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Item 7. Management’s Discussion and Analysis

2023-03-23 compared with 2022-03-23 · 140 added, 181 removed, 104 unchanged (76% of the section changed)

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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.

We are dedicated to building true partnerships with surgeons and healthcare providers to deliver solutions that provide both clinical and economic improvements.

We believe that genuine collaboration with surgeons and healthcare providers results in the development of new solutions that empower patient care.

Our first portfolio of products, the OviTex Reinforced Tissue Matrix (“OviTex”), which we first commercialized in the U.S.

in July 2016, 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.

Hernia repair is one of the most common surgeries performed in the U.S., representing approximately 1.1 million procedures annually.

Based on the volume weighted average selling price of our OviTex products, we estimate the annual U.S.

total addressable market opportunity for our OviTex products to be approximately $1.5 billion.

Our OviTex portfolio consists of multiple product configurations intended to address various surgical procedures within hernia repair and abdominal wall reconstruction, including ventral, inguinal, and hiatal hernia repair.

In addition, we have also designed an OviTex product specifically for use in laparoscopic and robotic-assisted hernia repair, which we market as OviTex LPR and began commercializing this product in November 2018.

We recently launched two new, larger configurations of OviTex LPR, designed for ventral and incisional hernias.

We have also focused on evaluating and publishing clinical data on the effectiveness and safety of our OviTex products.

To date, there have been thirty published or presented works relating to these clinical findings, either by us or a third-party evaluating the OviTex product.

Recently in October 2022, the 24-month results of our single arm, multicenter post-market clinical study, which we refer to as our BRAVO study, were published in the Annals of Medicine and Surgery .

The BRAVO study was designed to evaluate the clinical performance of OviTex for primary or recurrent ventral hernias using open, laparoscopic, or robotic techniques in 92 enrolled patients.

The recurrence rate at the 24-month time point was 2.6%, and surgical site occurrences (“SSOs”) were observed in 38% of the study population.

Of the enrolled patients, 78% were characterized as high risk for experiencing an SSO based on at least one known risk factor, which included obesity, active smoking, COPD, diabetes mellitus, coronary artery disease, or advanced age (≥75 years).

The results also indicated that BRAVO patients experienced statistically significant and clinically meaningful improvements in their quality of life and perceived health based on patient responses to the EuroQol-5 Dimension (EQ-5D) health assessment and the validated 12-question Hernia-Related Quality of Life survey (HerQLes).

In addition to the BRAVO study and other current clinical initiatives, we also commenced enrollment in May 2021 for our BRAVO II study, a prospective study evaluating the use of OviTex in robot-assisted ventral and inguinal hernia repairs.

Our second portfolio of products, the OviTex PRS Reinforced Tissue Matrix (“OviTex PRS”), which we first commercialized in the U.S.

in May 2019, addresses unmet needs in plastic and reconstructive surgery.

OviTex PRS is

indicated for use in implantation to reinforce soft-tissue where weakness exists in patients requiring soft-tissue repair or reinforcement in plastic and reconstructive surgery.

Our OviTex PRS portfolio is supported by non-human primate data that demonstrated more rapid tissue integration and tissue remodeling compared to the market leading biologic matrix used in this indication.

Based on the current sales of biologic matrices in the U.S., we estimate the annual U.S.

current addressable market opportunity for our OviTex PRS products to be approximately $700 million.

Our OviTex products have received 510(k) clearance from the U.S.

Food and Drug Administration (“FDA”), which clearance was obtained and is currently held by Aroa Biosurgery Ltd.

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

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.

Food and Drug Administration (“FDA”), which clearance was obtained and is currently held by our exclusive contract manufacturer of these products, Aroa.

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 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.

In addition, to address the significant increase in the number of robotic-assisted hernia repairs over the last several years, we have designed an OviTex product line for use in laparoscopic and robotic-assisted surgery (“OviTex LPR”), which we began commercializing in November 2018.

We subsequently expanded the OviTex LPR product line in December 2019.

