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Item 2. Management’s Discussion and Analysis

2023-05-11 compared with 2022-11-14 · 125 added, 147 removed, 32 unchanged (89% of the section changed)

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, 2021 included in our Annual Report on Form 10-K, filed with the SEC on May 13, 2022 (the “2021 Annual Report”).

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

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 the License Agreement with

See further discussion in Note 10 – Commitments and 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.

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.

On an ongoing basis, we evaluate our estimates and judgments, including those related to the estimate of the fair value of embedded conversion options and warrants.

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.

In addition, there are other items within our financial statements that require estimation but are not deemed critical as defined above.

Changes in these and other items could still have a

material impact upon our financial statements.

Our significant accounting policies are more fully described in Note 3 to our consolidated financial statements filed with our 2021 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 intend to 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.

Our recurring losses from operations, the events of default on the Company’s notes payable and dependency upon future issuances of equity or other financing to fund ongoing operations 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.

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 12 months.

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.

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 condensed consolidated financial statements do not necessarily purport to represent realizable or settlement

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.

Since our inception, we have incurred losses from operations each year.

As of September 30, 2022, we have an accumulated deficit of $186.1 million.

We continue to incur expenses related to

commercialization of our dermaPACE® system for the treatment of DFU in the United States.

If we can successfully commercialize, market, and distribute the dermaPACE® system, then we believe we may be 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 financings, as discussed above, may

provide the necessary funding for us to continue as a going concern for the next 12 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

• 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 our business are set forth under the section entitled “Risk Factors – Risks Related to Our Business” in our 2021 Annual Report.

The worldwide spread of the COVID-19 virus has resulted in a global slowdown of economic activity which has decreased demand for a broad variety of products, including from our customers.

experienced a disruption of our supply channels which will continue for an unknown period until the global supply chain can return to pre- disease status.

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.

These factors have had a negative impact on our sales and our 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, 2022 included in our Annual Report on Form 10-K, filed with the SEC on March 31, 2023 (the “2022 Annual Report”).

Executive Summary

We realized significant revenue growth during the three months ended March 31, 2023.

Revenue totaled $3.8 million, an increase of 18%, as compared to $3.2 million for the same period of 2022.

Gross margins also decreased to 67% for the three months ended March 31, 2023, from 72% for the same period in 2022, due to third party manufacturer price increases as compared to the prior year.

Net loss for the three months ended March 31, 2023, was $13.1 million, or ($0.02) per basic and diluted share, compared to a net loss of $5.1 million, or ($0.01) per basic and diluted share, for the

same period in 2022.

The increase in our net loss for the three months ended March 31, 2023, was due to the increased cost of financing to fund operations.

Results of Operations

For the Three Months Ended

For the Nine Months Ended

September 30,

Total Revenue

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Research and development

Gain on disposal of assets

Depreciation and amortization

1 unchanged sentence

Other Income (Expense), net

Income tax expense

Revenues and Gross Margin

Revenues for the three month-period ended September 30, 2022, were $4.2 million compared to $3.7 million for the same period of 2021, an increase of $0.4 million.

Revenues for the nine months

ended September 30, 2022, were $11.2 million compared to $8.7 million for the same period in 2021, an increase of $2.5 million.

The increase for both periods was driven by the continued increased sales of UltraMIST® devices and single-use

Gross margin as a percentage of revenue increased to 85.5% from 58.3% during the three-month period ended September 30, 2022, as compared with the same period of 2021, and to 77.0%

from 58.2% during the nine-month period ended September 30, 2022, as compared with the same period of 2021.

The increases in gross margin percentage for the three and nine-months ended September 30, 2022,

were driven by higher sales of single-use accessories, which have a higher gross margin percentage, and by the discontinuation of Biologics sales in the first quarter of 2022, which had a lower gross margin percentage.

General and Administrative Expenses

General and administrative expenses increased $540 thousand or 19% for the three-month period ended September 30, 2022, compared with the same period of 2021.

Revenues for the three month-period ended March 31, 2023, were $3.8 million compared to $3.2 million for the same period of 2022, an increase of $0.6 million.

The increase was driven by the continued

increased sales of UltraMIST® system.

Gross margin as a percentage of revenue decreased to 67% from 72% during the three-month period ended March 31, 2023.

The decrease in gross margin

percentage for the three months ended March 31, 2023, was driven by higher cost of production from our third-party manufacturers.

General and Administrative Expenses

decreased $427 thousand or 5% for the nine-month period ended September 30, 2022, compared with the same period of 2021.

The increase for the three-month were primarily due to increased accounting costs as we transition from contractors to

permanent employees.

The decrease for the nine-month period ended September 30, 2022, were primarily due to a reduction in the registration penalties and legal and license fees that were incurred during the same period in 2021.

Selling and Marketing Expenses

Selling and marketing expenses decreased by $500 thousand or 23% for the three-month period ended September 30, 2022, as compared with the same period of 2021.

General and administrative expenses increased $554 thousand or 25% for the three months ended March 31, 2023, compared with the same period of 2022.

The increase for the three months ended March 31,

2023, was primarily due to increased professional fees, including legal expenses, audit fees, and other consulting fees.

Selling and Marketing Expenses

decreased by $1.4 million or 22% for the nine-month period ended September 30, 2022, as compared with the same period of 2021.

The decrease was primarily due to a reduction in sales and marketing headcount during 2022 and increased cost management

Selling and marketing expenses decreased by $303 thousand or 18% for the three months ended March 31, 2023, as compared with the same period of 2022.

The decrease was primarily due to a reduction in

sales headcount during 2023 and additional cost management activities.

Research and Development Expenses

Research and development expenses decreased 47% to $157 thousand from $297 thousand during the three-month period ended September 30, 2022, as compared with the same period of 2021.

development expense as a percentage of revenue decreased from 8% during the three-month period ended September 30, 2021, to 4% for the same period in 2022.

Expense decreased 46% to $494 thousand, or 4% of revenue, from $923 thousand, or 11% of

revenue, during the nine-month period ended September 30, 2022, as compared with the same period of 2021.

These decreases were primarily due to improved cost management in 2022.

Research and development expenses decreased $35 thousand or 21% for the three-month period ended March 31, 2023, as compared with the same period of 2022.

Research and development expense as a

percentage of revenue decreased from 5% during the three-month period ended March 31, 2022, to 3% for the same period in 2023.

The decrease is primarily due to improved cost management in 2023.

Other Income (Expense), net

For the three months ended March 31,

Interest expense

Change in fair value of derivatives

Loss on issuance of debt

Other expense

Loss on foreign currency exchange

Other expense, net

nm - not meaningful

Other expense, net increased by $7.9 million to $11.1 million for the three months ended March 31, 2023, as compared to the same period for 2022.

This increase was due to increased convertible promissory notes

outstanding from the transactions executed during the second half of 2022 and an increased change in the fair value of warrants and their embedded conversion liabilities.

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.

Our recurring losses from operations, the events of default on the Company’s notes payable and dependency upon future issuances of equity or other

financing to fund ongoing operations 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.

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.

On August 5, 2022, we entered into the Purchase Agreement for our sale in the Private Placement of (i) Notes in an aggregate principal amount of $16.2 million, consisting of $12.4 million in

newly raised capital and $3.8 million in rolled forward accrued expenses, bridge notes payable, convertible promissory notes, related parties, and fees;

(ii) First Warrants to purchase an additional 404.8 million shares of common stock with an

exercise price of $0.067 per share and (iii) Second Warrants to purchase an additional 404.8 million shares of common stock with an exercise price of $0.04 per share.

The Notes will be convertible and the Warrants exercisable at such time as our

authorized and unissued shares of common stock are at a number sufficient to permit the exercise or conversion of all outstanding securities exercisable for, or convertible into, common stock.

During the nine months ended September 30, 2022, cash used by operating activities totaled approximately $13.2 million, which was largely by the change in the fair value of the derivative

Cash provided by investing activities during the first nine months of 2022 consisted primarily of the proceeds received from the sale of property and equipment of $1.0 million.

Cash provided by financing activities for the period consisted primarily of $12.4 million from the Notes issued in August 2022, of which $3.0 million was used to settle old convertible debt, $2.9

million received in connection with the Second Amendment to Note and Warrant Purchase and Security Agreement in February 2022 and proceeds from short-term notes of $0.6 million.

Since inception, we have incurred losses from operations each year.

As of March 31, 2023, we had an accumulated deficit of $207 million.

Historically, our operations have

primarily been funded from the sale of capital stock, notes payable, and convertible debt securities.

The recurring losses from operations, the events of default on our notes payable, and dependency upon future

issuances of equity or other financing to fund ongoing operations have raised substantial doubt as to our ability to continue as a going concern for a period of at least twelve months from the filing of this Form 10-Q.

We expect to devote

substantial resources for the commercialization of UltraMIST and PACE systems which will require additional capital resources to remain a going concern.

Management’s plans are to obtain additional capital in 2023 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 stockholders.

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.

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

For the three months ended March 31,

(in Thousands)

Cash flows used by operating activities

Cash flows (used by) provided by investing activities

Cash flows (used by) provided by financing activities

Cash used in operating activities during the three months ended March 31, 2023, totaled $0.4 million as compared to $3.1 million in the previous period.

This improvement in cash used in operations

aligns with our approach for profitable growth.

Cash used by financing activities of $0.8 million for the three months ended March 31, 2023, was primarily due to our factoring arrangement.

Cash provided by financing activities for the three months

ended March 31, 2022, consisted primarily of $2.9 million received from our senior lender.

Critical Accounting Policies and Estimates

We have used various accounting policies to prepare the consolidated financial statements in accordance with U.S.

Our significant accounting policies are disclosed in Note 4 to the consolidated

financial statements in Part II Item 8.

“Financial Statements and Supplementary Data” in our Annual Report on Form 10-K filed with the SEC on March 31, 2023.

The preparation of the condensed consolidated financial statements, in conformity with U.S.

GAAP, requires us to use judgment in making estimates and assumptions that affect the reported amounts of

assets, liabilities, revenues, and expenses.

These estimates reflect our best judgment about economic and market conditions and the potential effects on the valuation and/or carrying value of assets and liabilities based upon relevant information

We base our estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and

liabilities that are not readily apparent from other sources.

The following accounting policies and estimates are deemed critical:

Litigation Contingencies

We may be involved in legal actions involving product liability, intellectual property and commercial disputes, tax disputes, and governmental proceedings and investigations.

The outcomes of these

legal actions are not completely within our control and may not be known for prolonged periods of time.

In some actions, the enforcement agencies or private claimants seek damages that could require significant expenditures or result in lost

revenues or limit our ability to conduct business in the applicable jurisdictions.

Estimating probable losses from our litigation and governmental proceedings is inherently difficult, particularly when the matters are in early procedural stages,

with incomplete scientific facts or legal discovery;

involve unsubstantiated or indeterminate claims for damages;

potentially involve penalties, fines, or punitive damages;

or could result in a change in business practice.

The Company records a

liability in the consolidated financial statements for loss contingencies when a loss is known or considered probable, and the amount may be reasonably estimated.

If the reasonable estimate of a known or probable loss is a range, and no amount

within the range is a better estimate than any other, the minimum amount of the range is accrued.

If a loss is reasonably possible but not known or probable, and may be reasonably estimated, the estimated loss or range of loss is disclosed.

significant legal proceedings are discussed in Note 11 to the condensed consolidated financial statements.

Derivative Liabilities from Embedded Conversion Options and Warrants

The Company classified certain convertible instruments as having embedded conversion options which qualified as derivative financial instruments to be separately accounted for.

The Company also

determined that certain warrants also qualified as derivative financial instruments.

Various valuations models were used to estimate the fair value of these derivative financial instruments that are classified as derivative liabilities on the

consolidated balance sheets.

The models include subjective input assumptions that can materially affect the fair value estimates and as such are subject to uncertainty.

The material assumptions for the selected subjective inputs have not changed

for the reporting period, except for the expected volatility, which is estimated based on the actual volatility during the most recent historical period equal to the remaining life of the instruments.

Valuation of Intangible Assets and Goodwill

When we acquire a business, the assets acquired, and liabilities assumed are recorded at their respective fair values on the acquisition date.

Goodwill is the excess of the purchase price over the

estimated fair value of net assets of acquired businesses.

Intangible assets primarily include patents, trademarks, and customer relationships.

Determining the fair value of intangible assets acquired as part of a business combination requires us

to make significant estimates.

These estimates include the amount and timing of projected future cash flows of each project or technology, the discount rate used to discount those cash flows to present value, and the assessment of the asset’s

The estimates could be impacted by legal, technical, regulatory, economic, and competitive risks.

The test for impairment of goodwill requires us to make several estimates to determine the fair value of the goodwill.

Our estimates

associated with the goodwill impairment test are considered critical due to the amount of goodwill recorded on our consolidated balance sheets and the judgment required in determining fair value.

We assess the impairment of goodwill at the

consolidated level annually.

We also test definite-lived intangible assets for impairment when an event occurs, or circumstances change that would indicate the carrying amount of the assets or asset group may be impaired.

Our assessment for

goodwill and intangible assets impairment is based on future cash flows that require significant judgment with respect to future revenue and expense growth rates and other assumptions and estimates.

We use estimates that are consistent with the

highest and best use of the assets based on a market participant’s view of the assets being evaluated.

Actual results may differ from our estimates due to several factors including, among others, changes in competitive conditions, regulatory

changes, results of clinical trials, and changes in worldwide economic conditions.

Segment and Geographic Information

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Our revenues are generated from sales primarily in the United States.

International sales include sales in Europe, Canada, Middle East,

International sales include sales in Europe, Canada, the Middle East,

Central America, South America, Asia, and Asia/Pacific.

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Please see our 2022 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.

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

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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-Q

Item 2. Management’s Discussion and Analysis