What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-03-23 compared with 2021-03-25 · 107 added, 121 removed, 178 unchanged (56% of the section changed)

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Our actual results may differ materially from those described in or implied by these forward-looking statements as a result of many factors, including those set forth under the section titled “Risk Factors” and in other parts of this Annual Report.

We are a commercial-stage medical technology company focused on designing, developing and marketing innovative tissue reinforcement materials to address unmet needs in soft tissue reconstruction.

We are committed to providing patients with advanced, economically effective biologic material repair solutions to patients to minimize long-term exposure to permanent synthetic materials and improve clinical outcomes.

Our products are purposefully designed to address the shortcomings of existing reinforcement materials in hernia repair, abdominal wall reconstruction and plastic and reconstructive surgery.

We are a commercial-stage medical technology company focused on providing innovative soft-tissue reconstruction solutions that optimize clinical outcomes by prioritizing the preservation and restoration of the patient’s own anatomy.

Our growing product portfolio is purposefully designed to leverage the patient’s natural healing response while minimizing long-term exposure to permanent synthetic materials.

We are committed to delivering our advanced technologies with a strong economic value proposition to assist surgeons and institutions in providing next-generation soft-tissue repair solutions to more patients worldwide.

Our first portfolio of products, the OviTex Reinforced Tissue Matrix (“OviTex”), addresses unmet needs in hernia repair and abdominal wall reconstruction by combining the benefits of biologic matrices and polymer materials while minimizing their shortcomings, at a cost-effective price.

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(“Aroa”), our exclusive manufacturer and supplier.

Interim results of our ongoing prospective, single arm, multicenter post-market clinical study, which we refer to as our BRAVO study, suggest that OviTex is safe and clinically effective for treatment of ventral hernias.

Our BRAVO study was fully enrolled at 92 patients.

The interim analysis includes patient cohorts at the 90-day, 12-month and 24-month follow-up periods.

At 90 days post-operative, there were no recurrences or reoperations among the 84 patients analyzed and one implant removal due to a bowel perforation.

The final 12-month analysis includes 76 patients, of whom two patients experienced a recurrence, both adjacent to the original repair, with the OviTex repairs remaining intact.

Of the 51 patients that have reached 24-month follow-up, one patient experienced a surgical site occurrence from a superficial infection and none experienced a recurrence or long-term complication.

Additional results from the 30-day and 24-month patient cohorts showing low rates of surgical site occurrences requiring treatment were presented in September 2020 at the Americas Hernia Society Annual Meeting.

Interim results of our single arm, multicenter post-market clinical study, which we refer to as our BRAVO study, were recently published in the Journal of Clinical Medicine.

The interim analysis of patients reaching 12-month follow-up suggests that OviTex is safe and clinically effective for treatment of ventral hernias.

The recurrence rate was 2.7% at 12 months.

Twenty-four month follow-up has been completed for all possible patients in our BRAVO study, and the recurrence rate remains below 5%.

Final analysis is underway and full results will be presented in a future peer-reviewed publication.

Our second portfolio of products, the OviTex PRS Reinforced Tissue Matrix (“OviTex PRS”), addresses unmet needs in plastic and reconstructive surgery.

In April 2019, our OviTex PRS products received 510(k) clearance from the FDA, which clearance was obtained by Aroa and is currently held by us.

We began commercialization of our OviTex products in the United States in July 2016 and they are now used in more than 325 hospital accounts.

We began commercialization of our OviTex products in the U.S.

in July 2016.

Our OviTex portfolio consists of multiple products for hernia repair and abdominal wall reconstruction, inguinal hernia repair and hiatal hernia repair.

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Based on this feedback, we expanded our commercial launch in June 2020 and expect to continue to expand our surgeon network.

We also intend to engage in discussions with the FDA regarding an Investigational Device Exemption protocol to study the safety and effectiveness of our OviTex

PRS product for an indication in breast reconstruction surgery.

The FDA has stated that a PMA, rather than a 510(k) clearance, will be required for such an indication.

We market our products through a single direct sales force, predominantly in the United States.

We have invested in our direct sales and marketing infrastructure in order to expand our presence and to promote awareness and adoption of our products.

We have also engaged in discussions with the FDA regarding an Investigational Device Exemption protocol to study the safety and effectiveness of our OviTex PRS product for an indication in breast reconstruction surgery.

The FDA has stated that a premarket approval, rather than a 510(k) clearance, will be required for such an indication.

We market our products through a single direct sales force, predominantly in the U.S., augmented by distributors in certain European countries.

We have invested in our direct sales and marketing infrastructure to expand our presence and to promote awareness and adoption of our products.

As of December 31, 2021, we had 46 sales territories in the United States.

As part of our commercial strategy, we plan to continue to invest in our commercial organization by hiring additional account managers, clinical development specialists and administrative support staff to support and service new accounts for soft-tissue reconstruction procedures.

Additionally, we believe we can enhance the productivity of our sales force by improving customer segmentation and targeting, leveraging digital channels to engage customers and utilizing engagement analytics to support development.