OviTex PRS is indicated for use in implantation to reinforce soft-tissue where weakness exists in patients requiring soft-tissue repair or reinforcement in plastic and reconstructive surgery.

We commenced a limited launch in May 2019 and have gathered clinical feedback from our initial surgeon users.

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

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.

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.

We have also engaged in discussions with the FDA regarding an Investigational Device Exemption (“IDE”) 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 510(k) clearance will be required for such an indication.

We have also commenced a retrospective clinical study evaluating the effectiveness and safety of our OviTex PRS products.

We also continue to expand our service offerings and diversify our supplier base as we continue to create a soft tissue restoration portfolio, including through the development of complimentary solutions targeting surgical wound management and infection control.

In January 2023, we announced an exclusive development and distribution partnership with Collagen Matrix, Inc.

(“CMI”), pursuant to which we launched the commercialization of our NIVIS Fibrillar Collagen Pack, an absorbent matrix of Type I and Type III bovine collagen designed to manage moderately to heavily exudating wounds and to control minor bleeding.

We also previously commercialized through a distribution agreement with Next Science Technologies Pty Limited (“Next Science”), a proprietary antimicrobial surgical wash in 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 assessing additional strategic partnerships with medical device companies whereby we may enter into distribution, product development and/or licensing agreements for new products complimentary to, or related to, existing and future products in our distribution channel.

We have a broad portfolio of intellectual property protecting our products that we believe, when combined with the proprietary manufacturing processes associated with our products and our know-how, provides significant barriers to entry.

Our intellectual property applies to our differentiated product construction and materials.

In addition, we believe our exclusive manufacturing and long-term supply and license agreement (the “Aroa License”) with Aroa creates a competitive advantage by allowing us to secure an exclusive supply of ovine rumen at a low cost.

Ovine rumen, the forestomach of a sheep, is the source of the biologic material used in our OviTex portfolio products.

In manufacturing the product, we use biologic material from ovine rumen because of its plentiful supply, optimal biomechanical profile and open collagen architecture that allows for rapid cellular infiltration.

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

We market our products through a single direct sales force, predominantly in the U.S., as augmented by a smaller number of sales representatives and 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, 2022, we had 67 sales territories in the U.S.

As part of our commercial strategy, we plan to continue to invest in our commercial organization by hiring additional territory managers and administrative and field-based support employees to support and service new accounts for soft-tissue reconstruction procedures.

We believe we can enhance the productivity of our sales force by improving customer segmentation and targeting, implementing and further refining our proprietary training programs, leveraging support from our medical education and clinical development functions to drive physician awareness and education on our products, and utilizing engagement analytics to support product development.

Additionally, we have contracted with three national GPOs covering our OviTex product and plan to continue to contract with additional GPOs and other integrated delivery networks (“IDNs”) to increase access to and penetration of hospital accounts.

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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Additionally, we are exploring new packaging technology to increase the shelf life of our OviTex and OviTex PRS products.

We are also exploring additional

technologies that may complement our existing products, or expand the number of our product lines, in each case within the hernia, plastic and reconstruction, and broader soft-tissue reconstruction and preservation market.

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.

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 single digit royalties or other product acquisition costs.

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

We maintain our Aroa License for the exclusive supply of ovine rumen and manufacture of our reinforced tissue matrices under which we purchase product from Aroa at a fixed cost equal to 27% of our net sales of licensed products.

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

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%.

We have not been profitable since inception and as of December 31, 2021, we had an accumulated deficit of $229.9 million.

We expect to incur losses for the foreseeable future.

Business Update Regarding COVID-19

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 might be used.

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 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.

● Product Development :

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, 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 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.

Our business was directly impacted by the COVID-19 pandemic.

We experienced volatility in demand for our products which primarily resulted from government and hospital restrictions, as well as patient health and safety concerns, decreasing the volume of elective procedures using our products.

We saw improvement in our business during the second half of 2022 and anticipate that procedure volumes will continue to normalize to pre-pandemic levels;

we continue to monitor the potential impact of the COVID-19 pandemic on labor and hospital staffing levels, procedural volumes and ultimately on our results.

