What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-03-11 compared with 2023-03-23 · 182 added, 156 removed, 250 unchanged (57% of the section changed)

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“Risk Factors” of this Annual Report.

We are a commercial-stage regenerative medicine company focused on creating the next generation of differentiated products and improving outcomes in patients undergoing surgery.

We seek to leverage our unique understanding of biologics to improve the interaction between medical devices and patients, with the goal of reducing complications and improving healing.

From our proprietary tissue processing platforms, we have developed a portfolio of advanced regenerative medical products that are designed to mimic the healing response of natural biological material.

Our proprietary products are designed to address the device protection, women’s health, orthobiologics and cardiovascular markets, which represented a combined $3 billion market opportunity in the United States in 2019.

To expand our commercial reach, we have commercial relationships with major medical device companies, such as Boston Scientific, Biotronik and beginning in March 2023, Sientra, to promote and sell some of our products.

We believe our focus on our unique regenerative medicine platforms will ultimately maximize our probability of continued clinical and commercial success and will create a long-term competitive advantage for us.

We estimate that, over the past two years, approximately two million patients per year in the United States were implanted with either medical devices, such as pacemakers, defibrillators, neuro-stimulators, spinal fusion and trauma fracture hardware or tissue expanders for breast reconstruction.

At Elutia, our mission is to humanize medicine so that patients can thrive without compromise.

As a commercial-stage company, we seek to leverage our unique understanding of biologics to improve the interaction between implanted medical devices and patients by reducing complications associated with these surgeries.

These complications include device migration, erosion, non-union of implants as well as implant rejection.

In addition, our products are designed to mitigate the formation of scar and fibrotic capsule formation that commonly occurs with device implants and is linked with additional risk factors including infection and capsular contracture.

We estimate that, over the past two years, more than 600,000 surgical procedures were performed per year in the United States in which the patient was implanted with medical devices such as pacemakers, defibrillators, neuro-stimulators or tissue expanders for breast reconstruction.

This number has been driven by advances in medical device technologies, reimbursement models focused on patient outcomes, and an aging population with a growing incidence of comorbidities, including diabetes, obesity and cardiovascular and peripheral vascular diseases.

These comorbidities can exacerbate various immune responses and contribute to other complications upon device implant.

Our products are targeted to address unmet clinical needs with the goal of promoting healthy tissue formation and avoiding complications associated with medical device implants, such as infection, scar-tissue formation, capsular contraction, erosion, migration, non-union of implants and implant rejection.

We have leading products in each of our four priority markets:

device protection, cardiovascular, orthobiologics and women’s health.

In device protection, we sell the only biological envelope, protected by a global patent portfolio, that forms a natural, systemically vascularized pocket for holding implanted electronic devices.

In cardiovascular, we sell our SIS ECM for use as an intracardiac and vascular patch.

In orthobiologics, we have a proprietary processing technology for manufacturing a comprehensive portfolio of bone regenerative products designed to promote the body’s ability to regenerate healthy bone, osteogenesis, while decreasing cell apoptosis, or programmed cell death.

In women’s health, we have a patented cell removal technology that produces undamaged extracellular dermal matrices with superior handling, designed to promote faster healing and reduce inflammation.

In pre-clinical and clinical studies, our products have supported and, in some cases, accelerated tissue healing, and thereby improved patient outcomes.

We process all of our products at our two manufacturing facilities in Roswell, Georgia and Richmond, California, and stock inventory of raw materials, supplies and finished goods at those locations.

Our products are targeted to address unmet clinical needs with the goal of promoting healthy tissue formation and avoiding complications associated with medical device implants, such as scar tissue formation, capsular contraction, erosion, migration and implant rejection.

These products currently focus on our priority markets – Device Protection and Women’s Health.

In Device Protection, we sell CanGaroo, a “first-to-market” biological envelope, protected by a global patent portfolio, that is indicated for use with implantable electronic devices including cardiac and neurostimulator devices.

CanGaroo is designed to create a secure pocket to hold the device and mitigate complications such as device migration and erosion.

The CanGaroo product is a biomatrix comprised of extracellular matrix (“ECM”), which has been shown to support healthy wound healing.

Because of this inherent ECM trait, CanGaroo may facilitate re-operative procedures by mitigating scar formation and fibrosis.

In addition, the CanGaroo envelope is the only envelope designed for subcutaneous implantable cardiac defibrillators, a growing market.

In Women’s Health, we have developed both patented and proprietary technologies, culminating in the creation of SimpliDerm—a novel biological matrix meticulously designed to leverage the inherent science of natural healing processes.

SimpliDerm’s design uses human acellular dermal matrices with heightened structural integrity and superior handling capabilities, which may mitigate inflammation and tissue incorporation, leading to a better healing experience.

We believe that these acellular dermal matrices represent an optimal choice for tissue repair and reconstruction, finding

applications in fields such as sports medicine, hernia repair, and trauma reconstruction.

These matrices are also useable in breast reconstruction surgeries, particularly for women undergoing mastectomy as part of cancer treatment.

With respect to pipeline products, we are pioneering drug-eluting biomatrices (“DEB”), to help solve problems unaddressed by available options.

One such product is a version of CanGaroo currently known as CanGarooRM, a first-in-class biomatrix that combines the CanGaroo envelope with antibiotics.

These antibiotics, rifampin and minocycline, have been shown to reduce the risk of infection following surgical implantation of an electronic device.

CanGarooRM will require clearance of a U.S.

Food and Drug Administration 510(k) submission to be marketed in the United States.

If approved, we anticipate CanGarooRM will be the only drug-eluting biomatrix approved for use with implantable electronic devices.

This unique combination will be the first and only envelope that helps protect against infection, erosion, migration and complications associated with fibrotic tissue formation providing both acute and long-term benefits to the patient.

We also intend to leverage our DEB platform technology by developing and commercializing products for markets with similar unmet needs, including neurostimulation, wound care and breast reconstruction.

CanGaroo is sold through both our internal sales force and independent sales agents and our marketing partner, Boston Scientific.

SimpliDerm is sold through both independent sales agents and our distributor, Sientra.

We also sell legacy products into the Cardiovascular market.

In Cardiovascular, we sell our specialized porcine small intestine submucosa, which is also the tissue used to make CanGaroo, for use as an intracardiac and vascular patch as well as for pericardial reconstruction.

In addition, our TYKE product is designed for use in the neonatal patient population.

These cardiovascular products are sold in the United States through an exclusive agreement with LeMaitre Vascular and internationally through distributors.

We process all of our CanGaroo and cardiovascular products at our manufacturing facility in Roswell, Georgia and stock inventory of raw materials, supplies and finished goods at this location.

We rely on a single or limited number of suppliers for certain raw materials and supplies.

Except for the porcine tissue supplier of our raw materials for our CanGaroo and cardiovascular products, which is Cook Biotech, we generally have no long-term supply agreements with our suppliers, as we obtain supplies on a purchase order basis.