Additionally, we believe we can enhance the productivity of our

sales force by improving customer segmentation and targeting, leveraging digital channels to engage customers and utilizing engagement analytics to support development.

We announced, in November 2021, that we entered into a distribution agreement with Next Science Technologies Pty Limited (“Next Science”), a medical technology company, granting us the exclusive rights to sell and market Next Science’s proprietary antimicrobial surgical wash with XBIO ® technology across the U.S.

plastic reconstructive market.

We will commence private label marketing of the solution for plastic surgery in 2022.

Next Science’s XBIO Technology delivers an advanced option for surgical infection control by addressing the biofilms that make bacteria more resistant to traditional antimicrobial agents, disinfectants and host immune defenses.

We believe the infection control solution will expand our service offerings and diversify our supplier base as we continue to create a soft-tissue restoration portfolio.

We are currently devoting research and development resources to develop additional versions of our OviTex hernia product lines, including self-adhering technology to further enhance product compatibility in robotic procedures, as well as additional versions of our OviTex PRS product lines.

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We intend to continue to make investments in research and development efforts to develop improvements and enhancements.

Prior to obtaining FDA clearance for our first OviTex product, we devoted substantially all our resources to the design and development of our reinforced tissue matrices.

Our development efforts to date have included an extensive non-human primate preclinical research data set for OviTex.

In addition to our current portfolio, we are developing new product features and designs for both our OviTex and OviTex PRS portfolios.

We intend to continue to make investments in research and development efforts to develop improvements and enhancements.

We are also assessing strategic partnerships with medical device companies whereby we may enter into distribution, product development and/or licensing agreements for products complimentary to, or related to, existing and future products in our distribution channel, which could result in the payment of low single digit royalties or other product acquisition costs.

Our products are manufactured by Aroa at their FDA registered and ISO 13485 facility in Auckland, New Zealand.

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This revenue sharing arrangement allows us to competitively price our products and pass along cost-savings to our customers.

Substantially all our revenue to date has been generated by the sale of our OviTex products.

Our revenue for the years ended December 31, 2020 and 2019 was $18.2 million and $15.4 million, respectively, an increase of $2.8 million, or 18% for the year ended December 31, 2020 as compared to the year ended December 31, 2019.

The vast majority of our revenue to date has been generated by the sale of our OviTex products.

Our revenue for the years ended December 31, 2021 and 2020 was $29.5 million and $18.2 million, respectively, an increase of $11.3 million, or 62%.

Net loss increased from $28.8 million for the year ended December 31, 2020 to $33.3 million for the year ended December 31, 2021, an increase of $4.5 million, or 16%.

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Business Update Regarding COVID-19

Our business has been impacted by the COVID-19 pandemic.

We continue to closely monitor developments related to the COVID-19 pandemic and our decisions will continue to be driven by the health and well-being of our employees, hospital and physician customers, and their patients while maintaining operations to support our customers and their patients in the near-term.

Our business, results of operations and commercial operations has been impacted by the ongoing COVID-19 pandemic and the development of variants of COVID-19.

We continue to closely monitor developments related to the ongoing COVID-19 pandemic and our decisions will continue to be driven by the health and well-being of our employees, our customers, and their patients while maintaining operations to support our customers and their patients in the near-term.

These developments include:

● Surgery Deferrals :

To date, among other impacts on our business related to the pandemic, physicians and their patients are required by state mandates, or are choosing, to defer elective surgery procedures in which our products otherwise would be used.

We began to see an adverse impact on the number of surgical procedures using our OviTex products in the second half of March 2020.

Since mid-April 2020, the number of procedures using our products and our corresponding sales have increased in a gradual, non-linear fashion.

While our procedural volumes improved relative to the second quarter of 2020, we are continuing to experience postponements in non-emergent procedures in areas of the country where COVID-19 infections are rising, however, at a less drastic pace than the second quarter of 2020.

The extent of future elective surgery deferrals and the timing and extent of the economic impact of the pandemic, and the pace at which the economy recovers

therefrom, cannot be determined at this time.

We continue to work closely with our hospital and physician customers and suppliers to navigate through this unforeseen event while maintaining flexible operations.

We believe our revenue was slightly impacted during the first quarter of 2021, mostly in January 2021, due to COVID-19 resurgences and corresponding lower surgical procedural volumes, though these were not at the levels seen in early 2020.

This impact on surgical procedures subsided throughout the remaining months of the first quarter and the second quarter of 2021.

However, we believe our revenue in September 2021 and December 2021 was also impacted due to the surge of new COVID-19 cases relating to new variants.

The extent of future elective surgery deferrals and the timing and extent of the economic impact of the pandemic on us, and the pace at which the economy recovers therefrom, cannot be determined at this time, particularly in light of recent surges and the continued emergence of new variants.

Further, the reallocation of hospital resources to treat COVID-19 may continue to cause a financial strain on healthcare systems and reduce procedural volume.

We continue to work closely with our hospital and physician

customers and suppliers to navigate through this unforeseen event while maintaining flexible operations to respond to the ongoing COVID-19 pandemic.

● Operations :

Our sales, marketing and research and development efforts have continued since the outbreak of the pandemic.

As the hospital access environment continues to evolve throughout this pandemic and practices vary from hospital to hospital and state to state, our sales team has continued to adapt and remain flexible to adjust to changing conditions within their regions.

Most of our sales professionals have used a virtual selling program, which includes virtual sales calls with physicians, peer-to-peer discussions with key opinion leaders, physician webinars and sales professional training, instead of in-person sales and marketing programs.

Approximately 200 surgeons have participated in these virtual programs to date.

We expect to continue to adapt our sales and marketing plans as we continue to gain better visibility into the effects of the COVID-19 pandemic on our business.

As access to hospitals continues to evolve throughout this pandemic and vary from hospital to hospital and state to state, our sales team has continued to adapt to changing conditions within their regions.

Most of our sales professionals have used a virtual selling program, which includes virtual sales calls with physicians, peer-to-peer discussions with key opinion leaders, physician webinars and sales professional training to supplement our in-person sales and marketing programs.

We expect to continue to adapt our sales and marketing plans as we continue to gain better visibility into the effects of the ongoing COVID-19 pandemic on our business.

As Aroa is located and headquartered in Auckland, New Zealand, where COVID-19 mitigation efforts have to date been effective, our manufacturing and supply chain has largely been uninterrupted.

However, it could be disrupted in the future because of the pandemic due to staffing shortages, production slowdowns, stoppages, travel and shipping restrictions or disruptions in delivery systems.

● Cost Containment :

We initiated actions in April 2020 to generate savings in areas such as travel, events, and consulting.

Additionally, for the period from April 16, 2020 to July 15, 2020, we reduced the base salaries of our employees.

The base salaries of each of our senior executives were reduced by 30% and the base salaries of each of our vice presidents were reduced by 25%.

In addition, certain senior executives volunteered to reduce their salaries by an additional 5%, for a total reduction of 35% for those individuals.

Reductions in salary for other employees varied from 5% to 20%.

In addition, we suspended our matching contributions to all participants under our 401(k) Retirement Plan.

The matching contributions program was reinstated in August 2020.

These comprehensive spending cuts were necessary to protect our financial strength in the face of near-term challenges.

● Product Development :

We continue to evaluate the timing and scope of planned next generation product development and commercialization initiatives in light of the COVID-19 pandemic and we plan to continue to prioritize and invest in our critical R&D and clinical programs.

● Fourth Quarter and 2020 Results .

Our daily sales experienced steady improvement starting in May 2020.

The fourth quarter of 2020 began with this trend continuing, however, during the second half of the fourth quarter, we experienced increased volatility in demand for our products as COVID-19 cases and hospitalizations increased.

We continue to evaluate the timing and scope of planned next generation product development and commercialization initiatives in light of the ongoing COVID-19 pandemic and we plan to continue to prioritize and invest in our critical R&D and clinical programs.

● 2021 Results :

During January 2021, we experienced increased volatility in demand for our products as COVID-19 cases and related hospitalizations increased.

We saw improvement in our business during the second half of the first quarter and during the second quarter, however, we believe our revenue in September 2021 and December 2021 was also impacted by the surge of new COVID-19 cases relating to new variants.

The timing, extent and continuation of any increase in procedures, any corresponding increase in sales of our products, and whether there could be a future decrease in the current level of procedures being performed, remain uncertain and are subject to a variety of factors, including:

o A material increase in COVID-19 cases in one or more locations, such as the resurgence of cases in many states, may result in an increase in hospitalizations and a corresponding decrease in elective procedures in such impacted locations.

o The availability and speed of COVID-19 vaccine distribution and administration and the timing and extent to which the vaccination process will affect the progression of the virus.

o Government restrictions on elective procedures may change over time and may vary in different geographic locations due to localized increases or decreases of COVID-19 cases in the number of COVID-19 cases.

o A material increase in COVID-19 cases in one or more locations, including as a result of the development of new variants of COVID-19 may result in an increase in COVID-19 hospitalizations and a corresponding decrease in elective procedures in such impacted locations.

o The perceived safety of COVID-19 vaccines and boosters, the speed of COVID-19 vaccine distribution and administration, the timing and extent to which the vaccination process will affect the progression of the virus, and the efficacy of such vaccines against the new variants of the virus.

o Government vaccine mandates could affect our ability to retain or hire employees.

o Government restrictions on elective procedures may change over time and may vary in different geographic locations due to localized increases or decreases of COVID-19 cases.

o Patients electing to defer or avoid treatment for elective procedures due to concerns about being exposed to COVID-19, loss of employer-sponsored health insurance related to unemployment in the United States or other reasons.

o Hospitals may reserve increased space, personal protective equipment and staff for potential COVID-19 patients, especially if the number of COVID-19 cases spikes, limiting the space and resources allocated to inpatient and outpatient elective procedures.

o Hospitals may continue to preserve cash and may not immediately replenish their inventories of our products, which would impact our future sales and revenue.

