond to such cost-containment pressures by substituting lower-cost products or other therapies for our products.

Our failure to offer acceptable prices to these customers could adversely affect our sales and profitability in these markets.

We expect that market demand, government regulation, third-party coverage and reimbursement policies and societal pressures will continue to change the healthcare industry worldwide, resulting in further business consolidations and alliances among our customers, which may exert further downward pressure on the prices for our products.

The processing of human and porcine tissue for our products is technically complex, requiring high levels of quality control and precision, which subjects us to increased production risks.

We manufacture our human and porcine tissue products using technically complex processes requiring specialized facilities, highly specific raw materials, skill and diligence by our personnel and other production constraints.

The complexity of these processes, as well as strict company and government standards for the manufacture and storage of our products, subjects us to production risks.

The processing of porcine tissue for our products is technically complex, requiring high levels of quality control and precision, which subjects us to increased production risks.

We manufacture our porcine tissue products using technically complex processes requiring specialized facilities, highly specific raw materials, skill and diligence by our personnel and other production constraints.

The complexity of these processes, as well as strict company and government standards for the manufacture and storage of our products, subject us to production risks.

In addition to ongoing production risks, process deviations or unanticipated effects of approved process changes may result in non-compliance with regulatory requirements, including stability requirements or specifications.

For example, our bone allograft products, such as ViBone and OsteGro V, must be shipped and maintained within a specified temperature range.

If environmental conditions deviate from that range, our products’ remaining shelf-lives could be impaired or their safety and efficacy could be adversely affected, making them unsuitable for use.

The occurrence of this or any other actual or suspected production or distribution problem can lead to lost inventory, customer returns and, in some cases, recalls, with consequential damage to our reputation and customer relationships and the risk of product liability.

For example, in June 2021, we issued a voluntary recall pertaining to a single donor lot of our FiberCel Fiber Viable Bone Matrix, a bone repair product made from human tissue that is used in various orthopedic and spinal procedures.

Notice of the voluntary recall was issued to hospitals that received product from this specific lot following our learning of post-surgical infections in patients treated with FiberCel, including some patients that tested positive for tuberculosis.

The lot consisted of 154 units of FiberCel, all derived from a single donor, that were shipped to facilities in 20 states.

We have investigated the source of the infections in coordination with our distributor, the FDA and the U.S.

Centers for Disease Control and Prevention (“CDC”).

The FDA inspected our Richmond, California production facility, and this inspection did not result in any Form-483 observations.

Additionally, multiple product liability lawsuits have been filed against us.

See “We face the risk of product liability claims and may not be able to obtain or maintain adequate product liability insurance” for additional information about these product liability lawsuits.

This investigation, as well as others that may occur in the future, and the remediation of any potential or identified problems can cause production delays and result in substantial additional expenses and lost revenue.

In addition, we may experience difficulties in scaling up processing and production of our human and porcine tissue products, including problems related to yields, quality control and assurance, tissue availability, adequacy of control policies and procedures and availability of skilled personnel.

The occurrence of this or any other actual or suspected production or distribution problem can lead to lost

inventory, customer returns and, in some cases, recalls, with consequential damage to our reputation and customer relationships and the risk of product liability.

Product recalls and investigations, and the remediation of any potential or identified problems can cause production delays and result in substantial additional expenses and lost revenue.

In addition, we may experience difficulties in scaling up processing and production of our porcine tissue products, including problems related to yields, quality control and assurance, tissue availability, adequacy of control policies and procedures and availability of skilled personnel.

Furthermore, developing and maintaining our production capabilities has required, and will continue to require, the investment of significant resources, and we cannot guarantee that we will be able to achieve economies of scale.

If we are unable to process and produce our human tissue products on a timely basis, at acceptable quality and costs and in sufficient quantities, or if we experience technological problems, delays in production, failure in the storage of our products or other loss of supply, our business would be materially and adversely affected.

If we are unable to process and produce our porcine tissue products on a timely basis, at acceptable quality and costs and in sufficient quantities, or if we experience technological problems, delays in production, failure in the storage of our products or other loss of supply, our business would be materially and adversely affected.

Performance issues, service interruptions or price increases by our shipping carriers could adversely affect our business, harm our reputation and impair our ability to provide our products on a timely basis or at all.

2 unchanged sentences

Should a carrier encounter delivery performance issues such as loss, delays, damage or destruction of any of our products, it would be costly to replace these products in a timely manner and such occurrences may damage our reputation and lead to decreased demand for our products and increased cost and expense to our business.

This risk is particularly high with respect to ViBone, Fiber VBM, and OsteGro V, all of which must be shipped and maintained within a specified temperature range.