Specifically, we acquire donated human tissue directly through tissue procurement firms engaged by us.

Our product are shipped either directly to hospital customers or through distribution channels.

We have incurred significant operating losses since our inception.

We incurred a net loss of $32.9 million and $24.8 million for the years ended December 31, 2022 and 2021, respectively.

Our accumulated deficit as of December 31, 2022 was $138.0 million.

We expect to continue to incur significant expenses and operating losses for the foreseeable future as we expand our product development and clinical and research activities.

In addition, we expect to continue to incur additional costs and expenses associated with operating as 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, 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 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.

Accordingly, even if we are able to increase sales of our products, we may not become profitable.

In order to mitigate the current and potential future liquidity issues caused by the matters noted above, we may seek to raise capital through the issuance of common stock, restructure our Revenue Interest Obligation, or pursue asset sale or other transactions.

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

As such, based on our current operating plans, we believe there is uncertainty as to whether our future cash flows along with our existing cash, issuances of additional equity and cash generated from expected future sales will be sufficient to meet our anticipated operating needs through twelve months from the financial statement issuance date.

Due to these factors, there is substantial doubt about our ability to continue as a going concern within one year after the issuance of the financial statements.

Impact of COVID-19

As a result of the COVID-19 pandemic, the number of procedures performed using our products has intermittently decreased, as governmental authorities in the United States have recommended, and in certain cases required, that elective, specialty and other non-emergency procedures and appointments be suspended or canceled in order to avoid patient exposure to medical environments and the risk of potential infection with COVID-19, and to focus limited resources and personnel capacity on the treatment of COVID-19 patients.

These measures and challenges will likely continue for the duration of the pandemic, which is uncertain, and may reduce our net sales in the future and negatively impact our business, financial condition and results of operations while the pandemic continues.

In addition, numerous state and local jurisdictions, including those where our facilities are located, imposed, and others in the future may impose or re-impose, “shelter-in-place” orders, quarantines, executive orders and similar government orders and restrictions for their residents to control the spread of COVID-19.

The extent to which the COVID-19 pandemic impacts our future financial condition and results of operations 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, among others.

As new information regarding COVID-19 continues to emerge, and, as variants of COVID-19 emerge, it is difficult to predict the degree to which this disease will continue to affect our business.

We have a long-term supply agreement with Cook Biotech, the porcine tissue supplier of our raw materials for our CanGaroo and cardiovascular products.

SimpliDerm has historically been processed by us at our Richmond, California facility;

however, that facility was included with the divestiture of the Orthobiologics Business, and SimpliDerm will be provided to us on a go-forward basis through a long-term supply agreement with the purchaser of the Orthobiologics Business, Berkeley Biologics, LLC.

Discontinued Operations – Sale of Orthobiologics Business

On November 8, 2023, we sold substantially all of the assets related to our Orthobiologics segment (the “Orthobiologics Business”) to Berkeley Biologics, LLC (“Berkeley”).

The Orthobiologics Business was comprised of researching, developing, administering, insuring, operating, commercializing, manufacturing, selling and marketing our Orthobiologics products, and contract manufacturing of particulate bone, precision milled bone, cellular bone matrix, acellular dermis, soft tissue and other products.

As part of the divestiture, we also assigned the lease to our 36,173 square feet of manufacturing, laboratory and office space in Richmond, California 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.

The purchase agreement contains customary representations, warranties and covenants of the parties, and we, on the one hand, and Berkeley, on the other hand, agreed to customary indemnification provisions for breaches of representations, warranties and covenants, as well as assumed and excluded liabilities and pre-closing items.

Product Recalls

FiberCel Recall

On June 2, 2021, we issued a voluntary recall pertaining to a single donor lot of our FiberCel Fiber Viable Bone Matrix, a bone repair product formerly distributed by Medtronic, after learning of post-surgical infections reported in

several patients treated with the product, including some patients that tested positive for tuberculosis.

Since the voluntary recall, we have settled 26 lawsuits relating to FiberCel for a total of approximately $7.3 million and settled and paid 11 of these lawsuits 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.

On June 2, 2021, we issued a voluntary recall pertaining to a single donor lot of our FiberCel Fiber Viable Bone Matrix, a bone repair product formerly distributed by Medtronic PLC, after we learned of post-surgical Mycobacterium tuberculosis (“MTB”) infections in several patients treated with the product.

Since the voluntary recall, we have settled and paid 29 lawsuits and claims relating to FiberCel for a total cash outlay of approximately $9.1 million.

For the remaining 80 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 $15.0 million at December 31, 2023 recorded as Contingent Liability for FiberCel Litigation in the accompanying consolidated balance sheets included in this Annual Report.

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 Litigation product liability losses.

For an update on the legal proceedings related to the FiberCel Recall, see Part I, Item 3, “Legal Proceedings” and Note 16 to the consolidated financial statements included elsewhere in this Annual Report.

Viable Bone Matrix Recall

In July 2023, we announced a voluntary recall of a single lot of one of our viable bone matrix (“VBM”) products and the market withdrawal of all of our VBM products produced after a specified date.

(the “VBM Recall”).

Notice of the voluntary 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 have been filed, and 15 claims have been asserted as a result of the VBM Recall.

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 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.

As of December 31, 2023, the Company has recorded a legal fee liability and related insurance receivable totaling $0.1 million for legal services rendered in defending the Company in the VBM Recall.

All VBM products, which includes FiberCel, were divested by us in connection with the sale of our Orthobiologics Business to Berkeley in November 2023.

Berkeley did not assume any liabilities related to the FiberCel Recall or VBM Recall, our market withdrawal of all of our viable bone matrix products, or any claims or lawsuits related thereto.

The FiberCel Recall and VBM Recall 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.

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.

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Such negative publicity related to the perceived quality and safety of our products could affect our brand image, decrease confidence in our products or have an adverse effect on our ability to retain existing and attract new customers, suppliers and distribution partners, any one of which could result in decreased revenue, having an adverse effect on our business, financial condition and operating results.

Impact of Inflation

Inflationary factors, such as increases in our cost of goods sold or other operating expenses, may adversely affect our operating results.

While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we do not believe inflation had a material effect on our financial condition or results of operations during the years ended December 31, 2023 and 2022.

We cannot assure you, however, that we will be able to increase the selling prices of our products or reduce our operating expenses in an amount sufficient to offset the effects future

inflationary pressures may have on our gross margin.

Accordingly, we cannot assure you that our financial condition and results of operations will not be materially impacted by inflation in the future.

Components of Our Results of Operations

We recognize revenue on the sale of our products.

Our device protection and cardiovascular products are sold to hospitals and other healthcare facilities primarily through our direct sales force, commercial partners or independent sales agents.

Our women’s health product, SimpliDerm, is sold directly to hospitals and other healthcare facilities through independent sales agents.