Our revenue for the years ended December 31, 2022 and 2021 was $41.4 million and $29.5 million, respectively, which represents an increase of $12.0 million, or 41% for the year ended December 31, 2022.

Our net loss for the same time periods was $44.3 million and $33.3 million, respectively, which represents an increase of $11.0 million, or 33% for the year ended December 31, 2022.

As of December 31, 2022, we had an accumulated deficit of $274.2 million.

The vast majority of our revenue to date has been generated from sales of our OviTex and OviTex PRS products in the U.S., with the remainder generated from sales of our OviTex products in Europe and the sale of other products.

Business Update Regarding Macroeconomic Conditions and COVID-19

Our business, results of operations and commercial operations have been impacted by macroeconomic conditions, including the COVID-19 pandemic, as well as, to a lesser extent, inflationary pressures, fluctuations in foreign currency in the jurisdictions in which we operate, and geopolitical conflicts.

These factors have and may continue to impact us in the following ways:

In the first quarter of 2022, regional surges of the COVID-19 Omicron variant resulted in some government restrictions on elective procedures and surgical staffing challenges leading to the deferral of elective surgeries and lower surgical procedural volumes overall.

While we anticipate the normalization of surgical procedures to pre-pandemic levels, the pace of increased procedural volume remains unknown as hospitals allocate to address staffing shortages to prioritize any backlog of non-elective procedures.

Additionally, other labor and financial strains on healthcare systems may continue to reduce procedural volumes.

General Economic Uncertainty :

Continued concerns about the systemic impact of potential long-term and wide-spread recession and geopolitical issues, including the war in Ukraine, have contributed to increased market volatility and diminished expectations for economic growth in the world.

As a result, we have experienced high volatility in our stock price over the prior year.

Continued uncertainty and perception of worsening market conditions could result in a decline in our stock price, high inflation, increase our cost of capital and adversely affect our ability to access the capital markets in the future.

Financial Strain and Inflationary Pressures :

Market acceptance of our medical products in the U.S.

and other countries is dependent upon the procurement practices of our customers, patient need for our products and procedures and the reimbursement of patients’ medical expenses by government healthcare programs and third-party payors.

The continuing uncertainty surrounding global economic conditions and financial markets, including the financial strain suffered by hospital customers during the COVID-19 pandemic, may adversely affect demand for our products and procedures and

result in lower reimbursement rates or coverage for our products, resulting in lower sales volume and downward pricing pressure on our products and slower adoption of new products.

Components of Our Results of Operations

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Fees charged to customers for shipping are recognized as revenue.

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.

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 COVID-19 pandemic and related macroeconomic pressures 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, current and potential royalties and costs related to shipping.

Cost of revenue primarily consists of the costs of licensed products, charges related to excess and obsolete inventory adjustments, 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 ongoing COVID-19 pandemic will have on our product demand which could lead to additional charges to excess and obsolete inventory.

The initial term of our Aroa License terminates on 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 and related macroeconomic pressures 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, current and potential royalties 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, royalties and inventory excess and 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.

Sales and marketing expenses consist of commercial activities related to the sale of our products, along with the salaries and related benefits, including sales commissions and stock-based compensation for employees focused on these efforts.

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 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.

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

General and Administrative Expenses

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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.

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

Research and Development Expenses

Research and development expenses consist primarily of product research, engineering, product development, regulatory compliance and clinical development.

These expenses include salaries and related benefits, stock-based compensation, consulting services, costs associated with our preclinical studies, costs incurred with our manufacturing partner under development agreements related to technology transfer, laboratory materials and supplies and an allocation of related facilities costs.

These expenses include salaries and related benefits including stock-based compensation, for employees focused on these efforts, consulting services, costs associated with our preclinical studies, costs incurred with our manufacturing partner under development agreements related to technology transfer, costs incurred from license agreements with no alternative future uses, laboratory materials and supplies and an allocation of related facilities costs.

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 ongoing 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.

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 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

Prior to our IPO, our outstanding warrants to purchase shares of our preferred stock were classified as liabilities, recorded at fair value and were subject to remeasurement at each balance sheet date until they were exercised, expired or were otherwise settled.

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 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.

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

Loss on Extinguishment of Debt

Loss on extinguishment of debt consists of the excess consideration paid over the net carrying value of our debt at the time of extinguishment.

Other Expense

Other expense 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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Year Ended December 31,

(in thousands, except percentages)

Cost of revenue (excluding amortization of intangible assets)

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Loss from operations

Other (expense) income:

Interest expense

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 and stronger international sales.

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 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 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

Amortization of intangible assets was $0.3 million for both the years ended December 31, 2021 and 2020.

Gross margin increased to 64% for the year ended December 31, 2021 from 62% for the year ended December 31, 2020.

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, 2021 as compared to the prior year.

Sales and Marketing

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 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 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 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.

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,

(in thousands, except percentages)

Cost of revenue (excluding amortization of intangible assets)

Amortization of intangible assets

Operating expenses:

Sales and marketing

General and administrative

Research and development

Total operating expenses

Loss from operations

Other (expense) income:

Other expense:

Interest expense

Change in fair value of preferred stock warrant liability

Loss on extinguishment of debt

Other expense

Total other expense

Revenue increased by $12.0 million, or 41%, to $41.4 million for the year ended December 31, 2022 from $29.5 million for the year ended December 31, 2021.

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

During the year ended December 31, 2022, we sold 10,083 units of OviTex compared to 7,516 units of OviTex during the year ended December 31, 2021, a 34% increase in unit sales volume.

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.

Additionally, we sold 2,385 units of OviTex PRS compared to 1,260 units during the year ended December 31, 2021, an 89% increase in unit sales volume.

Cost of Revenue

Cost of revenue (excluding amortization of intangible assets) increased by $3.2 million to $13.6 million for the year ended December 31, 2022 from $10.3 million for the year ended December 31, 2021.

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.

The increase in cost of revenue was primarily the result of an increase in products purchased to support demand from our higher unit sales.

Amortization of Intangible Assets

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

Amortization of intangible assets increased by $0.5 million, or 164%, to $0.8 million for the year ended December 31, 2022 from $0.3 million for the year ended December 31, 2021.

In June 2022, we determined that our final milestone target under our licensing agreement with Aroa was probable of being met and recorded the payment obligation as an intangible asset, resulting in an additional cumulative amortization charge of $0.5 million.

Gross margin increased to 65% for the year ended December 31, 2022 from 64% for the year ended December 31, 2021.

The increase was primarily due to a lower expense recognized for excess and obsolete inventory adjustments as a percentage of revenue which resulted from improved inventory management processes during the year ended December 31, 2022 as compared to the prior year partially offset by higher amortization of intangible assets.

Sales and Marketing

Sales and marketing expenses increased by $14.2 million, or 49%, to $43.3 million for the year ended December 31, 2022 from $29.1 million for the year ended December 31, 2021.

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.

The increase was primarily due to higher salaries, benefits and commission costs as a result of our expanded commercial organization, higher travel and consulting expenses and additional employee-related costs due to an increase in headcount.

General and Administrative

General and administrative expenses increased by $1.4 million, or 11%, to $13.9 million for the year ended December 31, 2022 from $12.5 million for the year ended December 31, 2021.

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.

The increase was primarily due to higher salaries and benefits due to an increase in headcount, higher software related expenses and additional bad debt expense which offset lower insurance expense and recruiting fees.

Research and Development

Research and development expenses increased by $2.2 million, or 33%, to $8.9 million for the year ended December 31, 2022 from $6.7 million for the year ended December 31, 2021.

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

The increase was primarily due to an in-process research and development charge, higher salaries and benefits due to an increase in headcount and higher study costs, which offset a decrease in stock-based compensation expense.

Interest Expense

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

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.

Interest expense increased by $0.5 million, or 13%, to $4.1 million for the year ended December 31, 2022 from $3.6 million for the year ended December 31, 2021 as our borrowings increased under our MidCap Credit Agreement at higher interest rates.

Loss on Extinguishment of Debt

We recorded a loss on the extinguishment of debt of $1.2 million during the year ended December 31, 2022 related to the repayment of borrowings of our credit facilities with OrbiMed in May.

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

Other Expense

Other expense decreased by $0.2 million, or 96%, primarily due to foreign currency translation adjustments offset by increased interest income.

Liquidity and Capital Resources

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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.

In August 2022, we completed an underwritten public offering in which we issued and sold 4,600,000 shares of common stock at a public offering price of $8.00 per share.

We received net proceeds of $34.4 million after deducting underwriting discounts, commissions and other offering expenses.

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.

As of December 31, 2021, we had $30.0 million of borrowings outstanding under our credit facility (the “OrbiMed Credit Facility”).

This credit facility matures in November 2023 and requires that we maintain a minimum cash balance of $2.0 million.

As of December 31, 2022, we had $40.0 million of borrowings outstanding under our Credit and Security Agreement (the “MidCap Credit Agreement”) with MidCap Financial Trust, as agent and certain lender parties thereto.

The MidCap Credit Agreement matures in May 2027 and provides for up to $50.0 million in term loans (the “MidCap Term Loans”), consisting of a $40.0 million Tranche 1 (“Tranche 1”) and a $10.0 million Tranche 2 (“Tranche 2”).

Upon closing, we borrowed $40.0 million of Tranche 1 and used a portion of the proceeds to repay borrowings under the OrbiMed Credit Facility and intend to use the remaining proceeds to fund operations and other general corporate purposes.

We will be eligible to borrow Tranche 2 at our option upon meeting certain conditions, including, but not limited to, reaching $65.0 million of net product revenue over the preceding four quarters by fiscal year end 2023.

Based on our current business plan, we believe that our existing cash resources will be sufficient to meet our capital requirements and fund our operations for at least the next 12 months from the issuance of this Annual Report.

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.

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.

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

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, 2022, 2021 or 2020.

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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 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.

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 resulting from the COVID-19 pandemic, inflationary pressures, geopolitical conflict or other factors.

If we are unable to obtain adequate financing, we may be required to delay or reduce the current development, commercialization and marketing plans for our products.

The following table summarizes our sources and uses of cash for each of the periods presented:

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Cash provided by financing activities

Effect of exchange rate on cash

Effect of exchange rate change on cash and cash equivalents

Net (decrease) increase in cash and cash equivalents

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During the year ended December 31, 2022, we used $40.7 million of cash in operating activities, resulting from our net loss of $44.3 million and the change in operating assets and liabilities of $5.3 million offset by non-cash charges of $8.9 million.

Our non-cash charges were comprised of stock-based compensation expense of $4.0 million, our excess and obsolete inventory charge of $1.9 million, loss on extinguishment of debt of $1.2 million, depreciation and amortization expense of $1.2 million and interest expense of $0.7 million.

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

During the year ended December 31, 2021, we used $30.4 million of cash in operating activities, resulting from our net loss of $33.3 million and the change in operating assets and liabilities of $3.5 million offset by non-cash charges of $6.3 million.

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.

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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.

The change in our operating assets was primarily related to increases in accounts receivable, inventory and prepaid expenses and other assets.

Investing Activities

During the year ended December 31, 2022, cash used in investing activities was $1.9 million consisting of a $1.0 million payment made for our intangible asset and purchases of property and equipment.

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 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, 2022, cash provided by financing activities was $40.9 million, consisting primarily of $34.4 million in proceeds from an underwritten public offering, $40.0 million in proceeds received from the issuance of long-term debt, partially offset by $30.0 million in repayments of long-term debt and $3.5 million in payments of issuance costs.

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.

During the year ended December 31, 2019, cash provided by financing activities was $65.5 million, consisting primarily from the net proceeds received from our IPO and the net proceeds from the issuance of our Series B preferred stock.

In November 2018, we entered into the OrbiMed Credit Facility, which consists of up to $35.0 million in term loans (the “OrbiMed Term Loans”).

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.

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

Pursuant to the OrbiMed Credit Facility, we provided a first priority security interest in all existing and future acquired assets, excluding intellectual property and certain other assets, owned by us.

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 events, (xi) regulatory matters, (xii) and key contracts.

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

In the event of default under the OrbiMed Credit Facility, we may become obligated to immediately pay all outstanding principal and interest and all other due and unpaid obligations at the current rate in effect plus 3%.

The OrbiMed Term Loans mature on November 16, 2023 and bear interest at a rate equal to 7.75% plus the greater of one-month LIBOR or 2.0%.

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.

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.

On May 26, 2022, we entered into the MidCap Credit Agreement with MidCap Financial Trust, as agent and certain lender parties thereto.

The MidCap Credit Agreement provides for up to $50.0 million in MidCap Term Loans, consisting of a $40.0 million Tranche 1 and a $10.0 million Tranche 2.

Upon closing, we borrowed $40.0 million of Tranche 1 and used a portion of the proceeds to fully repay borrowings under the OrbiMed Credit Facility and intend to

use the remaining proceeds to fund operations and other general corporate purposes.

Pursuant to the MidCap Credit Agreement, we provided a first priority security interest in all existing and future acquired assets, including intellectual property, owned by us.

The MidCap Credit Agreement contains certain covenants that limit our ability to engage in certain transactions that may be in our long-term best interests, including the incurrence of additional indebtedness, effecting certain corporate changes, making certain investments, acquisitions or dispositions and paying dividends.

The MidCap Credit Agreement 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, (vi) change of control, (vii) bankruptcy and insolvency, (viii) impairment of security, (ix) key permit events, (x) termination of a pension plan, (xi) regulatory matters, (xii) material adverse effect and (xiii) breach of material contracts.

In addition, we must maintain minimum net revenue levels tested quarterly.

In the event of default under the MidCap Credit Agreement, we would be required to pay interest on principal and all other due and unpaid obligations at the current rate in effect plus 2%.

The MidCap Term Loans mature on May 1, 2027 and bear interest at a rate equal to 6.25% plus the greater of one-month Term SOFR (as defined in the MidCap Credit Agreement) or 1.0%.

We are required to make 36 monthly interest payments beginning on June 1, 2022 (the “Interest-Only Period”).

If we are in covenant compliance at the end of the Interest-Only Period, we will have the option to extend the Interest-Only Period by 12 months to 48 monthly interest payments, followed by 12 months of straight-line amortization, with the entire principal payment due at maturity.

If we are not in covenant compliance at the end of the Interest-Only Period, we are required to make 24 months of straight-line amortization payments, with the entire principal amount due at maturity.

Subject to certain limitations, the MidCap Term Loans have a prepayment fee equal to 3.0% of the prepaid principal amount for the first year following the closing date of the MidCap Term Loans, 2.0% of the prepaid principal amount for the second year following the closing date and 1.0% of the prepaid principal amount for the third year following the closing date and thereafter.

We are also required to pay an exit fee at the time of maturity or prepayment event equal to 5% of all principal borrowings (or in the event of a prepayment event, the amount of principal being prepaid).

Contractual Obligations and Commitments

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(1) Interest payable reflects the rate in effect as of December 31, 2022.

The interest rate on borrowings under the OrbiMed Credit Facility is variable and resets monthly.

The interest rate on borrowings under the MidCap Credit Facility is variable and resets monthly.

End of term fee reflects final payment fee due at maturity.

(2) Reflects payments due for our lease of office and laboratory space in Malvern, Pennsylvania under an operating lease agreement that expires in 2028.

(3) This table does not include (a) any milestone payments that are not deemed probable under license agreements as the timing and likelihood of such payments are not known with certainty and (b) contracts that are entered into in the ordinary course of business that are not material in the aggregate in any period presented above.

Excluded amounts primarily consist of a $1,000 milestone payment due to Aroa when certain sales milestones are met.

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