In addition, any significant increase in shipping rates could adversely affect our operating margins and results of operations.

2 unchanged sentences

We do not have redundant facilities.

We manufacture our human tissue-based products at our facility in Richmond, California.

The SIS ECM biomaterial used in our medical device products are manufactured by Cook Biotech at their facility in West Lafayette, Indiana and converted to a finished product at our facility in Roswell, Georgia.

5 unchanged sentences

Our insurance for damage to our property and the disruption of our business may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms or at all.

We obtain some of our raw materials from a limited group of suppliers and rely on a single supplier to source the SIS ECM biomaterial used to manufacture CanGaroo and our cardiovascular products for reasons of quality assurance, cost-effectiveness, availability or constraints resulting from regulatory requirements.

Our efforts to maintain a continuity of supply and high quality and reliability may not be successful on a timely basis or at all.

Manufacturing disruptions experienced by our suppliers may jeopardize our supply of finished products.

Due to the stringent regulations and requirements of the FDA and other similar non-U.S.

regulatory agencies regarding the manufacture of our products, we may not be able to quickly establish additional or replacement sources for certain raw materials.

A change in suppliers could require significant effort or investment in circumstances where the items supplied are integral to product performance or incorporate unique technology.

In addition, if a change in manufacturer results in a significant change to any product, a new 510(k) clearance

from the FDA or similar international regulatory authorization, or certification may be necessary before we implement the change, which could cause substantial delays.

Certain of our products are dependent on the availability of tissue from human donors, and any disruption in supply could adversely affect our business, financial condition and results of operations.

The products we manufacture for the orthobiologics and soft tissue reconstruction markets require that we obtain human tissue.

The success of our business depends, in part, on the availability of tissue from human donors.

Any inability to obtain tissue from our sources will interfere with our ability to effectively meet demand for these products.

The recovery of human tissue for our products is very labor-intensive, and it is, therefore, difficult to maintain a steady supply stream.

In addition, the availability of acceptable donors is relatively limited and may be impacted by regulatory changes, general public opinion of the donation process and the reputation of our company and the third-party procurement firms with which we partner to manage the donation process.

Media reports or other negative publicity concerning both improper methods of tissue recovery from donors and disease transmission from donated tissue, including bones and dermis, may limit widespread acceptance of our products.

Unfavorable reports of improper or illegal tissue recovery practices, both in the United States and internationally, as well as incidents of improperly processed tissue leading to transmission of disease, may broadly affect the rate of future tissue donation and market acceptance of allograft technologies and donated tissue use.

Potential patients may not be able to distinguish our products, technologies and tissue recovery and processing procedures from others engaged in tissue recovery.

In addition, unfavorable reports about us or any of our third-party procurement firms may make families of potential donors or donors themselves, from whom we are required to obtain consent before processing tissue, reluctant to agree to donate tissue to for-profit tissue processors.

For the year end December 31, 2022, we received donated tissue from seven third-party procurement firms, including one third-party procurement firm that supplied 52% of the donors received during the year.

Any disruption in the supply of any human tissue component could materially harm our ability to manufacture our products until a new source of supply, if any, could be found.

We may be unable to find a sufficient alternative supply channel within a reasonable period of time, on commercially reasonable terms or at all, which would have a material adverse effect on our business, financial condition and results of operations.

Increased prices for raw materials or supplies used in our products could adversely affect our business, financial condition and results of operations.

8 unchanged sentences

Demand for our products can change, and has changed, rapidly and unexpectedly, including during the time between when raw materials are ordered from our suppliers and the finished product is offered for sale.

to accurately forecast customer acceptance of new products, unanticipated changes in general market conditions, reimbursement or regulatory matters and weakening of economic conditions.

Our ability to accurately forecast demand for our products could be negatively affected by a number of factors, many of which are beyond our control, including our failure to accurately manage our expansion strategy, product introductions by competitors, an increase or decrease in customer demand for our products or for products of our competitors, our failure to accurately forecast customer acceptance of new products, unanticipated changes in general market conditions, reimbursement or regulatory matters and weakening of economic conditions.

Inventory levels that exceed the demand for our products may result in inventory write-downs or write-offs, which would adversely affect our gross margins.

For example, since our launch of SimpliDerm 2019, evolving demand for different dimensions of the product have periodically resulted in excess inventory write-downs.

Conversely, if we underestimate demand for our products, additional supplies of raw materials or additional manufacturing capacity may not be available when required on terms that are acceptable to us or at all, and suppliers or our third-party manufacturer may not be able to allocate sufficient capacity in order to meet our increased requirements.

18 unchanged sentences

State and federal healthcare programs, such as Medicare and Medicaid, closely regulate provider payment levels and have sought to contain, and sometimes reduce, payment levels.

Private payors frequently

follow government payment policies and are likewise interested in controlling increases in the cost of medical care.

Private payors frequently follow government payment policies and are likewise interested in controlling increases in the cost of medical care.

In addition, some payors are adopting pay-for-performance programs that differentiate payments to healthcare providers based on the achievement of documented quality-of-care metrics, cost efficiencies or patient outcomes.

3 unchanged sentences

Adverse changes in payment rates by payors to hospitals could adversely impact our ability to market and sell our products and negatively affect our financial performance.

In international markets, medical device regulatory requirements and healthcare payment systems vary significantly from country to country, and many countries have instituted price ceilings on specific product lines.

We cannot assure you that our products will be considered cost-effective by international third-party payors, that reimbursement will be available or, if available, that the third-party payors’ reimbursement policies will not adversely affect our ability to sell our products profitably.

Any failure to receive regulatory or reimbursement approvals would negatively impact market acceptance of our products in any international markets in which those approvals are sought.

We face the risk of product liability claims and may not be able to obtain or maintain adequate product liability insurance.

For example, since the voluntary recall pertaining to a single donor lot of our FiberCel Fiber Viable Bone Matrix was issued, and as of February 17, 2022, we have received notice of 107 separate lawsuits or claims alleging that the plaintiffs contracted tuberculosis and/or suffered substantial symptoms and complications following the implantation of FiberCel during spinal fusion operations.

We have settled 26 of these lawsuits for a total of approximately $7.3 million as of December 31, 2022 and continue to negotiate and attempt to resolve many of these cases.

Of these settled matters, 11 cases were both settled and paid as of December 31, 2022 for a total cash outlay of $3.6 million.

For the remaining 81 cases for which settlements have not been reached, we estimated a probable loss related to each case and have recorded a liability at an estimated amount of $13.7 million for a total estimated liability at December 31, 2022 of $17.4 million, which is recorded as Contingent Liability for FiberCel Litigation in the accompanying consolidated balance sheets included in this Annual Report.

See Part I, Item 3, “Legal Proceedings” and Note 17 to the consolidated financial statements included elsewhere in this Annual Report.

We are, and may in the future be, subject to product liability claims and lawsuits, including potential class actions or mass tort claims, alleging that our products have resulted or could result in an unsafe condition or injury.

Product liability claims may be made by patients and their families, healthcare providers or others selling our products.

Additionally, we may be subject to product liability claims, proceedings and lawsuits, even if the apparent injury is due to the actions of others or the pre-existing health of the patient.

For example, we rely on physicians and other healthcare providers to properly and correctly use our products.

If these physicians or other healthcare providers are not properly trained or are negligent in using our products, the capabilities of our products may be diminished or the patient may suffer critical injury.

If we cannot successfully defend against product liability claims, we could incur substantial liability and costs.

In addition, regardless of merit or eventual outcome, product liability claims may result in:

● harm to our business reputation;

● investigations by regulators;

● significant legal costs;

● distraction of management’s attention from our primary business;

● substantial monetary awards to patients or other claimants;

● loss of revenue;

● exhaustion of any available insurance and our capital resources;

● decreased demand for our products.

Our product liability insurance is subject to deductibles and coverage limitations, and we may not be able to maintain this insurance.

As of December 31, 2022, we have recorded insurance receivables of $13.8 million on our balance sheet in respect of our insurance coverage for the FiberCel Litigation product liability losses.

However, it is possible that future claims related to the FiberCel Litigation or other product liability claims could exceed the limits of, or be excluded from, coverage under our policy, and claims against us could also increase the cost of maintaining our coverage.

One or more product liability claims could have a significant adverse effect on our business, financial condition and results of operations.

We bear the risk of warranty claims on our products.

7 unchanged sentences

Quality is extremely important to us and our customers due to the serious and costly consequences of product failure.

Quality and safety issues may occur with respect to any of our products, and our future operating results will depend on our ability to maintain an effective quality control system and effectively train and manage our workforce with respect to our quality system.

The development, manufacture and control of our products are subject to extensive and rigorous regulation by numerous government agencies, including the FDA, the competent authorities of the EU member states and similar foreign agencies.

Compliance with these regulatory requirements, including but not limited to the FDA’s Quality System Regulation (“QSR”), current Good Manufacturing Practices (“GMPs”) and adverse events/recall reporting requirements in the United States and other applicable regulations worldwide, is subject to continual review and is monitored rigorously through periodic inspections by the FDA and foreign regulatory authorities.

If we fail to comply with our reporting obligations, the FDA, the competent authorities of the EU member states or other regulatory authority could

take action, including issuance of warning letters and/or untitled letters, administrative actions, criminal prosecution, imposition of civil monetary penalties, revocation of our device clearance, seizure of our products or delay in the clearance of future products.

The FDA and foreign regulatory authorities may also require post-market testing and surveillance to monitor the performance of approved or certified products.

Quality and safety issues may occur with respect to any of our products, and our future operating results will

depend on our ability to maintain an effective quality control system and effectively train and manage our workforce with respect to our quality system.

The development, manufacture and control of our products are subject to extensive and rigorous regulation by numerous government agencies, including the FDA.

If we fail to comply with our reporting obligations, the FDA or other regulatory authority could take action, including issuance of warning letters and/or untitled letters, administrative actions, criminal prosecution, imposition of civil monetary penalties, revocation of our device clearance, seizure of our products or delay in the clearance of future products.

The FDA may also require post-market testing and surveillance to monitor the performance of approved or certified products.

Our facilities and those of our suppliers, commercial partners and independent sales agents are also subject to periodic regulatory inspections.

If the FDA or a foreign authority were to conclude that we have failed to comply with any of these requirements, it could institute a wide variety of enforcement actions, ranging from a public warning letter to more severe sanctions, such as product recalls or seizures, withdrawals, monetary penalties, consent decrees, injunctive actions to halt the manufacture or distribution of products, import detentions of products made outside the United States, export restrictions, restrictions on operations or other civil or criminal sanctions.

If the FDA were to conclude that we have failed to comply with any of these requirements, it could institute a wide variety of enforcement actions, ranging from a public warning letter to more severe sanctions, such as product recalls or seizures, withdrawals, monetary penalties, consent decrees, injunctive actions to halt the manufacture or distribution of products, import detentions of products made outside the United States, export restrictions, restrictions on operations or other civil or criminal sanctions.

Civil or criminal sanctions could be assessed against our officers, employees, or us.

1 unchanged sentence

If our products do not function as designed, or are designed improperly, we or the third-party manufacturer of such products may withdraw such products from the market, whether by choice or as a result of regulatory requirements.

In January 2018, we recalled five of our allograft tissue implants because a pre-sterilized donor culture should have been disqualified, each of which had a negative effect on our business, financial condition and results of operations.

In August 2019, we recalled and discarded certain production lots of CanGaroo from the market due to suture breakage.

Furthermore, in June 2021, we issued a voluntary recall pertaining to a single donor lot of our FiberCel Fiber Viable Bone Matrix, a bone repair product made from human tissue that is used in various orthopedic and spinal procedures, following our learning of post-surgical infections in patients treated with FiberCel, including some patients that tested positive for tuberculosis.

This recall had a negative effect on our business, financial condition and results of operations and resulted in a number of lawsuits filed against us as discussed below under “— We face significant litigation related to FiberCel.

” Any product recall we or a third-party manufacturer may conduct in the future, whether voluntary or required, may also negatively affect our business, financial condition and results of operations, and this effect may be material.

We had two recalls in products formerly distributed through our recently divested Orthobiologics Business – one in June 2021 and one in July 2023.

These recalls had negative effects on our business, financial condition and results of operations and resulted in a number of lawsuits filed against us as discussed under the risk factor “ We face significant litigation related to FiberCel ” included in this Annual Report.

Any product recall we or a third-party manufacturer may conduct in the future, whether voluntary or required, could also have a negative impact on our business, financial condition and results of operations, and this effect may be material.

In addition, we cannot predict the results of future legislative activity or future court decisions, any of which could increase regulatory requirements, subject us to government investigations or expose us to unexpected litigation.

3 unchanged sentences

Any product defects or problems, regulatory action, litigation, negative publicity or recalls could disrupt our business and have a material adverse effect on our business, financial condition and results of operations.

We face significant litigation related to FiberCel.

See Part I, Item 3, “Legal Proceedings” and Note 17 to the consolidated financial statements included elsewhere in this Annual Report.

We have incurred and will continue to incur costs to defend these lawsuits.

Furthermore, these proceedings are still expected to continue for the reasonably foreseeable future, and we cannot predict the course the proceedings will take or their ultimate outcome.

As discussed above under “-- We face the risk of product liability claims and may not be able to obtain or maintain adequate product liability insurance”, we have recorded a total estimated contingent liability of $17.4 million related to the resolution of all FiberCel lawsuits and claims and have recorded insurance receivables of $13.8 million in respect of our insurance coverage for the FiberCel Litigation product liability losses, as well as related legal defense costs incurred as of December 31, 2022.

While we believe our estimated liability to be reasonable, the actual loss amounts are highly variable and turn on a case-by-case analysis of the relevant facts.

As such, actual settlement amounts may differ from our estimates and such differences may be material.

In addition, this contingent liability excludes the future costs to defend

against the lawsuits and claims.

To the extent these costs are not recovered through insurance proceeds, such costs could also have a material adverse effect on our business, cash flow, results of operations, financial position and prospects.

Our operating results may fluctuate significantly from quarter to quarter and year to year due to the seasonality of our business, as well as a variety of other factors, many of which are outside of our control.

5 unchanged sentences

Satisfaction of patient deductibles through the course of the year also results in increased sales later in the year.

In general, our first quarter usually has lower sales than the preceding fourth quarter as patient deductibles are re-established with the new year, thereby increasing their out-of-pocket costs.

In general, our first quarter usually has lower sales than the preceding fourth quarter as patient deductibles are re-established with the new year, thereby increasing the patients’ out-of-pocket costs.

Other factors that may cause fluctuations in our quarterly and annual results include, among other things:

2 unchanged sentences

● failure of government health benefit programs and private health plans to cover our products or to timely and adequately reimburse the users of our products;

● the impact of the COVID-19 pandemic, or any other pandemic, epidemic or outbreak of an infectious disease in the United States or worldwide that impacts the number of procedures being performed;

● the rate of reimbursement for procedures using our products by government and private insurers;

17 unchanged sentences

Accordingly, any significant shortfall in sales relative to our planned expenditures would have an immediate adverse effect on our business, results of operations and financial condition.

Further, as a strategic response to changes in the competitive environment or to changes in laws and regulations, we may from time to time make certain pricing, service or marketing decisions (e.g., reduce prices) that could have a material and adverse effect on our business, financial condition and results of operations.

Further, as a strategic response to changes in the competitive environment or to changes in laws and regulations,

we may from time to time make certain pricing, service or marketing decisions (e.g., reduce prices) that could have a material and adverse effect on our business, financial condition and results of operations.

Due to the foregoing factors, our revenue and operating results are and will remain difficult to forecast.

As of December 31, 2022, we had $24.3 million of indebtedness outstanding, consisting of $25.3 million outstanding under our SWK Loan Facility (as defined under Part II, Item 7.

“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Credit Facilities”), net of $1.0 million of unamortized discount and deferred financing costs, .

In addition, we are party to a royalty agreement with Ligand Pharmaceuticals Incorporated (“Ligand”) pursuant to which we assumed a restructured, long-term obligation to Ligand (the “Revenue Interest Obligation”), that requires us to pay Ligand 5.0% of future sales of the products we acquired from CorMatrix (as well as products substantially similar to those products), subject to annual minimum payments of $2.75 million and certain milestone payments if sales of the acquired products exceed certain thresholds.

See Part II, Item 7.

“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Significant Judgment and Estimates — Revenue Interest Obligation.”

This will place us at a competitive disadvantage compared to our competitors that have less indebtedness.

Subject to certain limited exceptions, these covenants limit our ability to, among other things:

● incur additional indebtedness;

● incur certain liens;

● pay dividends or make other distributions on equity interests;

● enter into agreements restricting their subsidiaries’ ability to pay dividends;

● redeem, repurchase or refinance subordinated indebtedness;

● consolidate, merge or sell or otherwise dispose of their assets;

● make investments, loans, advances, guarantees and acquisitions;

● enter into transactions with affiliates;

● amend or modify their governing documents;

● amend or modify certain material agreements;

● alter the business conducted by them and their subsidiaries;

● enter into sale and leaseback transactions.

While we were in compliance with all covenants under the agreement as of December 31, 2022, there can be no guarantee that we will not breach these covenants in the future.

Our ability to comply with these covenants may be affected by events and factors beyond our control.

The occurrence of any of these events could have a material adverse effect on our business, financial condition and results of operations.

In addition, we may incur significant additional indebtedness in the future.

Also, these restrictions do not prohibit us from incurring obligations that do not constitute indebtedness as defined therein.

To the extent that we incur additional indebtedness or such other obligations, the risks associated with our substantial indebtedness described above will increase.

Various events permit the lender under the SWK Loan Facility to terminate the agreement, following a cure period.

Such events include, without limitation, a failure to timely pay interest or principal, insolvency, or an action by the FDA or such other material adverse event impacting the operations of Aziyo.