Item 2. Management’s Discussion and Analysis
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial
statements and the related notes appearing elsewhere in this report, and together with our audited consolidated financial statements, related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as of
and for the year ended December 31, 2020 included in our Annual Report on Form 10-K, filed with the SEC on October 21, 2021 (the “2020 Annual Report”).
Overview
We are a shock wave technology company using a patented system of noninvasive, high-energy, acoustic shock waves for regenerative medicine and other applications. Our initial focus is regenerative medicine utilizing
noninvasive, acoustic shock waves to produce a biological response resulting in the body healing itself through the repair and regeneration of tissue, musculoskeletal, and vascular structures.
Our lead regenerative product in the United States is the dermaPACE® device, used for treating diabetic foot ulcers (“DFU”), which was subject to two double-blinded, randomized Phase III clinical studies. On December
28, 2017, the U.S. Food and Drug Administration (“FDA”) granted the Company’s request to classify the dermaPACE® System as a Class II device via the de novo process. As a result of this decision, the
Company was able to immediately market the product for the treatment of DFU as described in the de novo request, subject to the general control provisions of the Food, Drug and Cosmetic Act and the special
controls identified in this order.
On August 6, 2020, we entered into an asset purchase agreement (the “Asset Purchase Agreement” or “Acquisition”) with Celularity Inc. (“Celularity”) pursuant to which we acquired Celularity’s UltraMIST assets
(“UltraMIST” or the “Assets”). The UltraMIST® System provides through a fluid mist a low-frequency, non-contact, and pain free ultrasound energy deep inside the wound bed that promotes healing from within. The ultrasound acoustic waves promote
healing by reducing inflammation and bacteria in the wound bed, while also increasing the growth of new blood vessels to the area. The UltraMIST® System treatment must be administered by a healthcare professional. This proprietary technology has
been cleared by the FDA for the promotion of wound healing through wound cleansing and maintenance debridement combined with ultrasound energy deposited inside the wound that stimulated tissue regeneration.
In connection with the Asset Purchase Agreement, on August 6, 2020, we entered into a license and marketing agreement with Celularity pursuant to which Celularity granted to the Company a license to the Celularity
wound care biologic products, Biovance® and Interfyl® (the “License Agreement”). The License Agreement provides the Company with an exclusive license to use, market, distribute and sell Biovance® in the “Field” and “Territory” (each as defined in
the License Agreement), and a non-exclusive license to use, market, distribute and sell Interfyl® in the Field and in the Territory. The License Agreement has an initial five-year term, after which it automatically renews for additional one-year
periods, unless either party gives written notice at least 180 days prior to the expiration of the current term. In May 2021, the Company received notification alleging that it is not in compliance with the License Agreement with Celularity. See
further discussion in Note 13 - Contingencies in the accompanying Condensed Consolidated Financial Statements.
Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our Condensed Consolidated Financial Statements, which have been prepared in
accordance with U.S. GAAP. The preparation of our Condensed Consolidated Financial Statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses.
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On an ongoing basis, we evaluate our estimates and judgments, including those related to the recording of the allowances for doubtful accounts, net realizable value of
inventory, useful lives of long-lived assets, fair value of goodwill and other intangible assets, the determination of the valuation allowance for deferred taxes, the estimated fair value of the warrants, and the estimated fair value of
stock-based compensation. We base our estimates on authoritative literature and pronouncements, historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions. The results of our operations for
any historical period are not necessarily indicative of the results of our operations for any future period.
Our significant accounting policies are more fully described in Note 3 to our Consolidated Financial Statements filed with our 2020 Annual Report. For a description of recent
accounting policies and the impact on our financial statements, refer to Note 3 in the accompanying Condensed Consolidated Financial Statements.
Financial Overview
Since inception in 2005, our operations have primarily been funded from the sale of capital stock, notes payable, and convertible debt securities. We have devoted and expect to continue to devote substantial resources
for the commercialization of the dermaPACE® System and will continue to research and develop the non-medical uses of the PACE technology, both of which will require additional capital resources. We also expect to require additional working capital
as sales of our UltraMIST product continue to grow.
We incurred net losses of $30.9 million and $10.4 million for the years ended December 31, 2020 and 2019, respectively, and additional losses of approximately $4.9 million in the first quarter of 2021. These factors
and the events of default on the notes promissory discussed above create substantial doubt about the Company’s ability to continue as a going concern for a period of at least twelve months from the financial statement issuance date. See Note 16 –
Subsequent Events to the accompanying Condensed Consolidated Financial Statements for a discussion of the various events of default.
Our operating losses create substantial doubt about our ability to continue as a going concern. Although no assurances can be given, we believe that potential additional issuances of equity, debt or other potential
financing may provide the necessary funding for us to continue as a going concern for the next year. See “Liquidity and Capital Resources” for further information regarding our financial condition.
The continuation of our business is dependent upon raising additional capital to fund operations. Management’s plans are to obtain additional capital in 2022 through investments by strategic partners for market
opportunities, which may include strategic partnerships or licensing arrangements, or raise capital through the conversion of outstanding warrants, the issuance of common or preferred stock, securities convertible into common stock, or secured or
unsecured debt. These possibilities, to the extent available, may be on terms that result in significant dilution to our existing shareholders. In addition, there can be no assurances that our plans to obtain additional capital will be successful
on the terms or timeline we expect, or at all. Although no assurances can be given, management believes that potential additional issuances of equity or other potential financing transactions as discussed above should provide the necessary funding
for us for the next twelve months. If these efforts are unsuccessful, we may be required to significantly curtail or discontinue operations or, if available, obtain funds through financing transactions with unfavorable terms.
The accompanying Condensed Consolidated Financial Statements have been prepared in conformity with U.S. GAAP, which contemplate continuation of the Company as a going concern and the realization of assets and
satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the financial statements do not necessarily purport to represent realizable or settlement values. The Condensed Consolidated
Financial Statements do not include any adjustment that might result from the outcome of this uncertainty. Our Condensed Consolidated Financial Statements do not include any adjustments relating to the recoverability of assets and classification of
assets and liabilities that might be necessary should we be unable to continue as a going concern.
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Since our inception, we have incurred losses from operations each year. As of December 31, 2020, we had an accumulated deficit of $156.7 million. Although the size and timing of our future operating losses are subject
to significant uncertainty, we anticipate that our operating losses will continue over the next few years as we continue to incur expenses related to commercialization of our dermaPACE® system for the treatment of DFU in the United States. If we
are able to successfully commercialize, market and distribute the dermaPACE® system, then we believe we may able to partially or completely offset these losses in the future with revenues from sales of our UltraMist systems and applicators.
Although no assurances can be given, we believe that potential additional issuances of equity, debt or other potential financing, as discussed above, may provide the necessary funding for us to continue as a going concern for the next twelve
months. We cannot reasonably estimate the nature, timing and costs of the efforts necessary to complete the development and approval of, or the period in which material net cash flows are expected to be generated from, any of our products, due to
the numerous risks and uncertainties associated with developing and marketing products, including the uncertainty of:
• the scope, rate of progress and cost of our clinical trials;
• future clinical trial results;
• the cost and timing of regulatory approvals;
• supplier and customer disputes;
• the establishment of successful marketing, sales and distribution channels and partnerships, including our efforts to expand our marketing, sales and distribution reach through joint ventures and other contractual arrangements;
• the cost and timing associated with establishing reimbursement for our products;
• the effects of competing technologies and market developments; and
• the industry demand and patient wellness behavior.
Any failure to complete the development of our product candidates in a timely manner, or any failure to successfully market and commercialize our product candidates, would have a material adverse effect on our
operations, financial position and liquidity. A discussion of the risks and uncertainties associated with us and our business are set forth under the section entitled “Risk Factors – Risks Related to Our Business” in our 2020 Annual Report.
The worldwide spread of the COVID-19 virus has resulted and is expected to continue to result in a global slowdown of economic activity which is likely to continue to decrease demand for a broad variety of products,
including from our customers, while also disrupting supply channels and marketing activities for an unknown period of time. Also, the pandemic may cause continued or additional actions by hospitals and clinics such as limiting elective procedures
and treatments and limiting clinical trial activities and data monitoring. We expect all of these factors to continue to have a negative impact on our sales and our results of operations, the size and duration of which we are currently unable to
predict.
Results of Operations
Revenues and Cost of Revenues
Revenues for the three months ended March 31, 2021 were $2.1 million compared to $149 thousand for the same period in 2020, an increase of nearly $2.0 million. The increase was primarily driven by 2021 sales of
UltraMIST devices and single-use accessories. The Company’s UltraMIST business began with the August 6, 2020 Acquisition. Please see Note 13 - Contingencies in the accompanying Condensed Consolidated Financial Statements for a description of a
supplier dispute relating to UltraMIST.
Cost of revenues for the three months ended March 31, 2021 were $1.1 million versus $130 thousand for the same period of the prior year. Gross margin as a percentage of revenues was 50% for the 2021 first quarter and
13% for the 2020 first quarter. The increase in gross margin percentage was driven by sales of UltraMIST products and accessories, which have higher gross margin percentages than do DuraPACE products and accessories.
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Research and Development Expenses
Research and development expenses increased to $354 thousand from $287 thousand during the first quarter of 2021 compared with the first quarter of 2020, respectively. The 24% increase was driven by higher employee
compensation and benefits costs incurred by the larger, post-Acquisition organization, though these costs were partially offset by lower amounts paid to external parties for clinical studies and other research and development.
Selling and Marketing Expenses
Selling and marketing expenses increased $1.2 million or 193% from $608 thousand to $1.8 million from the three months ended March 31, 2020 to the three months ended March 31, 2021. The expense increase was primarily
driven by higher employee compensation, commissions, benefits costs incurred by the larger, post-Acquisition organization as well as higher levels of revenues. Contributing to the expense increase were higher sales-related technology, equipment
and supply costs, which were also the result of the larger, post-Acquisition organization.
General and Administrative Expenses
General and administrative expenses increased from $1.9 million to $3.3 million or 73% from the quarter ended March 31, 2020 to the quarter ended March 31, 2021. The $1.4 million increase was primarily the result of
approximately $791 thousand in expenses related to Registration Statement penalty accruals as well as smaller increases in bad debt expenses and expenses for professional fees and consultants. Approximately $176 thousand of the increase relates to
first quarter 2021 amortization of intangible assets related to the acquisition on August 6, 2020.
Liquidity and Capital Resources
We expect to devote substantial resources for the commercialization of the dermaPACE® System and intend continue to research and develop the next generation of our technology as well as the non-medical uses of the PACE
technology, both of which will require additional capital resources. We incurred a net loss of $30.9 million and $10.4 million for the years ended December 31, 2020 and 2019, respectively, and incurred additional net losses in the first quarter of
2021 of approximately $5.0 million. These factors and the events of default on the promissiory notes discussed above create substantial doubt about the Company’s ability to continue as a going concern for a period of at least twelve months from the
financial issuance date. See Note 16 – Subsequent Events to the accompanying Condensed Consolidated Financial Statements for a discussion of the various events of default. Historically, our operations have primarily been funded from the sale of
capital stock, notes payable, and convertible debt securities. The continuation of our business is dependent upon raising additional capital to fund operations; we may not be able to do so, and/or the terms of any financings may not be advantageous
to us.
During the three months ended March 31, 2021, cash used by operating activities totaled approximately $3.3 million, which was driven largely by the net loss for the quarter and was partially offset by increases in
accounts payable and accrued expenses as well as decreases in accounts receivable. Cash used by investing activities during the 2021 first quarter consisted of purchases of property and equipment of $101 thousand. Cash provided by financing
activities for the quarter consisted primarily of $1.1 million of proceeds from SBA Loan #2 as well as $125 thousand in proceeds from deposits from related parties and were offset by $46 thousand of principal payments on financing leases.
Cash used in operations averaged $1.1 million per month for the first quarter of 2021 and management anticipates cash usage for operations to be approximately $300 thousand to $500 thousand per month during the second
quarter and $250 thousand to $400 thousand per month for the second half of 2021 as resources are devoted to the commercialization of the dermaPACE and UltraMIST products including hiring of new employees, expansion of our international business
and continued research and development of the next generation of our technology as well as non-medical uses of our technology. Management’s plans are to obtain additional capital in 2022 through investments by strategic partners for market
opportunities, which may include strategic partnerships or licensing arrangements, or raise capital through the conversion of outstanding warrants, issuance of common or preferred stock, securities convertible into common stock, or secured or
unsecured debt. These possibilities, to the extent available, may be on terms that result in significant dilution to our existing shareholders. Although no assurances can be given, management believes that potential additional issuances of equity
or other potential financing transactions as discussed above should provide the necessary funding for us for the next twelve months. If these efforts are unsuccessful, we may be required to significantly curtail or discontinue operations or, if
available, obtain funds through financing transactions with unfavorable terms.
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Segment and Geographic Information
We have determined that we have one operating segment. Our revenues are generated from sales in United States, Europe, Canada, Middle East, Central America, South America, Asia and Asia/Pacific. All significant
expenses are generated in the United States and all significant assets are located in the United States.
Contractual Obligations
Our major outstanding contractual obligations relate to our financing leases for rental equipment, operating leases for our facilities and office equipment, purchase and supplier obligations for product component
materials and equipment, and our outstanding debt. Please see our 2020 Annual Report for additional discussions of these obligations.
Off-Balance Sheet Arrangements
Since inception, we have not engaged in any off-balance sheet activities, including the use of structured finance, special purpose entities or variable interest entities.
Effects of Inflation
Due to the fact that our assets are, to an extent, liquid in nature, they are not significantly affected by inflation. However, the rate of inflation, which has been increasing, affects expenses such as employee
compensation, office space leasing costs and research and development charges, which may not be readily recoverable during the period of time that we are bringing the product candidates to market. To the extent inflation results in rising interest
rates and has other adverse effects on the market, it may adversely affect our consolidated financial condition and results of operations.
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required under Regulation S-K for “smaller reporting companies.”