Our orthobiologics products are sold through commercial partners.

Our contract manufacturing products are sold directly to corporate customers.

Gross to net sales adjustments include sales returns and prompt payment and volume discounts.

During the year ended December 31, 2023, our device protection and cardiovascular products were sold to hospitals and other healthcare facilities primarily through our direct sales force, commercial partners or independent sales agents;

however, beginning in April 2023, our cardiovascular products have been sold domestically through our distribution agreement with LeMaitre Vascular and internationally through commercial partners.

Our women’s health product, SimpliDerm, is sold directly to hospitals and other healthcare facilities through independent sales agents or through our distribution agreement with Sientra.

In recent years, we have incurred significant costs in the operation of our business.

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Costs of Goods Sold

Our cost of goods sold relate to purchased raw materials and the processing and conversion costs of such raw materials consisting primarily of salaries and benefits, supplies, quality control testing and the manufacturing overhead incurred at our processing facilities in Richmond, California and Roswell, Georgia.

Both facilities have additional capacity, which if utilized, would further leverage our fixed overhead.

The Roswell facility has additional capacity, which if utilized, would further leverage our fixed overhead.

Cost of goods sold also includes the amortization of intangibles generated from the CorMatrix Acquisition in 2017.

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Sales and marketing expenses are primarily related to our direct sales force, consisting of salaries, commission compensation, fringe benefits, meals and other expenses.

Auto and travel costs have also historically contributed to sales and marketing expenses, albeit to a lesser extent due to the COVID-19 pandemic.

Auto and travel costs also contribute to sales and marketing expenses.

Outside of our direct sales force, we incur significant expenses relating to commissions to our CanGaroo commercial partners and independent sales agents.

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Research and development (“R&D”) expenses consist primarily of salaries and fringe benefits, laboratory supplies, clinical studies and outside service costs.

Our product development efforts primarily relate to new offerings in support of the orthobiologics market and activities associated with the development of CanGaroo RM, our CanGaroo Envelope with antibiotics.

Our future R&D expenses may increase as a result of additional work required to address the FDA’s questions in the NSE letter we recently received regarding our CanGaroo RM.

We also conduct clinical studies to validate the performance characteristics of our products and to capture patient data necessary to support our commercial efforts.

Our product development efforts primarily relate to activities associated with the development of CanGarooRM, our CanGaroo Envelope with antibiotics.

We also conduct clinical studies to

validate the performance characteristics of our products and to capture patient data necessary to support our commercial efforts.

FiberCel Litigation Costs

FiberCel litigation costs consist primarily of legal fees and the estimated costs to resolve the outstanding FiberCel litigation cases offset by the estimated amounts recoverable under insurance, indemnity and contribution agreements for such costs.

FiberCel litigation costs consist primarily of legal fees and the estimated and actual costs to resolve the outstanding FiberCel litigation cases offset by the estimated and actual amounts recoverable or recovered under insurance, indemnity and contribution agreements for such costs.

Results of Operations

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Total operating expenses

Loss from operations

Loss from continuing operations

Interest expense

Other income, net

Other expense (income), net

Loss before provision of income taxes

Income tax expense

Net loss from continuing operations

Net income from discontinued operations

NM = not meaningful

Net sales information for our products is summarized as follows:

Year Ended December 31,

Change 2021 / 2022

Years Ended December 31,

(in thousands, except percentages)

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Women's health

Orthobiologics

Cardiovascular

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Total net sales increased $0.9 million, or 3.8%, to $24.7 million in the year ended December 31, 2023 compared to $23.8 million in the year ended December 31, 2022.

With respect to the individual product segments, the increase in the net sales of both our device protection and women’s health products were primarily attributable to volume growth in the respective segment.

The net sales in the orthobiologics segment decreased between the years as a result of the discontinuation of sales to Medtronic in June 2021 following our recall.

Excluding the $4.9 million of Medtronic sales from the year ended December 31, 2021, our net sales of orthobiologic products increased $3.3 million between the years primarily due to increased sales from several contract manufacturing customers.

Net sales of our cardiovascular products were relatively flat between the years.

Revenues from Device Protection and Women’s Health increased compared to the corresponding period of the prior year due to volume growth and revenues from Cardiovascular decreased

due to the commencement of our distribution agreement with LeMaitre Vascular which provides for sales at a contracted price to the distributor versus sales prior to such agreement being made at end-user pricing.

Cost of Goods Sold

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Women's health

Orthobiologics

Cardiovascular

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Total Cost of Goods Sold

Total cost of goods sold increased $1.6 million to $30.0 million in the year ended December 31, 2022 compared to $28.4 million in the year ended December 31, 2021 primarily due to an increase in total net sales.

Total cost of goods sold increased $1.5 million to $13.7 million in the year ended December 31, 2023 compared to $12.2 million in the year ended December 31, 2022.

Gross margin was 44.7% in the year ended December 31, 2023 compared to 48.8% in the year ended December 31, 2022.

Gross margin, excluding intangible asset amortization, was 58.4% in the year ended December 31, 2023 compared to 63.0% in the year ended December 31, 2022.

With respect to the individual product segments, the gross margin of device protection declined slightly in the year ended December 31, 2022 compared to the year ended December 31, 2021 due to operational inefficiencies in the current year causing minor increases to the cost of the product.

The gross margin of women’s health products increased significantly in the current year due to non-recurring inventory writedowns in the prior year on certain slow moving product sizes which caused reductions in the prior years’ gross margin.

The current year decrease in gross margin of the orthobiologics products was primarily due to a shift in product mix as the contracted services component of

this segment, which have lower margins than our other products, experienced sales growth in the year ended December 31, 2022.

Gross margin on our cardiovascular products was relatively flat between years.

The slight decline in gross margin was due to the commencement of the LeMaitre Vascular distribution agreement described above.

Operating Expenses

Sales and Marketing

Sales and marketing expenses increased $1.4 million, or 7.3%, to $20.2 million in the year ended December 31, 2022 compared to $18.8 million in the year ended December 31, 2021.

The increase was primarily the result of increases in commissions paid to independent sales agents due to sales growth in our women’s health products and higher stock-based compensation.

As a percentage of net sales, sales and marketing expenses grew to 41.1% in the year ended December 31, 2022 from 39.7% in the year ended December 31, 2021 primarily due to increases in our commission-based revenue streams.

Sales and marketing expenses decreased $4.8 million, or 26.7%, to $13.1 million in the year ended December 31, 2023 compared to $17.9 million in the year ended December 31, 2022.

As a percentage of sales, sales and marketing expenses decreased to 52.9% in the year ended December 31, 2023 from 74.8% in the year ended December 31, 2022.

The decrease in expense was largely attributable to a reduction in force which occurred in the first quarter of 2023 and primarily impacted certain members of sales and marketing management.

General and Administrative

G&A expenses increased $2.9 million, or 21.5%, to $16.6 million in the year ended December 31, 2022 compared to $13.7 million in the year ended December 31, 2021.

The increase in G&A expenses was primarily due to certain non-recurring charges associated with legal fees on various corporate matters and the Chief Executive Officer transition described in Note 4 to the consolidated financial statements included elsewhere in this Annual Report.

As a percentage of net sales, G&A expenses rose to 33.8% in the year ended December 31, 2022 from 28.9% in the year ended December 31, 2021.

G&A expenses decreased $1.9 million, or 12.1%, to $14.1 million in the year ended December 31, 2023 compared to $16.1 million in the year ended December 31, 2022.

As a percentage of net sales, G&A expenses decreased to 57.0% in the year ended December 31, 2023 from 67.3% in the year ended December 31, 2022.

The decrease in expense was primarily due to declines in the cost of insurance and certain non-recurring legal and severance costs incurred in the 2022 period.

Research and Development

R&D expenses decreased $0.4 million, or 3.5%, to $8.9 million in the year ended December 31, 2022 compared to $9.3 million in the year ended December 31, 2021.

The decline in R&D expenses was largely attributable to the lessening of work needed to finalize the development and testing of our CanGaroo Envelope with antibiotics.

We continue to focus our R&D efforts on the development of our pipeline products.

R&D expenses decreased to $4.4 million in the year ended December 31, 2023 compared to $7.7 million in the year ended December 31, 2022.

We continue to focus our R&D efforts primarily on the development of our CanGarooRM Antibacterial Envelope.

Such related costs were less in 2023 versus the prior year due to the reduction of efforts needed and expenses incurred as the development progresses toward anticipated completion.

FiberCel Litigation Costs

FiberCel litigation costs increased to $10.0 million in the year ended December 31, 2023 compared to $5.2 million in the year ended December 31, 2022.

The increase in expense was primarily due to the settlements reached in a significant number of FiberCel Litigation cases in the year ended December 31, 2022 as well as the estimation of contingent liabilities for the unsettled cases.

The total of such settlement and estimated settlement values was recorded (net of estimated insurance, indemnity and contribution agreement recoveries) in the year ended December 31, 2022.

The increase in expense was primarily due to the continued evaluation of the contingent FiberCel liability and higher legal defense costs incurred as the FiberCel cases progress.

See further discussion in Note 17 to consolidated financial statements included elsewhere in this Annual Report.

Interest Expense

Interest expense was approximately $5.3 million in both the years ended December 31, 2022 and December 31, 2021.

While there was essentially no fluctuation between years, we had lower draws on our formerly outstanding MidCap Credit Facility and lower outstanding principal on our formerly outstanding MidCap Loan Facility, which reductions in interest expense were offset by increased principal outstanding and higher interest rates on the SWK Credit Facility which commenced in August 2022 upon consummation of our debt refinancing.

Interest expense was approximately $5.8 million in the year ended December 31, 2023 compared to $5.1 million in the year ended December 31, 2022.

The increase was due to the higher principal outstanding and interest rates incurred by us on our existing debt, the SWK Loan Facility, as compared to the debt outstanding in the year ended December 31, 2022, which consisted primarily of the MidCap Loan Facility and MidCap Credit Facility.

See “ - Liquidity and Capital Resources - Credit Facilities” below for a further discussion of these debt agreements and Note 10 to the consolidated financial statements included elsewhere in this Annual Report.

Other Income, net

Other income, net was approximately $4.2 million in the year ended December 31, 2022 and was primarily attributable to the $5.0 million gain on the revaluation of our Revenue Interest Obligation to Ligand.

Discontinued Operations

Net income from discontinued operations was $3.6 million for the year ended December 31, 2023 compared to $3.3 million for the year ended December 31, 2022.

The increase was due to the gain on sale of the Orthobiologics Business of approximately $6.0 million recorded upon closing of the transaction in November 2023 partially offset by losses incurred by the Orthobiologics Business during 2023 due to the financial impact of the VBM Recall and market withdrawal in July 2023 causing revenue reversals and inventory write-downs of approximately $3.0 million and $2.0 million, respectively.

Other Expense (Income), net

Other expense (income), net was an expense of approximately $4.9 million in the year ended December 31, 2023 and was primarily attributable to the revaluation of Common Warrants (defined below) and Prefunded Warrants (defined below) between issuance on September 21, 2023 and December 31, 2023.

See Note 14 to the consolidated financial statements included elsewhere in this Annual Report for additional information.

Such gain was

offset by o ther expense related to our debt refinancing in August 2022 and the associated prepayment fees, payment of unaccrued exit fees and the write-off of unamortized deferred financing costs, which collectively resulted in a loss of $1.2 million.

Other expense (income), net was income of approximately $4.2 million in the year ended December 31, 2022 and was primarily attributable to the $5.0 million gain on the revaluation of our Revenue Interest Obligation to Ligand.

See Note 11 to the consolidated financial statements included elsewhere in this Annual Report for additional information.

Such gain was offset by o ther expense related to our debt refinancing in August 2022 and the associated prepayment fees, payment of unaccrued exit fees and the write-off of unamortized deferred financing costs, which collectively resulted in a loss of $1.2 million.

Such loss was offset by other income of $0.4 million related to the forgiveness of interest accrued on the promissory note to a tissue supplier upon repayment of such note in August 2022.

See Note 10 to the accompanying consolidated financial statements included elsewhere in this Annual Report for further discussion of these transactions.

Other income, net was approximately $3.6 million in the year ended December 31, 2021.

Such other income relates to the forgiveness of our promissory note with Silicon Valley Bank under the Paycheck Protection Program of the CARES Act in the amount of approximately $3.0 million and our receipt of $550,000 in satisfaction of a 2018 settlement with KeraLink.

For further discussion on these items, see Notes 9 and 18 to the consolidated financial statements included elsewhere in this Annual Report.

Non-GAAP Financial Measures

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We believe this provides our management and investors with useful information to facilitate period-to-period comparisons of our operating results.

Our management uses this metric and the results of the segments in assessing the health of our business and our operating performance, and we believe investors’ understanding of our operating performance is similarly enhanced by our presentation of this metric.

Our management uses

this metric and the results of the segments in assessing the health of our business and our operating performance, and we believe investors’ understanding of our operating performance is similarly enhanced by our presentation of this metric.

Although we use gross margin, excluding intangible asset amortization, as described above, this metric has limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP.

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We have experienced and may in the future experience higher sales in the fourth quarter as a result of hospitals in the United States increasing their purchases of our products to coincide with the end of their budget cycles.

Satisfaction of

patient deductibles throughout the course of the year also results in increased sales later in the year, once patients have paid their annual insurance deductibles in full, which reduces their out-of-pocket costs.

Satisfaction of patient deductibles throughout the course of the year also results in increased sales later in the year, once patients have paid their annual insurance deductibles in full, which reduces their out-of-pocket costs.

Conversely, our first quarter generally has lower sales than the preceding fourth quarter as patient deductibles are re-established with the new year, which increases their out-of-pocket costs.

Liquidity and Capital Resources

As of December 31, 2022, we had cash and restricted cash of approximately $17.0 million.

Since inception, we have financed our operations primarily through private placements of our convertible preferred stock, amounts borrowed under our credit facilities, sales of our products and sales of our common stock.

Our historical cash outflows have primarily been associated with acquisition and integration, manufacturing and administrative costs, research and development, clinical activity and investing in our commercial infrastructure through our direct sales force and our commercial partners in order to expand our presence and to promote awareness and adoption of our products.

As of December 31, 2023, we had cash of approximately $19.3 million.

Since inception, we have financed our operations primarily through amounts borrowed under our credit facilities, proceeds from our initial public offering (“IPO”), sales of our products and more recently, the sale of our Orthobiologics Business and proceeds from a follow-on offering and private placements of our common stock and warrants.

Our historical cash outflows have primarily been associated with acquisitions and integration, manufacturing and administrative costs, general and marketing, research and development, clinical activity, purchase of property and equipment used in our production activities, litigation costs and investing in our commercial infrastructure through our direct sales force and our commercial partners in order to expand our presence and to promote awareness and adoption of our products.

As of December 31, 2023, our accumulated deficit was $175.6 million.

On October 13, 2020, in connection with our IPO, we issued and sold 2,941,176 shares of common stock, consisting of 2,205,882 shares of Class A common stock and 735,294 shares of Class B common stock, at a price to the public of $17.00 per share, resulting in net proceeds to us of approximately $43.0 million, after deducting the underwriting discount of approximately $3.5 million and offering expenses of approximately $3.5 million.

Additionally, in December 2021, we closed on a private investment in public equity (PIPE) financing, thereby receiving net proceeds of approximately $13.8 million, after deducting offering costs.

The PIPE investors purchased an aggregate of 2,122,637 shares of the Company’s Class A common stock and an aggregate of 1,179,244 shares of the Company’s Class B common stock (which are convertible on a one-for-one basis into shares of Class A common stock), in each case, at a price of $4.24 per share.

Furthermore, in December 2022, we issued and sold 2,350,000 shares our Class A common stock at a price to the public of $4.75 per share in a registered underwritten offering, resulting in net proceeds to us of approximately $10.2 million, after deducting underwriting discounts and offering expenses.

On December 8, 2021, we closed on a private investment in public equity (“PIPE”) financing, thereby receiving net proceeds of approximately $13.8 million, after deducting offering costs.

The PIPE investors purchased an aggregate of 2,122,637 shares of the Company’s Class A common stock and an aggregate of 1,179,244 shares of the Company’s

Class B common stock (which are convertible on a one-for-one basis into shares of Class A common stock), in each case, at a price of $4.24 per share.

On December 1, 2022, we issued and sold 2,350,000 shares our Class A common stock at a price to the public of $4.75 per share in a registered underwritten offering, resulting in net proceeds to us of approximately $10.2 million, after deducting underwriting discounts and offering expenses.

On September 21, 2023, we sold, in a private offering an aggregate of (i) 6,852,811 units (“Common Units”), each comprised of (a) one share of our Class A common stock and (b) a warrant (“Common Warrant”) to purchase one and one half shares of Class A Common Stock, and (ii) 503,058 units (the “Prefunded Units”), each comprised of (a) a prefunded warrant (“Prefunded Warrant”) to purchase one share of Class A Common Stock, and (b) a Common Warrant.

The Common Units were sold at a purchase price of $1.4275 per unit, and the Prefunded Units were sold at a purchase price of $1.4265 per unit, for aggregate gross proceeds of approximately $10.5 million, before deducting offering expenses.

Each Common Warrant is exercisable at any time until the earlier of (a) 30 trading days after the clearance by the FDA of our CanGarooRM antibiotic-eluting biologic envelope or (b) five years from the date of the offering, at an exercise price per share of $1.4275.

Each Prefunded Warrant is exercisable at any time at a nominal exercise price per share of $0.001 (with the remainder of the exercise price per share of Class A Common Stock having been prefunded to us).

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, and we may never become profitable.

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, CanGarooRM and successfully commercialize this product, we are unable to predict when we will become profitable, and we may never become profitable.

Our inability to achieve and then maintain profitability would negatively affect our business, financial condition, results of operations and cash flows.

In order to mitigate the current and potential future liquidity issues caused by the matters noted above, we may seek to raise capital through the issuance of common stock, such as the private placement which we closed in September 2023 described above, pursue asset sale or other transactions, such as the sale of the Orthobiologics Business described above.

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

As such, based on our current operating plans, we believe there is uncertainty as to whether our future cash flows along with our existing cash, availability under the SWK Loan Facility (described below under “—Credit Facilities”), issuances of additional equity and cash generated from expected future sales will be sufficient to meet our anticipated operating needs through twelve months from the financial statement issuance date.

Due to these factors, there is substantial doubt about our ability to continue as going concern within one year after the issuance of the financial statements.

Due to these factors, there is substantial doubt about our ability to continue as a going concern within one year after the issuance of the financial statements.

Cash Flows for the Years Ended December 31, 2023 and 2022

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Financing activities

Net decrease in cash

Net increase (decrease) in cash

Net Cash Used in Operating Activities

Net cash used in operating activities for the year ended December 31 2023 was $21.8 million compared to $21.4 million for the year ended December 31, 2022.

The year-over-year increase was primarily due to a gain on extinguishment of debt in the year ended December 31, 2021 versus a loss experienced in the year ended December 31, 2022.

Additionally, due to timing, accounts payable increases in the current period increased cash and offset a portion of the cash used in operating cash activities when compared to the prior period.

The slight year-over-year increase was primarily due to the higher net loss in the 2023 period.

Net Cash Used in Investing Activities

Net cash used in investing activities for the year ended December 31, 2022 was $0.5 million and approximately $0.4 million for the year ended December 31, 2021.

In both periods, the use of cash related to the purchase of property and equipment, the majority of which are used in the production activities of our Richmond, California facility.

Net cash provided by investing activities for the year ended December 31, 2023 was $14.2 million and net cash used in investing activities was approximately $0.5 million for the year ended December 31, 2022.

The significant increase was due to the proceeds received from the sale of our Orthobiologics Business.

Net Cash Provided by Financing Activities

Net cash provided by financing activities for the year ended December 31, 2022 totaled $8.5 million compared to $6.7 million of cash provided by financing activities for the year ended December 31, 2021.

The year-over-year net increase was caused primarily by the net cash infusion from the proceeds of the August 2022 debt refinancing, less all debt repayments and refinancing costs incurred during the year ended December 31, 2022 offset by the lower equity raise in the year ended December 31, 2022 as compared to the year ended December 31, 2021.

Net cash provided by financing activities for the year ended December 31, 2023 was $9.8 million compared to $8.5 million for the year ended December 31, 2022.

Both years included the proceeds of $10.1 million from the issuance of common stock (and warrants in 2023).

The year-over-year net increase of $1.3 million was primarily due to proceeds received from the financing of certain insurance premiums during the year ended December 31, 2023.

Credit Facilities

O n August 10, 2022 (the “Closing Date”), we entered into a senior secured term loan facility with SWK Funding LLC, as agent, and other lenders party thereto (as amended and modified subsequent to the Closing Date, the “SWK Loan Facility”) for an aggregate principal amount of $25 million.

An initial draw of $21 million drawn was made on the Closing Date with the additional $4 million drawn on December 14, 2022 upon satisfaction of the amended terms enabling such receipt.

The SWK Loan Facility also allows for the establishment of a separate, new asset-based revolving loan facility of up to $8 million, which had not been entered into to date.

We used $16 million of the proceeds of the SWK Loan Facility to pay all outstanding obligations on the formerly outstanding MidCap Loan Facility and MidCap Credit Facility.

Such payment included (i) $12.8 million to repay all outstanding principal and accrued interest on the MidCap Loan Facility, (ii) $1.7 million to pay the prepayment and exit fees on the MidCap Loan Facility and (iii) $1.5 million to repay the outstanding balance, accrued interest and exit fees on the MidCap Credit Facility.

As of December 31, 2022, we had $24.3 million of indebtedness outstanding under our SWK Loan Facility, with such balance being net of $1.0 million of unamortized discount and deferred financing costs, but increased by capitalized PIK Interest (as defined below) in November 2022 of $0.3 million.

O n August 10, 2022, we entered into a senior secured term loan facility with SWK Funding LLC (“SWK”), as agent, and other lenders party thereto for an aggregate principal amount of $25 million, and we amended the facility on May 12, 2023 (as amended, the “SWK Loan Facility”).

An initial draw of $21 million was made in August 2022, with the additional $4 million drawn on December 14, 2022 upon satisfaction of the amended terms enabling such receipt.

The SWK Loan Facility also allows for the establishment of a separate, new asset-based revolving loan facility of up to $8 million, which has not been entered into to date.

A total of $16 million of the proceeds from the SWK Loan Facility were used to pay all outstanding obligations on the formerly outstanding loan facility with MidCap Financial Trust (the “MidCap Loan Facility”), and credit facility with MidCap Financial Trust (the “MidCap Credit Facility”), which included (i) $12.8 million to repay all outstanding principal and accrued interest on the MidCap Loan Facility, (ii) $1.7 million to pay the prepayment and exit fees on the MidCap Loan Facility and (iii) $1.5 million to repay the outstanding balance, accrued interest and exit fees on the MidCap Credit Facility.

As of December 31, 2023, we had $23.7 million of indebtedness outstanding under our SWK Loan Facility, with such balance being net of $0.8 million of unamortized discount and deferred financing costs.

Interest Rates

All of the SWK Loan Facility borrowings take the form of Secured Overnight Financing Rate (“SOFR”) loans and will bear interest at a rate per annum equal to the sum of an applicable margin of (i) 7.75% and the “Term SOFR Rate” (based upon an interest period of 3 months), or (ii) if we have elected the PIK Interest option (as defined below), 4.75% and the “Term SOFR Rate.” We may elect a portion of the interest due, to be paid in-kind at a rate per annum of 4.5% (“PIK Interest”), and such election may be made (x) until November 15, 2024 if certain profitability and regulatory conditions (“Extension Conditions”) have not been met, or until November 17, 2025 if such conditions have been satisfied.

All of the SWK Loan Facility borrowings take the form of Secured Overnight Financing Rate (“SOFR”) loans and bear interest at a rate per annum equal to the sum of an applicable margin of (i) 7.75% and the “Term SOFR Rate” (based upon an interest period of 3 months), or (ii) if the Company has elected the PIK Interest option (as defined below), 3.75% and the “Term SOFR Rate.” The Company may elect a portion of the interest due, to be paid in-kind at a rate per annum of 4.5% (“PIK Interest”), and such election may be made (x) until November 15, 2024 if the conditions to draw the Additional Term Loan have not been met, or (y) if such conditions to draw the Additional Term Loan have been satisfied, until November 17, 2025.

The “Term SOFR Rate” is subject to a floor of 2.75%.

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The SWK Loan Facility Agreement requires certain mandatory prepayments, subject to certain exceptions, with:

(1) 100% of any net casualty proceeds in excess of $250,000 and (2) for non-ordinary course asset sales, an amount equal to the difference between (x) the proportion of divested gross profit (as defined in the SWK Loan Facility Agreement) to the Company’s total gross profit (as defined in the SWK Loan Facility Agreement) multiplied by the outstanding loans under the SWK Loan Facility, and (y) the difference between $1,000,000 and the aggregate sale proceeds of any assets previously sold during the fiscal year.

No such mandatory prepayments were required during the year ended December 31, 2022.

(1) 100% of any net casualty proceeds in excess of $250,000 and (2) for non-ordinary course asset sales, an amount equal to the difference between (x) the proportion of divested gross profit (as defined in the SWK Loan Facility) to the Company’s total gross profit (as defined in the SWK Loan Facility) multiplied by the outstanding loans under the SWK Loan Facility, and (y) the difference between $1,000,000 and the aggregate sale proceeds of any assets previously sold during the fiscal year.

No such mandatory prepayments were required during the three or twelve months ended December 31, 2022;

however, the closing of the divestiture of the Orthobiologics Business in November 2023 triggered the mandatory prepayment of $4.0 million.

Of such amount, $2.0 million wa s paid shortly after closing of the divestiture of the Orthobiologics Business and the remainder was paid on February 15, 2024 based on mutual agreement between the parties.

Optional Prepayment

The SWK Loan Facility Agreement also includes an exit fee equal to:

(i) if such prepayment occurs prior to the first anniversary of the Closing Date, 2% of the aggregate principal amount funded prior to the termination plus remaining unpaid interest payments scheduled to be paid during the first year of the loan or (ii) if such prepayment occurs after the first anniversary of the Closing Date but prior to the second anniversary of the Closing Date, 2% of the aggregate principal amount funded prior to termination.

The agreement, as amended, governing the SWK Loan Facility also includes an exit fee equal to 6.5% of the aggregate principal amount funded prior to termination plus $62,500 and prepayment penalties equal to:

Amortization and Final Maturity

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In addition, the SWK Loan Facility Agreement contains two financial covenants.

The first covenant, which is measured quarterly, requires us to achieve a specified Minimum Aggregate Revenue (as defined in the SWK Loan Facility Agreement) for the preceding 12-month period.

The second covenant requires us to maintain a minimum liquidity (as defined in the SWK Loan Facility Agreement) of $5.0 million until December 16, 2022 and thereafter, the greater of (a) $5.0 million and (b) the sum of the operating cash burn (as defined in the SWK Loan Facility Agreement) for the two prior consecutive fiscal quarters then ended (the “Liquidity Covenant”).

The SWK Loan Facility Agreement contains events of default, including, most significantly, 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.

As of December 31, 2022, we were in compliance with the financial covenant and all other covenants.

The first covenant, which is measured quarterly, requires us to achieve a specified Minimum Aggregate Revenue (as defined in the SWK Loan Facility) for the preceding 12-month period or, alternatively, to maintain Consolidated Unencumbered Liquid Assets (as defined in the SWK Loan Facility) greater than either (i) the outstanding principal balance of the loan, or (ii) the aggregate operating

cash burn (as defined in the SWK Loan Facility) for the preceding 12-month period.

The second covenant requires us to maintain a minimum liquidity (as defined in the SWK Loan Facility) of the greater of (a) $5.0 million and (b) the sum of the operating cash burn for the two prior consecutive fiscal quarters then ended (the “Liquidity Covenant”).

As of December 31, 2023, we were in compliance with the financial covenants and all other covenants.

Supplier Promissory Note

During 2017, we restructured certain of our liabilities with a tissue supplier and entered into an unsecured promissory note bearing interest at 5%.

In both 2022 and 2021, no payments were made on the promissory note because the Company’s senior lender restricted payment of the amounts due.

In 2022, no payments were made on the promissory note because the Company’s senior lender restricted payment of the amounts due.

The Company used $1.4 million of the proceeds from the SWK Loan Facility to repay the remaining balance on the promissory note;

however the accrued interest on the promissory note was forgiven by the lender.

Such forgiveness resulted in a gain to the Company of approximately $0.4 million which has been recorded as other income, net in the accompanying consolidated statements of operations for the year ended December 31, 2022 included elsewhere in this Annual Report.

In May 2020, we entered into a promissory note with Silicon Valley Bank, or SVB, under the Paycheck Protection Program of the CARES Act pursuant to which SVB agreed to make a loan to us in the amount of approximately $3.0 million.

The PPP Loan bears interest at a rate of 1.0% per annum with monthly principal and interest payments beginning in March 2021 and ending on the maturity date of May 7, 2022;

however such repayment commencement was deferred by the U.S.

Small Business Administration while they evaluated our forgiveness application.

In June 2021, we were notified by the U.S.

Small Business Administration that the entire balance of our PPP Loan and all related accrued interest was forgiven.

Such forgiveness resulted in a gain to us of approximately $3.0 million which has been recorded as other income, net in the accompanying consolidated statements of operations for the year ended December 31, 2021.

Such forgiveness resulted in a gain to the Company of approximately $0.4 million which has been recorded as other expense (income), net in the accompanying consolidated statements of operations for the year ended December 31, 2022 included elsewhere in this Annual Report.

Funding Requirements

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As of December 31, 2023, we had $23.7 million of indebtedness outstanding, consisting of $24.5 million outstanding under our SWK Loan Facility, net of $0.8 million of unamortized discount and deferred financing costs.

In addition, as further described in Note 10 to the consolidated financial statements included elsewhere in this Annual Report, 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.

Furthermore, a $5.0 million payment will be due to Ligand if cumulative sales of these products exceed $100 million and a second $5.0 million will be due if cumulative sales exceed $300 million during the ten-year term of the agreement which expires on May 31, 2027.

We are currently forecasting that the initial $5.0 million milestone payment will become payable in mid-2023.

If our available cash balances and cash flow from operations, if any, are insufficient to satisfy our liquidity requirements, we may seek to raise additional capital through equity offerings, debt financings, or asset sale or other transactions.

In addition, we are party to a royalty agreement with Ligand Pharmaceuticals Incorporated (“Ligand”) pursuant to a long-term obligation to Ligand (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.

If our available cash balances and cash flow from operations are insufficient to satisfy our liquidity requirements, we may seek to raise additional capital through equity offerings, debt financings, or asset sale or other transactions.

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

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Our present and future funding requirements will depend on many factors, including, among other things:

● the costs of defending against or the damages payable in connection with the FiberCel Recall and VBM Recall and any future litigation that we may be subject to (to the extent above the applicable insurance coverage);

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

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● 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 the damages payable in connection with the FiberCel Litigation and any future litigation that we may be subject to (to the extent above the applicable insurance coverage);

● the cost and timing of additional regulatory approvals;

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● unanticipated general, legal and administrative expenses.

● the effects on any of the above of the current COVID-19 pandemic or any other pandemic, epidemic or outbreak of infectious disease.

In addition, our operating plans 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.

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If we are unable to raise additional funds through equity or debt financings or other arrangements when needed, we may be required to delay the development or commercialization of our products, license to third parties the rights to commercialize products or technologies that we would otherwise seek to commercialize and reduce marketing, customer support or other resources devoted to our products or cease operations.

See our “Risk Factors — Risks Related to Our Business — 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 .”

See “Risk Factors — Risks Related to Our Business — 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 .” elsewhere in this Annual Report.

Based on our current operating plans, we believe there is uncertainty as to whether our future cash flows along with our existing cash, issuances of additional equity and cash generated from expected future sales will be sufficient to meet our anticipated operating needs through twelve months from the financial statement issuance date.

Due to these factors, there is substantial doubt about our ability to continue as going concern within one year after the issuance of the financial statements.

Due to these factors, there is substantial doubt about our ability to continue as a going concern within one year after the issuance of the financial statements.

Off-Balance Sheet Arrangements

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GAAP requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the amounts of revenues and expenses reported during the period.

On an ongoing basis, management evaluates these estimates and judgments, including those related to revenue, inventory valuation, valuation of intangibles, revenue interest obligation and stock-based compensation.

On an ongoing basis, management evaluates these estimates and judgments, including those related to inventories, receivables, long-lived assets, stock-based awards, revenue interest obligation, the warrant liability, the contingent liability for the FiberCel

Litigation and deferred income taxes.

Actual results may differ from those estimates.

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Revenue Recognition

We enter into contracts to sell and distribute products to healthcare providers or commercial partners, or are produced and sold under contract manufacturing arrangements with corporate customers which are billed under ship and bill contract terms.

We enter into contracts to sell and distribute products to healthcare providers or commercial partners which are billed under ship and bill contract terms.

Revenue is recognized when we have met our performance obligations pursuant to our contracts with our customers in an amount that we expect to be entitled to in exchange for the transfer of control of the products and services to our customers.

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or ii) the product is delivered to the customer or distributor, in accordance with the terms of the agreement.

A portion of our product revenue is generated from consigned inventory maintained at hospitals, and from inventory physically held by our direct sales representatives.

For these types of products sales, we retain control until the product has been used or implanted, at which time revenue is recognized.

A portion of our product revenue is generated from consigned inventory maintained at hospitals, distributors and by our direct sales representatives.

For these types of products sales, we retain control until the product has been shipped, used or implanted, at which time revenue is recognized.

We have elected to account for shipping and handling activities as a fulfillment cost rather than a separate performance obligation.

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If impairment exists, the carrying value of that asset is adjusted to its fair value.

A discounted cash flow analysis is used to estimate an asset’s fair value, using assumptions that market participants would apply.

A discounted cash flow analysis is used to

estimate an asset’s fair value, using assumptions that market participants would apply.

An impairment loss would be recorded for the excess of net carrying value over the fair value of the asset impaired.

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As part of this acquisition, we entered into a royalty agreement with Ligand pursuant to which we assumed the Revenue Interest Obligation, with an estimated present value on the acquisition date of $27.7 million.

The terms of the Revenue Interest Obligation require us to pay Ligand 5% of future sales of the products we acquired in the CorMatrix acquisition, subject to certain annual minimum payments.

The terms of the Revenue Interest Obligation require 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 $2.75 million.

Furthermore, a $5.0 million payment will be due to Ligand if cumulative sales of the acquired products exceed $100 million and a second $5.0 million will be due if cumulative sales exceed $300 million during the ten-year term of the agreement which expires on May 31, 2027.

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At each reporting period, the value of the Revenue Interest Obligation is re-measured based on current estimates of the net present value of future payments, with changes to be recorded in the consolidated statements of operations.

In connection with our

estimation at December 31, 2022, it was determined that the estimated future payments, discounted at the original discount rate, had decreased since the prior estimates.

Such decrease was primarily the result of anticipated changes to our strategic partnerships relative to sales of both our CanGaroo and cardiovascular product lines that will impact the timing and extent of such sales and, thereby, will reduce expected future payments to Ligand.

The change to estimated future payments yielded a reduction to the total Revenue Interest Obligation of approximately $5.0 million for the year ended December 31, 2022 with such amount recognized as a gain in Other income, net in our consolidated statement of operations.

There was no change to estimated future payments during the year ended December 31, 2023, and thus, no re-measurement gain or loss was recognized.

In connection with our estimation at December 31, 2022, it was determined that the estimated future payments, discounted at the original discount rate, had decreased since the prior estimates.

The change to estimated future payments yielded a reduction to the total Revenue Interest Obligation of approximately $5.0 million for the year ended December 31, 2022 with such amount recognized as a gain in other expense (income), net in our consolidated statement of operations.

The estimation of future sales and the possible attainment of sales milestones is subject to significant judgment.

Different judgments would yield different valuations of the Revenue Interest Obligation and these differences could be significant.

In January 2024, we amended the royalty agreement with Ligand and restructured the Revenue Interest Obligation by (i) revising the minimum annual royalty for 2024 and each subsequent fiscal year during the term of the agreement from $2.75 million to $4.4 million, (ii) revising the minimum quarterly payments for each fiscal quarter beginning October 1, 2023, and continuing through the term of the agreement from approximately $0.7 million to $1.1 million, (iii) agreeing to a payment of $3.0 million in satisfaction of all royalty obligations for the first three fiscal quarters of 2023, with half of such amount paid on January 20, 2024, and the remainder to be paid not later than April 10, 2024, and (iv) waiving the obligation to make the $5.0 million milestone payment that became due to Ligand in the second quarter of 2023.

The accounting impact of this amendment will be recognized in our consolidated financial statements for the quarter ended March 31, 2024.

Contingent Liability for FiberCel Litigation

We review every lawsuit and claim and are in contact with outside counsel on an ongoing basis in determining our Contingent Liability for FiberCel Litigation.

Where the available information is only sufficient to establish a range of probable liability, and no point within the range is more likely than any other, the lower end of the range has been used.

When a material loss contingency is reasonably possible, but not probable, we do not record a liability, but instead disclose the nature of the matter and an estimate of the loss or range of loss, to the extent such estimate can be made.

An accrual is established for each lawsuit and claim, when appropriate, based on the nature of each such lawsuit or claim.

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

Warrant Liability

We account for warrants in accordance with ASC 815, Derivatives and Hedging – Contracts in Entity's Own Equity , as either liabilities or as equity instruments depending on the specific terms of the warrant agreement.

The Prefunded and Common Warrants issued in connection with the September 2023 private placement (see Note 14 to the consolidated financial statements included elsewhere in this Annual Report) are classified as liabilities and are recorded at fair value.

The warrants are subject to re-measurement at each settlement date and at each balance sheet date and any change in fair value is recognized in other expense (income), net in the statements of operations.

The Company estimates the fair value of the warrant liability using a Black-Scholes pricing model.

We are required to make assumptions and estimates in determining an appropriate term, risk-free interest rate, volatility factor, dividend yield, and the fair value of common stock.

Any significant adjustments to the unobservable inputs would have a direct impact on the fair value of the warrant liability.

Different assumptions relative to the fair valuation of our Prefunded and Common Warrants would result in an adjustment to other expense (income), net in the consolidated statements of operations and such differences may be material.

Stock-Based Compensation

Compensation costs associated with stock option awards and other forms of equity compensation are measured at the grant-date fair value of the awards and recognized over the requisite vesting period of the awards on a straight-line basis.

Compensation costs associated with stock option awards, restricted stock units and other forms of equity compensation are measured at the grant-date fair value of the awards and recognized over the requisite vesting period of the awards on a straight-line basis.

Our policy is to grant stock options at an exercise price equal to 100% of the market value of a share of common stock at closing on the date of the grant.

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Treasury note auction results with a similar life to that of the option.

For our performance-based stock option grants which vest upon the achievement of specified market conditions, we used the Monte Carlo simulation model to calculate the grant-date fair value.

For our performance-based stock option and restricted stock unit grants which vest upon the achievement of specified market conditions, we used the Monte Carlo simulation model to calculate the grant-date fair value.

This model simulates the probabilities of the potential outcomes of our future stock prices over the performance period to determine a fair value.

Under this simulation model, our key assumptions relate to the risk-free interest rate and equity volatility based on consideration of our historical trading volatility as well as the observed equity volatility of other publicly-traded life sciences companies .

The period expense for all of our stock options is recognized on a straight-line basis over the requisite service period for the entire award.

Different assumptions relative to the fair valuation of our stock options would result in a different period expense and such differences may be material.

The period expense for all of our stock options and restricted stock units is recognized on a straight-line basis over the requisite service period for the entire award.

Different assumptions relative to the fair valuation of our stock options and restricted stock units would result in a different period expense and such differences may be material.

Section 107 of the JOBS Act permits us, as an “emerging growth company,” to take advantage of an extended transition period for adopting new or revised accounting standards until those standards would otherwise apply to private companies.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis