Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report, as well as the audited financial statements and the related notes thereto, and the discussion under Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report. This discussion contains forward-looking statements reflecting our current expectations, estimates, plans and assumptions concerning events and financial trends that involve risks and may affect our future operating results and financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the sections entitled “Forward-Looking Statements” and Part II, Item 1A. “Risk Factors” of this Quarterly Report and in the section entitled “Risk Factor Summary” and in Part I, Item IA. “Risk Factors” of our Annual Report.
Overview
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 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. The CanGaroo envelope is also the only envelope designed for subcutaneous implantable cardiac defibrillators, a growing market. Additionally, in June 2024, we received clearance from the U.S. Food and Drug Administration (“FDA”) for our antibiotic-eluting bioenvelope, EluPro (referred to as CanGarooRM during development). Specifically designed to prevent post-operative complications for devices such as pacemakers and defibrillators, EluPro provides antibiotic delivery combined with advanced tissue engineering to create a bioenvelope that over time remodels into a protective pocket of the patient's own tissue. Infection, migration, and skin erosion are some of the most frequently encountered complications of pacemaker surgery, occurring in up to five to seven percent of cases. EluPro is the only drug-eluting biomatrix (“DEB”) offering in the $600 million U.S. implantable electronic device protection 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
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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 DEB to help solve problems unaddressed by available options. As described above, EluPro is our first DEB product offering. 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 and EluPro, upon its commercial introduction in the third quarter of 2024, are sold through our internal sales force, independent sales agents and our marketing partner, Boston Scientific. SimpliDerm is sold through both independent sales agents and our distributor, Tiger Aesthetics Medical after their acquisition of the assets of Sientra in April 2024.
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. We have a long-term supply agreement with Cook Biotech (now owned by RTI Surgical), 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 sale of the Orthobiologics Business described below, and SimpliDerm is now being 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 completed the sale of substantially all of the assets relating to our former Orthobiologics segment (the “Orthobiologics Business”) to Berkeley Biologics, LLC (“Berkeley”). The Orthobiologics Business was comprised of assets relating to researching, developing, administering, insuring, operating, commercializing, manufacturing, selling and marketing our Orthobiologics products, and the business of contract manufacturing of particulate bone, precision milled bone, cellular bone matrix, acellular dermis, soft tissue and other products. The assets sold represent the entirety of our Orthobiologics segment. 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). There were no earn-out payments earned or paid in the three months ended June 30, 2024. 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. We recognized a gain of approximately $6.0 million on the sale of the Orthobiologics Business in the fourth quarter of 2023 and an additional gain of $0.2 million in the second quarter of 2024 from an adjustment payment related to the final working capital received by Berkeley at the sale date. The indemnity holdback is available as a source of recovery for Berkeley for claims of indemnification under the purchase agreement, and some or all of the holdback may be retained by Berkeley if Berkeley is successful in asserting a claim or claims for indemnification against us. Should we receive incremental proceeds in the future through an earn-out payment or payment of the holdback amount, an additional gain will be recorded upon the receipt of such amounts.
Product Recalls
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 formerly manufactured under a contract with Medtronic PLC, which also distributed the
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product. The recall was issued after learning of postsurgical infections reported in several patients treated with the product, including some patients that tested positive for tuberculosis. Additionally, i n 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. Notice of the voluntary recall was issued to centers after we learned of post-surgical tuberculosis infections in two patients treated with product from a single donor lot of our VBM product. Both of these products were part of our Orthobiologics Business, which we have fully divested as described above. For information about legal proceedings in which we are involved and the possible future financial implications, see Note 10 to condensed consolidated financial statements included elsewhere in this Quarterly Report.
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 three or six months ended June 30, 2024 and 2023. 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
Net Sales
We recognize revenue on the sale of our products. Our device protection products are sold to hospitals and other healthcare facilities primarily through our direct sales force, commercial partners or independent sales agents. Our cardiovascular products are sold domestically through a distribution agreement with LeMaitre Vascular and internationally through commercial partners. Our women’s health products are sold directly to hospitals and other healthcare facilities through independent sales agents or through our distribution agreement with Tiger Aesthetics Medical after their acquisition of the assets of Sientra in April 2024.
Expenses
In recent years, we have incurred significant costs in the operation of our business. We expect that our recurring operating costs will largely stabilize, or increase at modest rates, in the near future through the identification of efficiencies as we grow. We may, however, still experience more significant expense increases to the extent we expand our sales and marketing, product development and clinical and research activities. As a result, we will need to generate significant net sales in order to achieve profitability. Below is a breakdown of our main expense categories and the related expenses incurred in each category:
Cost 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 Roswell, Georgia and our former Orthobiologics facility in Richmond, California. 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.
Sales and Marketing Expenses
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 also contribute to sales and marketing expenses. Outside of our direct sales force, we incur significant expenses relating to commissions to our CanGaroo and SimpliDerm commercial partners and independent sales agents. Additionally, this expense category includes distribution
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costs as well as market research, trade show attendance, advertising and public relations related to our products, and customer service expenses.
General and Administrative Expenses
General and administrative (“G&A”) expenses consist primarily of compensation, consulting, legal, human resources, information technology, accounting, insurance and general business expenses. Our G&A expenses have increased as a result of operating as a public company, especially as a result of hiring additional personnel and incurring greater director and officer insurance premiums, greater investor relations costs, and additional costs associated with accounting, legal, tax-related and other services associated with maintaining compliance with exchange listing and SEC requirements.
Research and Development Expenses
Research and development (“R&D”) expenses consist primarily of salaries and fringe benefits, laboratory supplies, clinical studies and outside service costs. Over the last several years, our product development efforts have primarily related to activities associated with the development of EluPro (referred to as CanGarooRM during development), our initial DEB product offering. See above for discussion of the June 2024 FDA approval of EluPro. Future development efforts are expected to focus on (i) expanding the EluPro offering with additional sizes and product features and (ii) developing new products within the DEB product portfolio. 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 and actual amounts recoverable under insurance, indemnity and contribution agreements for such costs.
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Results of Operations
Comparison of the Three Months Ended June 30, 2024 and 2023
Three Months Ended June 30,
2024
2023
Change 2023 / 2024
% of Net
% of Net
(in thousands, except percentages)
Amount
Sales
Amount
Sales
$
%
Net sales
$
6,291
100.0
%
$
6,351
100.0
%
$
(60)
(0.9)
%
Cost of goods sold
3,492
55.5
%
3,637
57.3
%
(145)
(4.0)
%
Gross profit
2,799
44.5
%
2,714
42.7
%
85
3.1
%
Sales and marketing
3,330
52.9
%
3,022
47.6
%
308
10.2
%
General and administrative
4,689
74.5
%
3,861
60.8
%
828
21.4
%
Research and development
1,001
15.9
%
869
13.7
%
132
15.2
%
FiberCel litigation costs
2,289
36.4
%
1,271
20.0
%
1,018
80.1
%
Total operating expenses
11,309
179.8
%
9,023
142.1
%
2,286
25.3
%
Loss from operations
(8,510)
(135.3)
%
(6,309)
(99.3)
%
(2,201)
34.9
%
Interest expense
1,267
20.1
%
1,409
22.2
%
(142)
(10.1)
%
Loss on revaluation of warrant liability
18,337
291.5
%
—
—
%
18,337
NM
Other expense (income), net
257
4.1
%
—
—
%
257
NM
Loss before provision of income taxes
(28,371)
(451.0)
%
(7,718)
(121.5)
%
(20,653)
267.6
%
Income tax expense
(11)
(0.2)
%
12
0.2
%
(23)
(191.7)
%
Net loss from continuing operations
(28,360)
(450.8)
%
(7,730)
(121.7)
%
(20,630)
266.9
%
Discontinued operations
180
2.9
%
(2,891)
(45.5)
%
3,071
(106.2)
%
Net loss
$
(28,180)
(447.9)
%
$
(10,621)
(167.2)
%
$
(17,559)
(165.3)
%
NM = not meaningful
Net Sales
Net sales information for our products is summarized as follows:
Three Months Ended June 30,
2024
2023
% of Net
% of Net
Change 2023 / 2024
(in thousands, except percentages)
Amount
Sales
Amount
Sales
$
%
Products:
Device protection
$
2,639
41.9
%
$
2,221
35.0
%
$
418
18.8
%
Women's health
2,571
40.9
%
2,400
37.8
%
171
7.1
%
Cardiovascular
1,081
17.2
%
1,730
27.2
%
$
(649)
(37.5)
%
Total Net Sales
$
6,291
100.0
%
$
6,351
100.0
%
$
(60)
(0.9)
%
Total net sales decreased $0.1 million, or 0.9%, to $6.3 million in the three months ended June 30, 2024 compared to $6.4 million in the three months ended June 30, 2023. Revenues from Device Protection and Women’s Health increased compared to the prior year’s second quarter due primarily to volume growth, and revenues from Cardiovascular decreased due to the commencement in April 2023 of our distribution agreement with LeMaitre Vascular which provides for sales at a contract price versus sales prior to such agreement being made at end-user pricing.
Cost of Goods Sold
Cost of goods sold and gross margin percentage information for our products is summarized as follows:
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Three Months Ended June 30,
2024
2023
Gross
Gross
Change 2023 / 2024
(in thousands, except percentages)
Amount
Margin %
Amount
Margin %
$
%
Products:
Device protection
$
1,068
59.5
%
$
722
67.5
%
$
346
47.9
%
Women's health
1,161
54.8
%
1,493
37.8
%
(332)
(22.2)
%
Cardiovascular
414
61.7
%
573
66.9
%
(159)
(27.7)
%
Cost of goods sold, excluding intangible asset amortization
2,643
58.0
%
2,788
56.1
%
(145)
(5.2)
%
Intangible asset amortization expense
849
(13.5)
%
849
(13.4)
%
—
—
%
Total Cost of Goods Sold
$
3,492
44.5
%
$
3,637
42.7
%
$
(145)
(4.0)
%
Total cost of goods sold decreased $0.1 million to $3.5 million in the three months ended June 30, 2024 compared to $3.6 million in the three months ended June 30, 2023. Gross margin was 44.5% in the three months ended June 30, 2024 compared to 42.7% in the three months ended June 30, 2023. Gross margin, excluding intangible asset amortization, was 58.0% in the three months ended June 30, 2024 compared to 56.1% in the three months ended June 30, 2023. The improvement in gross margin was primarily due to the Women’s health business which experienced certain non-recurring production issues in the 2023 period which had a negative impact on gross margins. As noted above, with the sale of the Orthobiologics Business in November 2023, we no longer internally produce our women’s health product, SimpliDerm.
Operating Expenses
Sales and Marketing
Sales and marketing expenses increased $0.3 million, or 10.2%, to $3.3 million in the three months ended June 30, 2024 compared to $3.0 million in the three months ended June 30, 2023. As a percentage of sales, sales and marketing expenses increased to 52.9% in the three months ended June 30, 2024 from 47.6% in the three months ended June 30, 2023. The increase in expense was largely attributable to the non-cash equity compensation grants made in January 2024.
General and Administrative
G&A expenses increased $0.8 million, or 21.4%, to $4.7 million in the three months ended June 30, 2024 compared to $3.9 million in the three months ended June 30, 2023. As a percentage of net sales, G&A expenses increased to 74.5% in the three months ended June 30, 2024 from 60.8% in the three months ended June 30, 2023. The increase in expense was primarily driven by the non-cash equity compensation grants made in January 2024.
Research and Development
R&D expenses were essentially flat between years slightly increasing to $1.0 million in the three months ended June 30, 2024 compared to $0.9 million in the three months ended June 30, 2023. Over the last several years, our R&D efforts have primarily related to activities associated with the development of EluPro (referred to as CanGarooRM during development). The June 2024 FDA approval of EluPro is discussed in further under the heading "Overview" above..
FiberCel Litigation Costs
FiberCel litigation costs increased to $2.3 million in the three months ended June 30, 2024 compared to $1.3 million in the three months ended June 30, 2023. The increase in expense was primarily due to the continued evaluation of the contingent FiberCel liability. See further discussion in Note 10 to condensed consolidated financial statements included elsewhere in this Quarterly Report.
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Interest Expense
Interest expense was approximately $1.3 million in the three months ended June 30, 2024 compared to $1.4 million in the three months ended June 30, 2023. The decrease was primarily due to lower principal outstanding on the SWK debt in the current year period as a result of mandatory repayments in connection with our sale of the Orthobiologics Business in November 2023.
Discontinued Operations
Income from discontinued operations for the three months ended June 30, 2024 was $0.2 millon and loss from discontinued operations for the three months ended June 30, 2023 was $2.9 million. See Notes 1 and 4 to condensed consolidated financial statements included elsewhere in this Quarterly Report for further discussion.
Comparison of the Six Months Ended June 30, 2024 and 2023
Six Months Ended June 30,
2024
2023
Change 2023 / 2024
% of Net
% of Net
(in thousands, except percentages)
Amount
Sales
Amount
Sales
$
%
Net sales
$
12,985
100.0
%
$
12,743
100.0
%
$
242
1.9
%
Cost of goods sold
7,343
56.5
%
6,655
52.2
%
688
10.3
%
Gross profit
5,642
43.5
%
6,088
47.8
%
(446)
(7.3)
%
Sales and marketing
6,639
51.1
%
7,713
60.5
%
(1,074)
(13.9)
%
General and administrative
9,745
75.0
%
7,381
57.9
%
2,364
32.0
%
Research and development
2,173
16.7
%
2,460
19.3
%
(287)
(11.7)
%
FiberCel litigation costs
4,074
31.4
%
3,182
25.0
%
892
28.0
%
Total operating expenses
22,631
174.3
%
20,736
162.7
%
1,895
9.1
%
Loss from operations
(16,989)
(130.8)
%
(14,648)
(114.9)
%
(2,341)
(16.0)
%
Interest expense
2,580
19.9
%
2,839
22.3
%
(259)
(9.1)
%
Loss on revaluation of warrant liability
27,974
215.4
%
—
—
%
27,974
NM
Other expense (income), net
(1,186)
(9.1)
%
—
—
%
(1,186)
NM
Loss before provision of income taxes
(46,357)
(357.0)
%
(17,487)
(137.2)
%
(28,870)
165.1
%
Income tax expense
(3)
(0.0)
%
24
0.2
%
(27)
(112.5)
%
Net loss from continuing operations
(46,354)
(357.0)
%
(17,511)
(137.4)
%
(28,843)
(164.7)
%
Discontinued operations
180
1.4
%
(1,084)
(8.5)
%
1,264
(116.6)
%
Net loss
$
(46,174)
(355.6)
%
$
(18,595)
(145.9)
%
$
(27,579)
(148.3)
%
NM = not meaningful
Net Sales
Net sales information for our products is summarized as follows:
Six Months Ended June 30,
2024
2023
% of Net
% of Net
Change 2023 / 2024
(in thousands, except percentages)
Amount
Sales
Amount
Sales
$
%
Products:
Device protection
$
4,996
38.5
%
$
4,571
35.9
%
$
425
9.3
%
Women's health
6,138
47.3
%
4,695
36.8
%
1,443
30.7
%
Cardiovascular
1,851
14.3
%
3,477
27.3
%
$
(1,626)
(46.8)
%
Total Net Sales
$
12,985
100.0
%
$
12,743
100.0
%
$
242
1.9
%
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Total net sales increased $0.3 million, or 1.9%, to $13.0 million in the six months ended June 30, 2024 compared to $12.7 million in the six months ended June 30, 2023. Revenues from Device Protection and Women’s Health increased compared to the prior year period due primarily to volume growth, and revenues from Cardiovascular decreased due to the commencement in April 2023 of our distribution agreement with LeMaitre Vascular which provides for sales at a contract price versus sales prior to such agreement being made at end-user pricing.
Cost of Goods Sold
Cost of goods sold and gross margin percentage information for our products is summarized as follows:
Six Months Ended June 30,
2024
2023
Gross
Gross
Change 2023 / 2024
(in thousands, except percentages)
Amount
Margin %
Amount
Margin %
$
%
Products:
Device protection
$
1,796
64.1
%
$
1,277
72.1
%
$
519
40.6
%
Women's health
3,162
48.5
%
2,736
41.7
%
426
15.6
%
Cardiovascular
686
62.9
%
943
72.9
%
(257)
(27.3)
%
Cost of goods sold, excluding intangible asset amortization
5,644
56.5
%
4,956
61.1
%
688
13.9
%
Intangible asset amortization expense
1,699
(13.1)
%
1,699
(13.3)
%
—
—
%
Total Cost of Goods Sold
$
7,343
43.5
%
$
6,655
47.8
%
$
688
10.3
%
Total cost of goods sold increased $0.6 million to $7.3 million in the six months ended June 30, 2024 compared to $6.7 million in the six months ended June 30, 2023. Gross margin was 43.5% in the six months ended June 30, 2024 compared to 47.8% in the six months ended June 30, 2023. Gross margin, excluding intangible asset amortization, was 56.5% in the six months ended June 30, 2024 compared to 61.1% in the six months ended June 30, 2023. The decline in gross margin was primarily due to the Cardiovascular business which decreased due to the commencement of the LeMaitre Vascular distribution agreement described above.
Operating Expenses
Sales and Marketing
Sales and marketing expenses decreased $1.1 million, or 13.9%, to $6.6 million in the six months ended June 30, 2024 compared to $7.7 million in the six months ended June 30, 2023. As a percentage of sales, sales and marketing expenses decreased to 51.1% in the six months ended June 30, 2024 from 60.5% in the six months ended June 30, 2023. The decrease in expense was largely attributable to the previously announced reduction in force which occurred at the end of the first quarter of 2023 and primarily impacted certain members of sales and marketing management.
General and Administrative
G&A expenses increased $2.3 million, or 32.0%, to $9.7 million in the six months ended June 30, 2024 compared to $7.4 million in the six months ended June 30, 2023. As a percentage of net sales, G&A expenses increased to 75.0% in the six months ended June 30, 2024 from 57.9% in the six months ended June 30, 2023. The increase in expense resulted largely from the non-cash equity compensation grants made in January 2024.
Research and Development
R&D expenses decreased to $2.2 million in the six months ended June 30, 2024 compared to $2.5 million in the six months ended June 30, 2023. Over the last several years, our R&D efforts have primarily related to activities associated with the development of EluPro (referred to as CanGarooRM during development). See above for discussion of the June 2024 FDA approval of EluPro. Such related costs were less in the first half of 2024 versus the prior year’s comparable
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period due to the reduction of efforts needed and expenses incurred as the development progressed toward anticipated completion.
FiberCel Litigation Costs
FiberCel litigation costs increased to $4.1 million in the six months ended June 30, 2024 compared to $3.2 million in the six months ended June 30, 2023. The increase in expense was primarily due to the continued evaluation of the contingent FiberCel liability. See further discussion in Note 10 to condensed consolidated financial statements included elsewhere in this Quarterly Report.
Interest Expense
Interest expense was approximately $2.6 million in the six months ended June 30, 2024 compared to $2.8 million in the six months ended June 30, 2023. The decrease was primarily due to lower principal outstanding on the SWK debt in the current year period as a result of mandatory repayments in connection with our sale of the Orthobiologics Business in November 2023.
Discontinued Operations
Income from discontinued operations for the six months ended June 30, 2024 was $0.2 millon and loss from discontinued operations for the six months ended June 30, 2023 was $1.1 million. See Notes 1 and 4 to condensed consolidated financial statements included elsewhere in this Quarterly Report for further discussion.
Non-GAAP Financial Measures
This Quarterly Report presents our gross margin, excluding intangible asset amortization, for the three and six months ended June 30, 2024 and 2023. We calculate gross margin, excluding intangible asset amortization, as gross profit, excluding amortization expense relating to intangible assets we acquired in the CorMatrix Acquisition, divided by net sales. Gross margin, excluding intangible asset amortization, is a supplemental measure of our performance, is not defined by or presented in accordance with U.S. generally accepted accounting principles (“GAAP”), has limitations as an analytical tool and should not be considered in isolation or as an alternative to our GAAP gross margin, gross profit or any other financial performance measure presented in accordance with GAAP. We present gross margin, excluding intangible asset amortization, because we believe that it provides meaningful supplemental information regarding our operating performance by removing the impact of amortization expense, which is not indicative of our overall operating performance. 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 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. In addition, other companies, including companies in our industry, may use other measures to evaluate their performance, which could reduce the usefulness of this non-GAAP financial measure as a tool for comparison.
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The following table presents a reconciliation of our gross margin, excluding intangible asset amortization, for the three and six months ended June 30, 2024 and 2023 to the most directly comparable GAAP financial measure, which is our GAAP gross margin (in thousands).
Three Months Ended
Six Months Ended
June 30,
June 30,
2024
2023
2024
2023
Net sales
$
6,291
$
6,351
$
12,985
$
12,743
Cost of goods sold
3,492
3,637
7,343
6,655
Gross profit
2,799
2,714
5,642
6,088
Intangible asset amortization expense
849
849
1,699
1,699
Gross profit, excluding intangible asset amortization
$
3,648
$
3,563
$
7,341
$
7,787
Gross margin
44.5
%
42.7
%
43.5
%
47.8
%
Gross margin, excluding intangible asset amortization
58.0
%
56.1
%
56.5
%
61.1
%
Seasonality
Historically, we have experienced seasonality, with lower sales in our first and second quarters and higher sales in our fourth quarter, and we expect this trend to continue. 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. 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 June 30, 2024, we had cash of approximately $18.2 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 June 30, 2024, our accumulated deficit was $221.8 million.
On June 18, 2024, we sold, in a registered direct offering (“Registered Offering”) an aggregate of (i) 3,175,000 shares (“Common Shares”) of the Company’s Class A common stock and (ii) prefunded warrants (“2024 Prefunded Warrants”) to purchase up to an aggregate of 725,000 shares of Class A Common Stock. The public offering price for each share of Class A Common Stock was $3.40, and the public offering price for each 2024 Prefunded Warrant was $3.399 , for aggregate gross proceeds of approximately $13.3 million, before deducting offering expenses. The 2024 Prefunded Warrants have an exercise price of $0.001 per share of Class A Common Stock, are exercisable immediately and will expire when exercised in full.
On September 21, 2023, we sold, in a private offering (“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 (“2023 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 2023 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
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date of the offering, at an exercise price per share of $1.4275. Each 2023 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). With the FDA’s approval of EluPro in June 2024 (referred to as CanGarooRM during development), the last exercise date for the Common Warrants was July 31, 2024. All Common Warrants outstanding as of June 30, 2024 were exercised by such date yielding exercise proceeds of $13.8 million in July 2024.
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 successfully commercialize our new EluPro 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 Registerd Offering and Private Offering 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, 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.
Cash Flows for the Six Months Ended June 30, 2024 and 2023
Six Months Ended
June 30,
2024
2023
(in thousands)
Net cash provided by (used in):
Operating activities
$
(6,973)
$
(7,555)
Investing activities
167
(267)
Financing activities
5,718
129
Net decrease in cash
$
(1,088)
$
(7,693)
Cash Flows From Operating Activities
Net cash used in operating activities for the six months ended June 30, 2024 was $7.0 million compared to $7.6 million for the six months ended June 30, 2023. The year-over-year decrease was primarily due to a lower net loss (excluding non-cash items) as well as reductions in inventory held.
Cash Flows From Investing Activities
Net cash provided by investing activities for the six months ended June 30, 2024 was $0.2 million compared to net cash used in investing activities of $0.3 million for the six months ended June 30, 2023. The current year period reflects the receipt of $0.2 million in the second quarter of 2024 from an adjustment payment related to the final working capital received by Berkeley at the sale date. The prior year period use of cash is related to the purchase of property and equipment for our production activities.
Cash Flows From Financing Activities
Net cash provided by financing activities for the six months ended June 30, 2024 was $5.7 million compared to $0.1 million for the six months ended June 30, 2023. The year-over-year increase was caused primarily by the Registered Offering and warrant exercises which yielded proceeds of $14.1 million offset by repayments of long-term debt and
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payments on the revenue interest obligation which collectively totalled $7.2 million. No such activity occurred in the 2023 period.
Credit Facilities
General
O n August 10, 2022 (the “Closing Date”), we entered into a senior secured term loan facility with SWK Funding LLC (“SWK”), 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 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 has not been entered into to date. As of June 30, 2024, we had $23.0 million of indebtedness outstanding under our SWK Loan Facility, with such balance being net of $0.7 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 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), 3.75% 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 conditions, as defined, have not been met, or (y) if such conditions have been satisfied, until November 17, 2025. The “Term SOFR Rate” is subject to a floor of 2.75%.
Mandatory Prepayments
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) 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. The closing of the sale 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. No such mandatory prepayments were required in the six months ended June 30, 2023.
Optional Prepayment
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: (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 the termination.
Amortization and Final Maturity
The SWK Loan Facility matures on August 10, 2027 and accrues interest, payable quarterly in arrears. Principal amortization of the SWK Loan Facility starts on November 15, 2024, which amortization may be extended to November 17, 2025 if the Extension Conditions (as defined in the SWK Loan Facility Agreement) have been satisfied. Principal payments during the amortization period will be limited based on revenue-based caps. As of June 30, 2024, quarterly
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principal payments are scheduled to begin on November 15, 2024, in an amount equal to 5% of the outstanding principal on such principal payment commencement date with the balance paid at maturity.
Security
All obligations under the SWK Loan Facility are, and any future guarantees of those obligations will be, secured by, among other things, and in each case subject to certain exceptions, a first priority lien on and security interest in, upon, and to all of our assets, whether now owned or hereafter acquired, wherever located.
Covenants and Other Matters
The SWK Loan Facility Agreement that governs the SWK Loan Facility contains a number of covenants that, among other things and subject to certain exceptions, restrict our ability to:
● incur additional indebtedness;
● incur certain liens;
● pay dividends or make other distributions on equity interests;
● redeem, repurchase or refinance subordinated indebtedness;
● consolidate, merge or sell or otherwise dispose of assets;
● make investments, loans, advances, guarantees and acquisitions;
● enter into transactions with affiliates;
● amend or modify our governing documents;
● amend or modify certain material agreements; and
● alter the business conducted by us and our subsidiaries.
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) 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”).
On March 27, 2024, we entered into an amendment to the SWK Loan Facility Agreement, which modified the Minimum Aggregate Revenue covenant under the SWK Facility to provide that as of the last business day of each fiscal quarter of the Company beginning with the first fiscal quarter of 2024, our required Minimum Aggregate Revenue (as defined in the SWK Facility) for the trailing twelve-month period must be equal to or greater than $20.0 million.
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 Elutia. As of June 30, 2024, we were in compliance with the financial covenants and all other covenants.
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Funding Requirements
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 significant costs and expenses associated with operating as a public company.
As of June 30, 2024, we had $22.3 million of indebtedness outstanding, consisting of $23.0 million outstanding under our SWK Loan Facility, net of $0.7 million of unamortized discount and deferred financing costs. Such indebtedness currently has a principal payment commencement date of November 15, 2024, with quarterly principal payments in an amount equal to 5% of the outstanding principal. 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, as amended in January 2024, 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. We may also consider raising additional capital in the future to expand our business, pursue strategic investments or take advantage of financing opportunities. Our present and 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 and timing 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 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;
● costs associated with any product recall that may occur;
● the effect of competing technological and market developments;
● the expenses we incur in manufacturing and selling our products;
● the extent to which we acquire or invest in products, technologies and businesses in the future, although we may currently have no commitments or agreements relating to any of these types of transactions;
● the costs of operating as a public company;
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● unanticipated general, legal and administrative expenses; and
● the effects on any of the above from any 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. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest may be materially diluted, and the terms of such securities could include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing, if available, may involve agreements that include restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures, creating liens, redeeming shares of our common stock and/or declaring dividends. If we raise funds through collaborations, licensing agreements or other strategic alliances, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates, or grant licenses on terms that may not be favorable to us. 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 Annual Report, Part I, Item 1A. “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 .”
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.
Critical Accounting Policies and Estimates
The preparation of our unaudited condensed consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures. We have discussed the policies and estimates that we believe are critical and require the use of complex judgment in their application in our Annual Report, and, during the three and six months ended June 30, 2024, there were no material changes to those previously disclosed other than those outlined in Note 2, “Summary of Significant Accounting Policies.”
Recent Accounting Pronouncements
Refer to Note 3, “Recently Issued Accounting Standards,” to our condensed consolidated financial statements included elsewhere in this Quarterly Report for information regarding recently issued accounting pronouncements.
JOBS Act
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. We have elected to avail ourselves of this exemption and, as a result, for so long as we remain an emerging growth company, unless we subsequently choose to affirmatively and irrevocably opt out of the extended transition period, our financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies. Section 107 of the JOBS Act provides that we can elect to opt out of the extended transition period at any time, which election is irrevocable.
We will remain an emerging growth company until the earliest of: (i) the last day of the first fiscal year in which our annual gross revenues are $1.235 billion or more; (ii) the last day of 2025; (iii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common equity held by non-affiliates is $700 million or more as of the last business day of our most recently completed second
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fiscal quarter; or (iv) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the previous three years.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.