We cannot predict with certainty the extent to which the COVID-19 pandemic will impact procedures and our revenues in the first quarter of 2021 and beyond.

There is considerable uncertainty and lack of visibility regarding our near-term revenue growth prospects and product development plans due to the rapidly evolving environment and continued uncertainties resulting from the COVID-19 pandemic.

At this time, the full extent of the impact of the COVID-19 pandemic on our business, financial condition and results of operations is uncertain and cannot be predicted with reasonable accuracy and will depend on future developments that are also uncertain and cannot be predicted with reasonable accuracy.

o Hospitals may reserve increased space, personal protective equipment and staff for potential COVID-19 patients, especially if the number of COVID-19 cases in a particular region spikes or a new variant of COVID-19 emerges in such region, limiting the space and resources allocated to inpatient and outpatient elective procedures.

o Hospitals may experience staffing shortages due to normal turnover and due to COVID-19, which could reduce the number of elective procedures that can be performed at hospitals with staffing shortages.

o Hospitals may continue to preserve cash and may not immediately replenish their inventories of our products, which would impact our future sales and revenue and make it difficult to accurately predict our inventory requirements.

We continue to closely monitor local, regional and global COVID-19 surges as well as new variants of the virus for any potential impact on procedures during the first quarter of 2022 and beyond.

There remains uncertainty and lack of visibility regarding our near-term revenue growth prospects and product development plans due to the rapidly evolving environment and continued uncertainties resulting from the ongoing COVID-19 pandemic.

While certain regions are experiencing a reduction in COVID-19 cases and a relaxing of governmental restrictions, at this time, the full extent of the impact of the ongoing COVID-19 pandemic on our business, financial condition and results of operations is uncertain and cannot be predicted with reasonable accuracy and will depend on future developments that are also uncertain, such as the potential development of new variants of COVID-19, and the future geographic scope of COVID-19.

Components of Our Results of Operations

Substantially all of our revenue consists of direct sales of our products to hospital accounts in the U.S.

Substantially all our revenue consists of direct sales of our products to hospital accounts in the U.S.

Depending on the terms of our agreements with our customers, we recognize revenue related to product sales either when control transfers, which generally occurs when the product is shipped to the customer, or when the product is utilized in a surgical procedure in the case of consignment agreements.

Fees charged to customers for shipping are recognized as revenue.

Recent revenue growth has been driven by increasing product sales due to our expanding customer base, although it is unclear at this point what long-term effect the COVID-19 pandemic will have on our ability to continue to generate revenue and expand our customer base.

Recent revenue growth has been driven by increasing revenue from product sales due to our expanding customer base, although it is unclear at this point what long-term effect the ongoing COVID-19 pandemic will have on our ability to continue to generate revenue and expand our customer base.

Cost of Revenue

Cost of revenue primarily consists of the costs of licensed products, charges related to excess and obsolete inventory adjustments, and costs related to shipping.

Cost of revenue primarily consists of the costs of licensed products, charges related to excess and obsolete inventory adjustments, current and potential royalties and costs related to shipping.

We purchase product from Aroa at a fixed cost equal to 27% of our net sales of licensed products.

The initial term of our Aroa License terminates on the later of (i) August 3, 2022, or (ii) the expiration of the last patent covering bovine and ovine products, with an option to extend for an additional ten-year period.

We expect our cost of revenue to increase in absolute dollars as, and to the extent, our sales volume grows although it is unclear at this point what long-term effect, if any, the COVID-19 pandemic will have on our product demand which could lead to additional charges to excess and obsolete inventory.

We expect our cost of revenue to increase in absolute dollars as, and to the extent, our sales volume grows although it is unclear at this point what long-term effect, if any, the ongoing COVID-19 pandemic will have on our product demand which could lead to additional charges to excess and obsolete inventory.

Amortization of Intangible Assets

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We calculate our gross margin percentage as our gross profit divided by our revenue.

Our gross margin has been, and we expect it will continue to be, affected by a variety of factors, including sales volume and excess and inventory obsolescence costs.

Our gross margin has been, and we expect it will continue to be, affected by a variety of factors, including sales volume, current and potential royalties and excess and inventory obsolescence costs.

Our gross profit may increase to the extent our revenue grows.

Sales and Marketing Expenses

Sales and marketing expenses consist of market research and commercial activities related to the sale of OviTex and OviTex PRS and salaries and related benefits, sales commissions and stock-based compensation for employees focused

on these efforts.

Other significant sales and marketing expenses include costs incurred with post-market clinical studies, conferences and trade shows, promotional and marketing activities, as well as travel and training expenses.

Over time we expect our sales and marketing expenses to increase in absolute dollars as we continue to expand our commercial organization to both drive and support our planned growth in revenue.

It is unclear at this point, however, what long-term effect, if any, the COVID-19 pandemic will have on these expansion plans.

It is unclear at this point, however, what long-term effect, if any, the ongoing COVID-19 pandemic will have on these expansion plans.

We expect our sales and marketing expenses to continue to decrease as a percentage of revenue primarily as, and to the extent, our revenue grows.

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General and administrative expenses also include professional service fees for legal, accounting, consulting, investor and public relations, insurance costs and direct and allocated facility-related costs.

We expect that our general and administrative expenses will increase in absolute dollars as we expand our headcount to support our growth and incur additional expenses related to operating as a publicly traded commercial company, including director and officer insurance coverage, legal costs, accounting costs and costs related to SEC compliance and investor relations.

It is unclear at this point, however, what long-term effect, if any, the COVID-19 pandemic will have on these expenses.

We expect that our general and administrative expenses will increase in absolute dollars as we execute our growth initiatives and expand our business and headcount to support these initiatives.

It is unclear at this point, however, what long-term effect, if any, the ongoing COVID-19 pandemic will have on these expansion plans.

We expect our general and administrative expenses to continue to decrease as a percentage of revenue primarily as, and to the extent, our revenue grows.

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We expense research and development costs as they are incurred.

We expect research and development expenses in absolute dollars to increase in the future as we develop new products and enhance existing products although it is unclear at this point what long-term effect, if any, the COVID-19 pandemic will have on these development plans.

We expect research and development expenses in absolute dollars to increase in the future as we develop new products and enhance existing products although it is unclear at this point what long-term effect, if any, the ongoing COVID-19 pandemic will have on these development plans.

We expect research and development expenses as a percentage of revenue to vary over time depending on the level and timing of new product development initiatives.

Interest Expense

Interest expense consists of cash interest under our credit facilities, non-cash interest attributable to the accrual of final payment fees and the amortization of deferred financing costs related to our indebtedness.

Interest expense consists of cash interest under our credit facilities and non-cash interest attributable to the amortization of final payment fees and deferred financing costs related to our indebtedness.

Change in Fair Value of Preferred Stock Warrant Liability

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The change in fair value of our preferred stock warrant liability reflected a non-cash charge primarily driven by changes in the fair value of our underlying Series B preferred stock.

All outstanding warrants to purchase shares of our preferred stock were converted into warrants to purchase shares of our common stock after our IPO.

Other income consists primarily of income earned on our cash, cash equivalents and short-term investments.

All outstanding warrants to purchase shares of our preferred stock were converted into warrants to purchase shares of our common stock upon our IPO.

Other (Expense) Income

Other (expense) income consists primarily of miscellaneous tax expenses and foreign currency exchange gains and losses offset by income earned on our cash and cash equivalents.

Results of Operations

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Interest expense

Change in fair value of preferred stock warrant liability

Other (expense) income

Total other expense

Revenue increased by $11.3 million, or 62%, to $29.5 million for the year ended December 31, 2021 from $18.2 million for the year ended December 31, 2020.

The increase in revenue was primarily driven by an increase in unit sales of our products due to the expansion of our commercial organization with increased penetration within existing customer accounts.

During the year ended December 31, 2021, we sold 7,516 units of OviTex compared to 4,794 units of OviTex during the year ended December 31, 2020, a 57% increase in unit sales volume.

Additionally, we sold 663 units of OviTex PRS compared to 240 units during the year ended December 31, 2019.

Additionally, we sold 1,260 units of OviTex PRS compared to 663 units during the year ended December 31, 2020, a 90% increase in unit sales volume.

Cost of Revenue

Cost of revenue (excluding amortization of intangible assets) increased by $3.7 million to $10.3 million for the year ended December 31, 2021 from $6.7 million for the year ended December 31, 2020.

The increase in cost of revenue was primarily the result of higher revenue due to the growth in the number of OviTex and OviTex PRS units sold offset by a lower charge to excess and obsolete inventory.

The increase in cost of revenue was primarily the result of an increase in products purchased to support our higher unit sales and an increase in our provision for excess and obsolete inventory.

Amortization of Intangible Assets

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Sales and marketing expenses increased by $7.0 million, or 31%, to $29.1 million for the year ended December 31, 2021 from $22.1 million for the year ended December 31, 2020.

The increase was primarily due to higher salary, benefits and commission costs of $4.2 million as a result of an expansion of our commercialization activities, including an increase in headcount, which was partially offset by lower travel and consulting expenses and other cost containment actions taken in response to the COVID-19 pandemic.

The increase was primarily due to higher salaries, benefits and commission costs as a result of an expansion of our commercialization activities, including an increase in headcount and increased travel and consulting expenses.

The prior year period also included cost containment actions taken in response to the COVID-19 pandemic including salary reductions and reduced traveling which were not repeated in 2021.

General and Administrative

General and administrative expenses increased by $2.3 million, or 23%, to $12.5 million for the year ended December 31, 2021 from $10.1 million for the year ended December 31, 2020.

The increase was primarily due to increased insurance costs of $1.7 million, increased professional, legal and consulting fees of $0.9 million, higher stock-based compensation expense of $0.8 million and higher salary and benefits costs of $0.3 million which was partially offset by the cost containment actions taken in response to the COVID-19 pandemic.

The increase was primarily due to higher salaries and benefits, increased professional, consulting and legal fees, higher stock-based compensation expense, increased insurance expense, higher recruiting fees and additional facilities expenses.

The prior year period also included cost containment actions taken in response to the COVID-19 pandemic including salary reductions which were not repeated in 2021.

Research and Development

Research and development expenses increased by $2.5 million, or 58%, to $6.7 million for the year ended December 31, 2021 from $4.3 million for the year ended December 31, 2020.

The increase in research and development expense primarily relates to increased salaries and benefits offset by a decrease in licensing payments.

The increase in research and development expense primarily relates to a non-cash stock-based compensation expense of $0.7 million related to amendments to certain equity award agreements following the death of our co-founder and former Chief Medical Officer, higher salaries and benefits, increased testing and development expenses and increased consulting expenses.

The prior year period also included cost containment actions taken in response to the COVID-19 pandemic including salary reductions which were not repeated in 2021.

Interest Expense

Interest expense was $3.6 million for both the years ended December 31, 2021 and 2020.

Change in Fair Value of Preferred Stock Warrant Liability

We recognized a loss on the change in the fair value of our preferred stock warrant liability of $5,000 during the year ended December 31, 2019.

All outstanding warrants to purchase shares of our preferred stock were converted into warrants to purchase shares of our common stock and the liability was reclassed to additional paid-in capital in the accompanying consolidated balance sheet.

Other income decreased by $0.3 million, or 87%, to $45,000 for the year ended December 31, 2020 from $0.4 million for the year ended December 31, 2019 due to a decrease in interest income as a result of the decrease in short-term investments.

Comparison of the Years Ended December 31, 2019 and 2018

Other (Expense) Income

Other (expense) income decreased by $0.3 million, or 607%, to an expense of $0.2 million for the year ended December 31, 2021 primarily due to a decrease in interest income.

Comparison of the Year Ended December 31, 2020 and 2019

Year Ended December 31,

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Research and development

Gain on litigation settlement

Total operating expenses

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Interest expense

Loss on extinguishment of debt

Change in fair value of preferred stock warrant liability

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Revenue increased by $2.8 million, or 18%, to $18.2 million for the year ended December 31, 2020 from $15.4 million for the year ended December 31, 2019.

During the year ended December 31, 2020, we sold 4,794 units of OviTex compared to 3,779 units of OviTex during the year ended December 31, 2019, a 27% increase in unit sales volume.

We commenced a limited launch of OviTex PRS in May 2019, selling 240 units during the year ended December 31, 2019.

Additionally, we sold 663 units of OviTex PRS compared to 240 units during the year ended December 31, 2019, a 176% increase in unit sales volume.

Cost of Revenue

Cost of revenue (excluding amortization of intangible assets) increased by $0.8 million to $6.7 million for the year ended December 31, 2020 from $5.9 million for the year ended December 31, 2019.

The larger reserve expense recognized during the year ended December 31, 2018 was primarily due to Aroa reducing the shelf life of a certain product line during the year.

The increase in cost of revenue was primarily the result of higher revenue due to the growth in the number of OviTex and OviTex PRS units sold offset by a lower provision for excess and obsolete inventory.

Amortization of Intangible Assets

Amortization of intangible assets was $0.3 million for the year ended December 31, 2019 as compared to $0.8 million for the year ended December 31, 2018.

In May 2018, we achieved one of our regulatory milestones, and we determined that certain commercial sales milestone targets under our licensing agreement with Aroa became probable of being met.

As a result, we recorded these milestone payments as intangible assets that required a cumulative amortization charge during 2018.

Amortization of intangible assets was $0.3 million for both the years ended December 31, 2020 and 2019.

Gross margin increased to 62% for the year ended December 31, 2020 from 60% for the year ended December 31, 2019.

The increase was primarily due to a lower expense recognized for excess and obsolete inventory adjustments as a percentage of revenue during the year ended December 31, 2019 as compared to the prior year and the $0.4 million cumulative amortization charge recognized during the year ended December 31, 2018.

The increase was primarily due to a lower expense recognized for excess and obsolete inventory adjustments as a percentage of revenue due to longer shelf life and inventory management during the year ended December 31, 2020 as compared to the prior year.

Sales and Marketing

Sales and marketing expenses increased by $4.1 million, or 22%, to $22.1 million for the year ended December 31, 2020 from $18.1 million for the year ended December 31, 2019.

The increase was primarily due to higher salary, benefits and commission costs of $4.4 million due to our sales expansion activities, including the hiring of additional sales personnel.

The increase was primarily due to higher salaries, benefits

and commission costs of $4.5 million as a result of an expansion of our commercialization activities, including an increase in headcount, which was partially offset by lower travel and consulting expenses and other cost containment actions taken in response to the ongoing COVID-19 pandemic.

General and Administrative

General and administrative expenses increased by $3.9 million, or 63%, to $10.1 million for the year ended December 31, 2020 from $6.2 million for the year ended December 31, 2019.

The increase was primarily due to higher salary and benefits costs of $0.7 million, increased insurance costs of $0.4 million and higher professional fees of $0.1 million.

The increase was primarily due to increased insurance costs of $1.7 million, increased professional, legal and consulting fees of $0.9 million, higher stock-based compensation expense of $0.8 million and higher salaries and benefits costs of $0.3 million which was partially offset by the cost containment actions taken in response to the ongoing COVID-19 pandemic.

Research and Development

Research and development expenses decreased by $0.2 million, or 4%, to $4.2 million for the year ended December 31, 2019 from $4.3 million for the year ended December 31, 2018.

The decrease in research and development expense primarily relates to a decrease in external development and testing.

Gain on Litigation Settlement

In 2018, we recognized a gain on litigation settlement of $2.2 million related to a litigation claim that we had brought against the former carrier for our directors and officer and employment practices liability insurance for breach of contract and failure to reimburse us for defense costs incurred in litigation against LifeCell that was fully settled in 2016.

Research and development expenses increased by $0.1 million, or 3%, to $4.3 million for the year ended December 31, 2020 from $4.2 million for the year ended December 31, 2019.

The increase in research and development expense primarily relates to increased salaries and benefits offset by a decrease in licensing payments.

Interest Expense

Interest expense increased by $1.8 million, or 100%, to $3.6 million for the year ended December 31, 2019 from $1.8 million for the year ended December 31, 2018.

The increase was primarily due to having a larger principal balance outstanding with a higher interest rate during the year ended December 31, 2019 compared to the prior year.

Loss on Extinguishment of Debt

We recorded a loss on the extinguishment of debt of $1.8 million during the year ended December 31, 2018 related to the repayment of borrowings and cancellation of refinancing of our credit facilities with Hercules and MidCap Financial Trust (“MidCap”) in April and November, respectively.

The losses were primarily comprised of the write-off of unamortized debt discounts and prepayment penalties at the time of extinguishment.

Interest expense was $3.6 million for both the years ended December 31, 2020 and 2019.

Change in Fair Value of Preferred Stock Warrant Liability

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Other income increased by $0.3 million, which was primarily attributable to having larger cash, cash equivalents and short-term investment balances, which earned more interest income during the year ended December 31, 2019 as compared to the prior year.

Liquidity and Capital Resources

As of December 31, 2021, we had cash and cash equivalents of $43.9 million, working capital of $48.5 million and an accumulated deficit of $229.9 million.

As of December 31, 2019, we had cash, cash equivalents and short-term investments of $54.6 million, working capital of $57.6 and an accumulated deficit of $167.9 million.

On November 13, 2019, we closed our IPO in which we issued and sold 4,398,700 shares of our common stock at a public offering price of $13.00 per share, which included 398,700 shares of our common stock sold pursuant to the underwriters’ option to purchase additional shares.

We received net proceeds of $50.6 million after deducting underwriting discounts and commissions and other expenses.

On June 30, 2020, we closed a follow-on public offering in which we issued and sold 3,000,000 shares of our common stock at a public offering price of $16.00 per share.

We received net proceeds of $44.7 million after deducting underwriting discounts, commissions and other offering expenses.

As of December 31, 2020, we had cash and cash equivalents of $74.4 million, working capital of $76.6 million and an accumulated deficit of $196.7 million.

We have incurred operating losses since our inception, and we anticipate that our operating losses will continue in the near term as we seek to invest in our sales and marketing initiatives to support our growth in existing and new markets and in additional research and development activities.

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If these sources are insufficient to satisfy our liquidity requirements, we may seek to sell additional common or preferred equity or debt securities, or enter into a new credit facility.

On December 18, 2020, we entered into an Equity Distribution Agreement (the “Equity Agreement”) with Piper Sandler & Co (the “Agent”) in connection with the establishment of an at-the-market offering program under which it may sell up to an aggregate of $50.0 million of shares of our common stock, from time to time through the Agent as sales agent.

No sales were made under the Equity Agreement during the year ended December 31, 2020.

In December 2020, we entered into an Equity Distribution Agreement (the “Equity Agreement”) with Piper Sandler & Co (the “Agent”) in connection with the establishment of an

at-the-market offering program under which we may sell up to an aggregate of $50.0 million of shares of our common stock, from time to time through the Agent, as sales agent.

No sales were made under the Equity Agreement during the years ended December 31, 2021 or 2020.

If we raise additional funds by issuing equity or equity-linked securities, our stockholders would experience dilution and any new equity securities could have rights, preferences and privileges superior to those of holders of our common stock.

Debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt.

We cannot be assured that additional equity, equity-linked or debt financing will be available on terms favorable to us or our stockholders, or at all, including as a result of market volatility following the COVID-19 pandemic.

We cannot be assured that additional equity, equity-linked or debt financing will be available on terms favorable to us or our stockholders, or at all, including because of market volatility following the COVID-19 pandemic.

If we are unable to obtain adequate financing, we may be required to delay the development, commercialization and marketing of our products.

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Cash used in operating activities

Cash provided by (used in) investing activities

Cash (used in) provided by investing activities

Cash provided by financing activities

Effect of exchange rate on cash

Net increase in cash and cash equivalents

Net (decrease) increase in cash and cash equivalents

Operating Activities

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Our non-cash charges were comprised of stock-based compensation expense of $3.7 million, our excess and obsolete inventory charge of $1.4 million, interest expense of $0.7 million and depreciation and amortization expense of $0.5 million.

The change in our operating assets and liabilities was primarily related to an increase in our inventory and prepaid expenses and other assets partially offset by increases in accrued expenses and other current and long-term liabilities.

During the year ended December 31, 2020, we used $24.5 million of cash in operating activities, resulting from our net loss of $28.8 million and the change in operating assets and liabilities of $0.2 million offset by non-cash charges of $4.5 million.

Our non-cash charges were comprised of stock-based compensation expense of $2.1 million, our excess and obsolete inventory charge of $1.3 million, interest expense of $0.6 million and depreciation and amortization expense of $0.5 million.

During the year ended December 31, 2019, we used $25.5 million of cash in operating activities, resulting from our net loss of $22.4 million and the change in operating assets and liabilities of $6.3 million, offset by non-cash charges of $3.2 million.

Our non-cash charges were primarily comprised of our excess and obsolete inventory charge of $1.6 million, stock-based compensation expense of $0.5 million, interest expense of $0.5 million and depreciation and amortization expense of $0.6 million.

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Investing Activities

During the year ended December 31, 2021, cash used in investing activities was $0.6 million consisting of purchases of property and equipment.

During the year ended December 31, 2020, cash provided by investing activities was $9.1 million consisting primarily of the proceeds from the sale and maturity of short-term investments.

During the year ended December 31, 2019, cash used in investing activities was $12.0 million, consisting of purchases of short-term investments of $9.3 million, payments made for our intangible assets of $2.5 million and purchases of property and equipment of $0.2 million.

During the year ended December 31, 2019, cash used in investing activities was $12.0 million consisting primarily from the purchase of short-term investments of $9.3 million and payments made for our intangible assets of $2.5 million.

Financing Activities

During the year ended December 31, 2021, cash provided by financing activities was $0.6 million, consisting primarily of the proceeds received from the exercise of stock options.

During the year ended December 31, 2020, cash provided by financing activities was $44.4 million, consisting primarily of the net proceeds received from a follow-on public offering of our common stock.

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The OrbiMed Term Loans consist of two tranches, a $30.0 million Tranche 1 (“Tranche 1”) and a $5.0 million Tranche 2 (“Tranche 2”).

Upon closing, we borrowed $30.0 million of Tranche 1 and used a portion of the proceeds to repay borrowings under our credit facility with MidCap.

Upon closing, we borrowed $30.0 million of Tranche 1.

We elected not to borrow Tranche 2 prior to its expiration on December 31, 2019.

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The OrbiMed Credit Facility contains a negative pledge on intellectual property owned by us.

The OrbiMed Credit Facility also contains customary indemnification obligations and customary events of default, including, among other things, (i) non-payment, (ii) breach of warranty, (iii) non-performance of covenants and obligations, (iv) default on other indebtedness, (v) judgments, (iv) change of control, (vii) bankruptcy and insolvency, (viii) impairment of security, (ix) key permit events, (x) key person event, (xi) regulatory matters, (xii) and key contracts.

The OrbiMed Credit Facility also contains customary indemnification obligations and customary events of default, including, among other things, (i) non-payment, (ii) breach of warranty, (iii) non-performance of covenants and obligations, (iv) default on other indebtedness, (v) judgments, (iv) change of control, (vii) bankruptcy and insolvency, (viii) impairment of security, (ix) key permit events, (x) key person events, (xi) regulatory matters, (xii) and key contracts.

In addition, we must maintain a minimum cash balance of $2.0 million.

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We are required to make 60 monthly interest payments beginning on November 30, 2018 with the entire principal payment due at maturity.

The OrbiMed Term Loans have a prepayment penalty equal to 10.0% of the prepaid principal amount prior to the second anniversary of the OrbiMed Term Loans, 5.0% of the prepaid

principal amount after the second anniversary but prior to the third anniversary and 2.5% of the prepaid principal amount after the third anniversary.

The OrbiMed Term Loans have a prepayment penalty equal to 10.0% of the prepaid principal amount prior to the second anniversary of the OrbiMed Term Loans, 5.0% of the prepaid principal amount after the second anniversary but prior to the third anniversary and 2.5% of the prepaid principal amount after the third anniversary.

We are also required to pay an exit fee at the time of maturity or prepayment event equal to 10% of all principal borrowings and an administration fee equal to $10,000 on the last day of each quarter until all obligations have been paid in full.

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Operating lease commitments (2)

Purchase commitments with Aroa

Purchase commitments

(1) Interest payable reflects the rate in effect as of December 31, 2021.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis