Item 1A. Risk Factors.
Investing in
our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below and
the other information in this Annual Report, including our consolidated financial statements and the related notes, as well as
our other public filings with the SEC, before making an investment in our common stock. Our business, financial condition, results
of operations and prospects could be materially and adversely affected if any of these risks occurs, and as a result, the market
price of our common stock could decline and you could lose all or part of your investment. This Annual Report also contains forward-looking
statements that involve risks and uncertainties. See “Forward-Looking Statements.” Our actual results could differ
materially and adversely from those anticipated in these forward-looking statements as a result of certain factors, including those
set forth below.
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Risks Related to
Our Business
Our long-term
growth depends on our ability to enhance our products, expand our product indications and develop, acquire and commercialize additional
product offerings.
Our industry is highly
competitive and subject to rapid change and technological advancements. Competition intensifies as technical advances in each field
are made and become more widely known. We can give no assurance that others will not develop products, services and processes with
significant advantages over the products, services and processes that we offer or are seeking to develop. It is, therefore, important
to our business that we continue to enhance our existing product offerings, expand our product indications and develop or otherwise
introduce and successfully commercialize new products. Developing, acquiring and commercializing products is expensive and time-consuming
and could divert management’s attention away from our core business. Even if we are successful in developing additional products,
the success of any new product offering or enhancements to any of our existing products will depend on several factors, including
our ability to:
• properly identify and anticipate physician and patient needs;
• distinguish our products from those of our competitors;
• develop an effective and dedicated sales and marketing team;
• provide adequate training to potential users of our products;
• receive adequate coverage and reimbursement for our products; and
If we are not successful
in expanding our indications and developing, acquiring and commercializing new products and product enhancements, our ability to
increase our net sales may be impaired, which could have a material adverse effect on our business, financial condition and results
of operations. In addition, our research and development efforts may require a substantial investment of time and resources before
we are adequately able to determine the commercial viability of a new product, technology or other innovation.
Even if we are able
to successfully develop and commercialize new product offerings or enhancements, they may be quickly rendered obsolete by changing
customer preferences or the introduction by our competitors of products embodying new technologies or features and/or otherwise
not produce sales in excess of the costs of development, any of which could also materially and adversely affect our business,
financial condition and results of operations. Furthermore, to the extent we seek to enhance our products and broaden our product
portfolio through acquisitions or other commercial transactions, we will be subject to additional risks. See “— We
regularly evaluate opportunities to make acquisitions of, investments in, and licenses or other commercial arrangements involving,
other companies or technologies, and to enter into other strategic transactions. These transactions entail significant risks.”
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A substantial
portion of our net sales is generated through our commercial partners and independent sales agents, which subjects us to various
risks.
We currently rely
on the efforts of our commercial partners and independent sales agents to generate a substantial portion of our net sales, and
we expect to continue to rely on these third parties to generate a substantial portion of our net sales in the future while we
work to grow our direct sales force. As a result, the impairment or termination of these relationships for any reason, or the failure
of these parties to diligently sell our products and comply with applicable laws and regulations, could materially and adversely
affect our ability to generate revenue and profits. Because our commercial partners and independent sales agents control the relationships
with our end customers, if our relationship with any commercial partner or independent sales agent ends, we will likely also lose
our relationship with their customers. Furthermore, our success is partially dependent on the willingness and ability of the sales
representatives and other employees of our commercial partners and independent sales agents to diligently sell our products. However,
we cannot guarantee that they will be successful in marketing our products. In addition, because our commercial partners and independent
sales agents do not sell our products exclusively, they may focus their sales efforts and resources on other products that produce
better margins or greater commissions for them or are incorporated into a broader strategic relationship with a partner. Because
we do not control the sales representatives and other employees of our commercial partners, we cannot guarantee that our sales
processes, regulatory compliance and other priorities will be consistently communicated and executed. In addition, we do not have
staff in many of the areas covered by our commercial partners and independent sales agents, which makes it particularly difficult
for us to monitor their performance. While we may take steps to mitigate the risks associated with noncompliance by our commercial
partners and independent sales agents, there remains a risk that they will not comply with regulatory requirements or our requirements
and policies. Actions by the sales representatives and other employees of our commercial partners and independent sales agents
that are beyond our control could result in flat or declining sales in that territory, harm to the reputation of our company or
our products or legal liability, any of which could have a material adverse effect on our business, financial condition and results
of operations. In addition to the risk of losing customers, the operation of local laws and our agreements with our commercial
partners and independent sales agents would make it difficult for us to replace a commercial partner or independent sales agent
we feel is underperforming.
In order to increase
our sales, particularly with respect to our Core Products, we intend to develop relationships and arrangements with additional
commercial partners and/or independent sales agents, which we may not be able to do on commercially reasonable terms or at all.
If we are unable to establish new commercial partner and independent sales agent relationships and maintain our relationships with
our existing commercial partners and independent sales agents, in each case, on commercially reasonable terms, we will be unable
to increase sales of our products and our business, financial condition and results of operations could be materially and adversely
affected.
In
addition, certain of our commercial partners may, from time to time, account for a significant portion of our net sales
and/or accounts receivable. Sales to Surgalign Holdings, one of our commercial partners, accounted for 10% of our net sales
during the year ended December 31, 2020 and represented 13% of our accounts receivable as of December 31, 2020. Sales to
Medtronic, also one of our commercial partners, accounted for 17% of our net sales during the year ended December 31, 2020
and represented 34% of our accounts receivable as of December 31, 2020. The loss of one or more significant commercial
partners, a material reduction in their purchases of our products, or their inability to perform their contractual
obligations, including, for example, committed purchase requirements, could adversely affect our business, financial
condition and results of operations. We are also subject to the risk that any such commercial partner will experience
financial difficulties that prevent them from making payments to us on a timely basis or at all.
Our revenue
and profitability could be materially and adversely affected if we fail to maintain our relationships with our existing contract
manufacturing customers and enter into agreements with new contract manufacturing customers, or if existing contract manufacturing
customers reduce purchases of our products. Our relationships with these customers also subject us to certain risks.
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Our contract manufacturing
operations are an important component of our business, enabling us to utilize as much as possible of the human biological material
from which we produce our core orthopedic/spinal repair and soft tissue reconstruction products, leverage our existing overhead
and improve our cash flow. In addition, we have historically generated a significant portion of our total net sales from sales
of our Non-Core Products, which is composed primarily of purchases from our contract manufacturing customers. Sales of our Non-Core
Products represented approximately 15.1% and 27.9% of our total net sales for the years ended December 31, 2020 and 2019, respectively,
and this decrease largely resulted from a reduction in volume of products purchased by one significant contract customer following
the expiration of its contract. As a result, if we are unable to maintain our relationships with our existing contract manufacturing
customers and establish relationships with new contract manufacturing customers on terms that are favorable to us, or if our existing
contract manufacturing customers materially reduce their purchases of our products, our sales and profitability may be further
adversely affected.
In addition, although
we have invested, and expect to continue to invest, significant time and resources cultivating our relationships with these customers,
these relationships subject us to certain risks. For example, our contract manufacturing customers may use their experience with
our products to develop their own solutions, which they may be able to produce at a lower cost than the price they pay for our
products. This is particularly true given that many of our customers are large, established companies that may be able to achieve
greater economies of scale in manufacturing and production and/or experience synergies from vertical integration. In addition,
our contract manufacturing customers routinely audit and inspect our facilities, processes and practices to ensure that our manufacturing
process and products meet their internal standards and applicable regulatory standards. To date, we have passed all such audits
and inspections. However, we may not do so in the future, and any failure to perform to our customers’ satisfaction in these
audits could significantly harm our relationships with them and our reputation, which could materially and adversely affect our
business, financial condition and results of operations. Furthermore, the need to comply with our customers’ internal requirements
could result in increased development, manufacturing, warranty and administrative costs. A significant increase in these costs
could adversely affect our business, financial condition and results of operations. There is also a risk that we may be unable
to supply products in the quantities and of the quality required by these customers within their required timeframes, which would
also jeopardize our relationships with them. Disagreements or disputes may also arise from time to time. Any of these events, to
the extent they cause our customers to reduce purchases of our products or terminate their relationships with us, could have a
material adverse effect on our business, financial condition and results of operations.
In addition, our sales
to these customers may be impacted by changes in their buying habits over which we have no control. Such changes may be driven
by, among other things, changes in market share, cyclicality, inventory reductions, spending patterns, cost-cutting measures, product
development activity and timelines and changes in supply chain management, as well as the impact of general economic conditions.
These customers may also experience financial difficulties or other problems that may prevent them from making payments to us on
a timely basis or at all. Any of these events could cause our operating results to fluctuate from period to period, make it more
difficult for us to manage our inventory and production schedules and otherwise adversely affect our business, financial condition
and results of operations.
We plan
to expand our direct sales force, and if we are unable to successfully expand, manage and maintain our direct sales force, we may
not be able to generate greater market share and revenue growth.
Prior to the CorMatrix
Acquisition, we had a very small direct sales force and sold our Core Products primarily through independent sales agents or to
other companies for resale or incorporation into their products. Though our orthopedic/spinal repair products are now primarily
sold through our commercial partners, we currently utilize our direct sales force to sell CanGaroo and our cardiovascular products,
as well as our SimpliDerm product. As of December 31, 2020, our direct sales organization consisted of 33 sales representatives,
who are focused on increasing market access and market penetration by selling our products, managing our commercial partners, and
providing technical assistance. Our operating results are directly dependent upon the efforts of these employees. If our direct
sales force fails to adequately promote, market and sell our products and effectively manage and assist our commercial partners,
our net sales may be adversely affected.
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In addition, in order
to expand our network of hospital and physician customers, drive deeper penetration in our current accounts and provide additional
technical assistance to our commercial partners, we plan to expand the size and geographic scope of our direct sales force. This
growth may require us to split or adjust existing sales territories, which may adversely affect our ability to retain customers
in those territories. Additionally, our future success will depend largely on our ability to continue to hire, train, retain and
motivate skilled sales personnel with significant industry experience and technical knowledge of regenerative medicine and related
products. Because the competition for their services is high, we cannot assure you we will be able to hire and retain additional
personnel on favorable or commercially reasonable terms, if at all. Failure to hire or retain qualified sales personnel would prevent
us from expanding our business and generating additional revenue. In addition, it typically takes a substantial period of time
before newly hired sales personnel are effective. Though we currently utilize commercial partners and independent sales agents
to sell certain of our products, there is no guarantee that we will be able to establish relationships with additional parties,
or that our existing commercial partners and independent sales agents will purchase or otherwise commercialize any products we
may seek to introduce in the future. If we are unable to expand our sales and marketing capabilities, we may not be able to effectively
commercialize our products, which could have a material adverse effect on our business, financial condition and results of operations.
We are working
to grow our direct sales force for certain of our products, which may result in higher fixed costs and may slow our ability to
reduce costs in the face of a sudden decline in demand for our products.
A key component of
our growth involves expanding the size and geographic scope of our direct sales force. A direct sales force may subject us to higher
fixed costs than those of other companies that market competing products primarily through third parties due to the costs that
we will bear associated with employee benefits, training and managing sales personnel. As a result, we could be at a competitive
disadvantage relative to competitors who rely more heavily on third parties to market and sell their products. Additionally, these
fixed costs may slow our ability to reduce costs in the face of a sudden decline in demand for our products, which could have a
material adverse effect on our business, financial condition and results of operations.
We have
incurred operating losses since our inception, expect to continue to incur significant expenses and operating losses in the future,
and may not be able to achieve or sustain profitability.
We have incurred net
losses since our inception in 2015. For the years ended December 31, 2019 and 2020, we had net losses of $11.9 million and
$21.8, respectively. As of December 31, 2020, we had an accumulated deficit of $80.3 million. To date, we have financed
our operations primarily through private placements of our convertible preferred stock, amounts borrowed under our credit facilities
and sales of our products. We have devoted the majority of our resources to acquisition and integration, manufacturing costs, research
and development, clinical activity and investing in our commercial infrastructure through our direct sales force and commercial
partners in order to expand our presence and to promote awareness and adoption of our products.
We expect that our
operating expenses will continue to increase as we grow our sales organization, expand our product development and clinical and
research activities, and incur additional costs associated with being a public company. As a result, we expect to continue to incur
operating losses in the future and may never achieve profitability. Furthermore, even if we do achieve profitability, we may not
be able to sustain or increase profitability on an ongoing basis. If we do not achieve or sustain profitability, it will be more
difficult for us to finance our business and accomplish our strategic objectives, either of which would have a material adverse
effect on our business, financial condition and results of operations and cause the market price of our Class A common stock to
decline. In addition, failure of our products to significantly penetrate existing or new markets would negatively affect our business,
financial condition and results of operations.
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Our business
has been, and may continue to be, adversely affected by the outbreak of the novel strain of coronavirus disease, COVID-19, and
may be adversely affected by any future pandemic, epidemic or outbreak of an infectious disease in the United States or worldwide.
If a pandemic, epidemic
or outbreak of an infectious disease occurs in the United States or worldwide, our business may be adversely affected. In December
2019, a novel strain of coronavirus, SARS-CoV-2, was identified in Wuhan, China. Since then, SARS-CoV-2, and the resulting disease,
COVID-19, has spread to most countries and all 50 states within the United States. The COVID-19 pandemic has negatively impacted
our business, financial condition and results of operations by significantly decreasing and delaying the number of procedures performed
using our products, and we expect the pandemic to continue to negatively impact our business, financial condition and results of
operations. Similar to the general trend in elective and other surgical procedures, the number of procedures performed using our
products has decreased significantly as healthcare organizations in the United States have prioritized the treatment of patients
with COVID-19 or have otherwise altered their operations to prepare for and respond to the pandemic. For example, in the United
States, governmental authorities have recommended, and in certain cases required, that elective, specialty and other non-emergency
procedures and appointments be suspended or canceled in order to avoid patient exposure to medical environments and the risk of
potential infection with the novel coronavirus, and to focus limited resources and personnel capacity on the treatment of COVID-19
patients. Beginning in March 2020, a significant number of procedures using our products have been postponed or cancelled, which
has negatively impacted sales of our products. Decreases in procedures have been most prevalent in regions experiencing significant
outbreaks, while healthcare organizations in other regions have continued to undertake procedures using our products at reduced
levels as compared to before the pandemic. The COVID-19 pandemic could also adversely impact the initiation, continuation and completion
of our clinical trials by, for example, delaying procedures using our products or reducing the number of patients, healthcare providers
or clinical facilities available or willing to participate in the clinical trials. These delays could result in increased costs,
delays in advancing our product development, delays in testing the effectiveness of our technology or termination of the clinical
studies altogether. These measures and challenges will likely continue for the duration of the pandemic, which is uncertain, and
may continue to reduce our net sales and negatively impact our business, financial condition and results of operations while the
pandemic continues. Further, even after the pandemic ultimately subsides, we anticipate there will be a substantial backlog of
patients seeking procedures and appointments for a variety of medical conditions and, as a result, patients seeking procedures
performed using our products will have to navigate limited provider capacity. We believe this limited capacity of providers, hospitals
and other healthcare facilities could have a significant adverse effect on our business, financial condition and results of operations
during and following the COVID-19 pandemic.
Numerous state
and local jurisdictions, including those where our facilities are located, have imposed, and others in the future may impose,
“shelter-in-place” orders, quarantines, executive orders and similar government orders and restrictions for their
residents to control the spread of COVID-19. Such orders or restrictions have resulted in reduced operations at our manufacturing
facilities, travel restrictions and cancellation of events and have restricted the ability of our sales representatives and those
of our commercial partners and independent sales agents to attend procedures in which our products are used, among other effects,
thereby significantly and negatively impacting our operations. Other disruptions or potential disruptions include restrictions
on the ability of our sales representatives and other personnel, and those of our commercial partners and independent sales agents,
to travel and access customers for training and case support; inability of our suppliers to manufacture and deliver to us on a
timely basis or at all; delays in our ability to obtain medical records for tissue donors, which we need in order to release our
products; disruptions in our production schedule and ability to manufacture and assemble products; inventory shortages or obsolescence;
delays in actions of regulatory bodies; delays in clinical trials and studies; diversion of or limitations on employee resources
that would otherwise be focused on the operations of our business, including because of sickness of employees or their families
or the desire of employees to avoid contact with groups of people; delays in growing or reductions in our direct sales force,
including through delays in hiring, lay-offs, furloughs or other losses of sales representatives; restrictions in our ability
to ship our products to customers; business adjustments or disruptions of certain third parties, including suppliers, medical
institutions and clinical investigators with whom we conduct business; negative impact on our customers’ credit profiles,
which may adversely impact our future collection experience; and additional government requirements or other incremental mitigation
efforts that may further impact our or our suppliers’ capacity to manufacture our products. The extent, to which the COVID-19
pandemic or any future pandemic, epidemic or outbreak of an infectious disease impacts our business, will depend on future events
and developments, which are highly uncertain and cannot be predicted, including the severity and spread of the disease and the
effectiveness of actions to contain the disease or treat its impact, among others. As new information regarding COVID-19 continues
to emerge, it is difficult to predict what impact this disease will ultimately have on our business.
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Adverse
changes in general domestic and global economic conditions and instability and disruption of credit markets, including as a result
of the current COVID-19 pandemic or any other outbreak of an infectious disease, could adversely affect our business, financial
condition, results of operations and liquidity.
We are subject to
risks arising from adverse changes in general domestic and global economic conditions, including any recession, economic slowdown
or disruption of credit markets. While the potential economic impact brought by, and the duration of, any pandemic, epidemic or
outbreak of an infectious disease, including COVID-19, may be difficult to assess or predict, the current COVID-19 pandemic has
resulted in, and may continue to result in, significant disruption of global financial markets. These events, and any financial
crisis that may occur in the future, could make it more difficult and more expensive for hospitals and health systems to obtain
credit, which may contribute to pressures on their operating margins. As a result, hospitals and health systems may curtail and
reduce capital and overall spending, which may have a significant adverse effect on our business. In addition, the current economic
downturn that has resulted from the COVID-19 pandemic has resulted and may continue to result in, and any economic downturn that
may occur in the future may also result in, higher unemployment and a reduction in the number of individuals covered by private
insurance, which may result in an increase in the cost of uncompensated care for hospitals. Higher unemployment may also result
in a shift in reimbursement patterns as unemployed individuals switch from private plans to public plans such as U.S. Medicaid
or Medicare. As economic conditions deteriorate and unemployment increases, any significant shift in coverage for the unemployed
may have an unfavorable impact on our business.
In addition, the current
COVID-19 pandemic and any other disruption in the capital and credit markets could impede our access to capital, which could be
further adversely affected if we are unable to maintain our current credit ratings. Should we have limited access to additional
financing sources, we may need to defer capital expenditures or seek other sources of liquidity, which may not be available to
us on acceptable terms or at all. Similarly, if our suppliers face challenges in obtaining credit or other financial difficulties,
they may be unable to provide the materials required to manufacture our products. All of these factors related to global economic
conditions, which are beyond our control, could adversely impact our business, financial condition, results of operations and liquidity.
Our future
growth depends on physician awareness of the distinctive characteristics, benefits, safety, clinical efficacy and cost-effectiveness
of our products.
We focus our sales,
marketing and training efforts on physicians, surgeons and other healthcare professionals. The acceptance of our products depends
in part on our ability to educate these individuals as to the distinctive characteristics, benefits, safety, clinical efficacy
and cost-effectiveness of our products compared to alternative products, procedures and therapies. We support our direct sales
force, commercial partners and independent sales agents through in-person educational programs and online medical educational materials,
among other things. We also produce marketing materials, including materials outlining our products, for our sales teams using
printed, video and multimedia formats. However, our efforts to educate physicians, surgeons and other healthcare professionals
regarding our products may not be successful, particularly in markets in which we rely exclusively on the efforts of our commercial
partners and independent sales agents. A failure to educate physicians and surgeons may impair our ability to achieve market acceptance
of our products and adversely affect our business, financial condition and results of operations.
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Our success
depends on the continued and future acceptance of our products by the medical community.
Even if we are able
to increase awareness of our products among healthcare professionals, there can be no assurance that this will translate into greater
acceptance of our products by the medical community. We believe physicians, surgeons and other healthcare professionals will only
adopt our products if they determine, based on experience, clinical data and published peer reviewed journal articles, that the
use of our products in a particular procedure is a favorable alternative to other available methods. Physicians also are more interested
in using cost-effective products as they face increasing cost-containment pressure. In general, physicians may be slow to change
their medical treatment practices and adopt our products for a variety of reasons, including, among others:
• their lack of experience using our products;
• pressure to contain costs;
• preference for other treatment modalities or our competitors’ products;
• the time that must be dedicated to learning how to use our products.
The degree of market
acceptance of our products will continue to depend on a number of factors, some of which are outside of our control, including,
among other things:
• the actual and perceived safety and efficacy of our products;
• relative convenience and ease of administration;
• the strength of marketing and distribution support;
• the timing of market introduction of competitive products;
• publicity concerning our products or competing products and treatments;
• our reputation and the reputation of our products;
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In addition, we believe
recommendations for, and support of our products by, influential physicians are essential for market acceptance and adoption. If
we do not receive this support (e.g., because we are unable to demonstrate favorable long-term clinical data or otherwise), physicians
and hospitals may not use our products, which would significantly impair our ability to increase our sales and prevent us from
achieving and sustaining profitability.
Unfavorable
results from any of our pre-clinical studies or clinical trials, comparative effectiveness, economic or other studies, or from
similar trials or studies conducted by others, may negatively affect the use or adoption of our products by physicians, hospitals
and payors, which could have a negative impact on the market acceptance of our products and their profitability.
We regularly conduct
a variety of pre-clinical studies and clinical trials, comparative effectiveness studies and economic and other studies of our
products in an effort to generate clinical and real-world outcomes and cost effectiveness data in order to obtain product approval
and drive further penetration in the markets we serve. If a clinical study conducted by us or a third party fails to demonstrate
statistically significant results supporting performance, use benefits or compelling health or economic outcomes from using our
products, physicians may elect not to use our products. Furthermore, in the event of an adverse clinical study outcome, our products
may not achieve “standard-of-care” status, where they exist, for the conditions in question, which could deter the
adoption of our products. Also, if serious adverse events are reported during the conduct of a study, it could affect continuation
of the study, product approval or clearance and product adoption. In addition, U.S. and foreign regulatory authorities routinely
conduct audits of clinical studies and such audits may result in adverse regulatory actions. If we are unable to develop a body
of statistically significant evidence from our clinical study program, whether due to adverse results or the inability to complete
properly designed studies, domestic and international public and private payors could refuse to cover procedures using our products,
limit the manner in which they cover our products or reduce the price they are willing to pay or reimburse for procedures using
our products. Any of these events could have a negative impact on market acceptance of procedures using our products and their
profitability, which could have a material adverse effect on our business, financial condition and results of operations.
We will
need to continue to expand our organization, and managing growth may be more difficult than we expect.
Managing our growth
may be more difficult than we expect. We anticipate that a period of significant expansion will be required to penetrate and service
the markets for our existing and anticipated future products and to continue to develop new products. This expansion will place
a significant strain on our management, operational and financial resources. To manage the expected growth of our operations and
personnel, we must both modify our existing operational and financial systems, procedures and controls and implement new systems,
procedures and controls. We must also expand our finance, administrative and operations staff. Management may be unable to hire,
train, retain, motivate and manage necessary personnel or to identify, manage and exploit existing and potential strategic relationships
and market opportunities. If we fail to meet these challenges effectively, there may be an adverse effect on our business, financial
condition and results of operations.
We regularly
evaluate opportunities to make acquisitions of, investments in, and licenses or other commercial arrangements involving, other
companies or technologies, and to enter into other strategic transactions. These transactions entail significant risks.
Our success depends,
in part, on our ability to continually enhance and broaden our product offerings in response to changing customer demands, competitive
pressures and advances in technologies. Accordingly, although we have no current commitments with respect to any acquisition or
investment, we regularly review potential acquisitions of, investments in, and licenses or other commercial arrangements involving,
complementary businesses, products or technologies instead of developing them ourselves. In addition, in regularly evaluating our
financial and operating performance, we may decide to sell one or more of our product lines or another portion of our business.
Opportunities to engage in these transactions may not be readily available to us at commercially reasonable prices, on other terms
acceptable to us or at all. Even if such opportunities are available, these transactions involve significant risks. In connection
with one or more of these transactions, we may:
• use cash that we may need in the future to operate our business;
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• otherwise be unable to succeed in the marketplace with the acquisition.
The occurrence of
any of the above could materially and adversely affect our business, financial condition and results of operations. Furthermore,
business acquisitions also involve the risk of unknown liabilities associated with the acquired business, which could be material.
Such liabilities could include lack of compliance with government regulations that could subject us to investigation, civil and
criminal sanctions, litigation and/or other actions that make it impossible to realize the anticipated benefits of the transaction.
For example, we may acquire a company that was not compliant with FDA quality requirements or was making payments or other forms
of remuneration to physicians to induce them to use their products. Incurring unknown liabilities or the failure to complete or
realize the anticipated benefits of an acquisition, investment or other commercial arrangement, whether resulting from one or more
of the factors described above or otherwise, could have a material and adverse effect on our business, financial condition and
results of operations.
New lines
of business and new products and services may subject us to additional risks.
From time to time,
we may implement or acquire new lines of business or introduce new products and services within our existing business lines. There
are risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed
or are evolving. In developing and commercializing new lines of business and new products and services, we may invest significant
time and resources. External factors, such as regulatory compliance obligations, competitive alternatives, lack of market acceptance
and shifting market preferences, may also affect the successful implementation of a new line of business or a new product or service.
Failure to successfully plan for and manage these risks in the development and implementation of new lines of business or new products
or services could have a material adverse effect on our business, financial condition and results of operations.
We face
significant and continuing competition from other companies, some of which have longer operating histories, more established products
and/or greater resources than we do, which could adversely affect our business, financial condition and results of operations.
We operate in highly
competitive markets that are characterized by intense competition, subject to rapid change and significantly affected by new product
introductions, technological advancements and other market activities of industry participants. Our competitors have historically
dedicated, and will continue to dedicate, significant resources to promote their products and to develop new products that compete
with ours. Customers in our target markets consider many factors when selecting a product, including product efficacy, ease of
use, price, availability of payor coverage and adequate third-party reimbursement for procedures using the product, customer support
services for technical-, clinical- and reimbursement-related matters and customer preference for, and loyalty to, particular products
or a particular manufacturer. We expect competition to remain intense as competitors introduce additional competing products and
enhancements to their existing products, and continue expanding into geographic markets where we currently operate or plan to expand.
Product introductions or enhancements by competitors, which may have advanced technology, better features or lower pricing, may
make our products obsolete or less competitive. As a result, we will be required to devote continued efforts and financial resources
to develop and commercialize new products and enhancements to our existing products, deliver cost-effective clinical outcomes,
manage our costs and expand our geographic reach.
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Many of our current
and potential competitors have longer operating histories and substantially greater financial, technical, marketing, sales, distribution
and other resources than we do, which may prevent us from achieving significant market penetration or improved operating results.
Certain competitors’ products, such as competitors of SimpliDerm, are subject to a simpler reimbursement process than are
our products. Competitors may also be able to leverage their market share and other resources to set prices at a level below that
which is profitable for us. These companies may also enjoy other competitive advantages, including, without limitation:
• greater company, product and brand recognition;
• better quality and greater volume of clinical data;
• more established sales, marketing and worldwide distribution networks;
• better product support and service;
• superior product safety, reliability and durability;
• more effective pricing and revenue strategies; and
• more effective clinical training programs.
Our ability to achieve
and maintain profitability will depend, in part, on our ability to develop or acquire proprietary products that reach the market
in a timely manner, receive adequate coverage and reimbursement for procedures using our products, and are safer and more effective
than their alternatives, as well as our ability to otherwise compete effectively on the factors listed above. If we are unable
to do so, our sales and/or margins will decrease, which could have a material adverse effect on our business, financial condition
and results of operations.
Pricing
pressure as a result of cost-containment efforts of our customers, purchasing groups, third-party payors and governmental organizations
could adversely affect our sales and profitability.
Medical technology
companies, healthcare systems and group purchasing organizations (“GPOs”) have intensified competitive pricing pressure
as a result of industry trends and new technologies. Rising healthcare costs have resulted in numerous cost reform initiatives
by legislators, regulators and third-party payors. This cost reform has triggered a consolidation trend in the healthcare industry
to aggregate purchasing power and, as a result, purchasing decisions are increasingly shifting to hospitals, integrated delivery
networks (“IDNs”) and other hospital groups, and away from individual surgeons and physicians. Many existing and potential
facility customers for our products within the United States are members of GPOs and IDNs, including accountable care organizations
or public-based purchasing organizations, and our business is partly dependent on contracts with these organizations. Purchases
of our products can be contracted under national tenders or with larger hospital GPOs. GPOs and IDNs negotiate pricing arrangements
with healthcare product manufacturers and distributors and offer the negotiated prices to affiliated hospitals and other members.
GPOs and IDNs typically award contracts on a category-by-category basis through a competitive bidding process and, at any given
time, we are typically in various stages of responding to bids and negotiating and renewing GPO and IDN agreements. Bids are generally
solicited from multiple manufacturers or service providers with the intention of obtaining lower pricing. Due to the highly competitive
nature of the bidding process and the GPO and IDN contracting processes in the United States, we may not be able to obtain or maintain
contract positions with major GPOs and IDNs across our product portfolio. Furthermore, GPO and IDN contracts are typically terminable
without cause upon 60 to 90 days’ notice. In addition, while having a contract with a major purchaser for a given product
category can facilitate sales, there can be no guarantee that sales volumes for those products will be maintained. For example,
GPOs and IDNs are increasingly awarding contracts to multiple suppliers for the same product category and, even when we are the
sole contracted supplier of a GPO or IDN for a certain product category, members of the GPO or IDN are generally free to purchase
from other suppliers. If we are unable to maintain and renew our contracts with our current GPO and IDN customers and negotiate
contracts with new customers on favorable terms, or if sales volumes under these agreements decline, our business, financial condition
and results of operations could be materially and adversely affected.
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In addition, most
of our customers purchase our products directly and then bill third-party payors for procedures using those products. Because there
is typically no separate reimbursement for supplies used in surgical procedures, the additional cost associated with the use of
our products can affect the profit margin of the hospital or surgery center where the procedure is performed. Some of our target
customers may be unwilling to adopt our products in light of the additional associated cost or may negotiate for lower pricing.
Further, any decline in the amount payors are willing to reimburse our customers for procedures using our products, including those
as a result of healthcare reform initiatives, could make it difficult for existing customers to continue using or to adopt our
products and could create additional pricing pressure for us. In addition to these competitive forces, we continue to see pricing
pressure as hospitals introduce new pricing structures into their contracts and agreements, including fixed price formulas, capitated
pricing and episodic or bundled payments intended to contain healthcare costs. If we are forced to lower the price we charge for
our products, our margins will decrease, which could impair our ability to grow our business and have a material adverse effect
on our business, financial condition and results of operations and impair our ability to grow our business.
Outside the United
States, centralized governmental healthcare authorities may exert pricing pressures in an effort to lower healthcare costs. Implementation
of healthcare reforms and competitive bidding contract tenders may limit the price or the level at which reimbursement is provided
for our products and adversely affect both our pricing flexibility and the demand for our products. Healthcare providers may respond
to such cost-containment pressures by substituting lower-cost products or other therapies for our products. Our failure to offer
acceptable prices to these customers could adversely affect our sales and profitability in these markets.
We expect that market
demand, government regulation, third-party coverage and reimbursement policies and societal pressures will continue to change the
healthcare industry worldwide, resulting in further business consolidations and alliances among our customers, which may exert
further downward pressure on the prices for our products.
The processing
of human and porcine tissue for our products is technically complex, requiring high levels of quality control and precision, which
subjects us to increased production risks.
We manufacture our
human and porcine tissue products using technically complex processes requiring specialized facilities, highly specific raw materials,
skill and diligence by our personnel and other production constraints. The complexity of these processes, as well as strict company
and government standards for the manufacture and storage of our products, subjects us to production risks. In addition to ongoing
production risks, process deviations or unanticipated effects of approved process changes may result in non-compliance with regulatory
requirements, including stability requirements or specifications. For example, our bone allograft products FiberCel, ViBone and
OsteGro V, must be shipped and maintained within a specified temperature range. If environmental conditions deviate from that range,
our products’ remaining shelf-lives could be impaired or their safety and efficacy could be adversely affected, making them
unsuitable for use. The occurrence of this or any other actual or suspected production or distribution problem can lead to lost
inventories, customer returns and, in some cases, recalls, with consequential damage to our reputation and customer relationships
and the risk of product liability. The investigation and remediation of any potential or identified problems can cause production
delays and result in substantial additional expenses and lost revenue. In addition, we may experience difficulties in scaling up
processing and production of our human and porcine tissue products, including problems related to yields, quality control and assurance,
tissue availability, adequacy of control policies and procedures and availability of skilled personnel. Furthermore, developing
and maintaining our production capabilities has required, and will continue to require, the investment of significant resources,
and we cannot guarantee that we will be able to achieve economies of scale. If we are unable to process and produce our human tissue
products on a timely basis, at acceptable quality and costs and in sufficient quantities, or if we experience technological problems,
delays in production, failure in the storage of our products or other loss of supply, our business would be materially and adversely
affected.
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Performance
issues, service interruptions or price increases by our shipping carriers could adversely affect our business, harm our reputation
and impair our ability to provide our products on a timely basis or at all.
Expedited, reliable
shipping is essential to our operations. We rely heavily on providers of transport services for reliable, timely and secure point-to-point
transport of our products to our customers and for tracking of these shipments. Should a carrier encounter delivery performance
issues such as loss, delays, damage or destruction of any of our products, it would be costly to replace these products in a timely
manner and such occurrences may damage our reputation and lead to decreased demand for our products and increased cost and expense
to our business. This risk is particularly high with respect to FiberCel, ViBone and OsteGro V, which must be shipped and maintained
within a specified temperature range. In addition, any significant increase in shipping rates could adversely affect our operating
margins and results of operations. Similarly, strikes, severe weather, natural disasters, equipment malfunctions or other service
interruptions affecting the delivery services we use, would impair our ability to process orders for our products on a timely basis
or at all, which could have a material adverse effect on our business, financial condition and results of operations.
If our facilities
are damaged or become inoperable, we will be unable to continue to research, develop and supply our products and, as a result,
there will be an adverse effect on our business until we are able to secure new facilities and rebuild our inventory.
We do not have redundant
facilities. We perform most of our research and development activity and manufacture our tissue-based products at our facility
in Richmond, California. The SIS ECM biomaterial used in our medical device products are manufactured by Cook Biotech at their
facility in West Lafayette, Indiana and converted to a finished product at our facility in Roswell, Georgia. Regulatory approvals
of our products are limited to one or more specifically approved manufacturing facilities. As a result, if we fail to produce enough
of a product at a facility, or if any of our production facilities were to be shut down or otherwise become unavailable for any
reason, finding alternative manufacturing capabilities and obtaining the necessary regulatory approvals would require a considerable
amount of time and expense and would cause a significant disruption in service to our customers.
Disruption to our
facilities could arise for a variety of reasons, including technical, labor or other difficulties, equipment malfunction, contamination
due to a COVID-19 infection or otherwise, the failure of our employees to follow specific protocols and procedures, the destruction
of, or damage to, any facility (as a result of a natural or man-made disaster, including, but not limited to, a tornado, flood,
fire, power outage or other event), quality control issues or other reasons. Any disruption in the operation of our facilities
as a result of any of the above could impair our product development and commercialization efforts and result in lost sales, lost
customers and harm to our reputation, any of which would negatively impact our growth prospects and profitability and have a material
adverse effect on our business, financial condition and results of operations. In addition, certain of these events, such as natural
or man-made disasters, would cause us to incur additional losses, including the time and expense required to repair and/or replace
our equipment and to rebuild our inventory. Although we possess insurance for damage to our property and the disruption of our
business, this insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us
on acceptable terms or at all.
Because
we depend upon a limited number of third-party suppliers and manufacturers and, in certain cases, exclusive suppliers for products
essential to our business, we may incur significant product development costs and experience material delivery delays if we lose
any significant supplier, which could materially and adversely affect our business, financial condition and results of operations.
We obtain some of
our raw materials from a limited group of suppliers and rely on a single supplier to source the SIS ECM biomaterial used to manufacture
CanGaroo and our cardiovascular products for reasons of quality assurance, cost-effectiveness, availability or constraints resulting
from regulatory requirements. For us to be successful, our suppliers must be able to provide us with products and components in
substantial quantities, in compliance with regulatory requirements, in accordance with agreed upon specifications, at acceptable
costs and on a timely basis. Our efforts to maintain a continuity of supply and high quality and reliability may not be successful
on a timely basis or at all. Manufacturing disruptions experienced by our suppliers may jeopardize our supply of finished products.
Due to the stringent regulations and requirements of the FDA and other similar non-U.S. regulatory agencies regarding the manufacture
of our products, we may not be able to quickly establish additional or replacement sources for certain raw materials. A change
in suppliers could require significant effort or investment in circumstances where the items supplied are integral to product performance
or incorporate unique technology. Transitioning to a new supplier could be time-consuming and expensive, may result in interruptions
in our operations and product delivery, could affect the performance specifications of our products or could require that we modify
the design of those systems.
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A reduction or interruption
in manufacturing, or an inability to secure alternative sources of raw materials or components, could have a material and adverse
effect on our business, financial condition, results of operations and cash flows. One or more of our suppliers may refuse to extend
us credit with respect to our purchasing or leasing of equipment, supplies, products or components, or may only agree to extend
us credit on significantly less favorable terms or subject to more onerous conditions. This could significantly disrupt our ability
to purchase or lease required equipment, supplies, products and components in a cost-effective and timely manner, and could have
a material adverse effect on our business, financial condition and results of operations. Any casualty, natural disaster or other
disruption of any of our sole-source suppliers’ operations, for example due to a COVID-19 infection of employees of the supplier,
or any unexpected loss of any existing exclusive supply contract, could have a material adverse effect on our business, financial
condition and results of operations. In addition, if a change in manufacturer results in a significant change to any product, a
new 510(k) clearance from the FDA or similar international regulatory authorization may be necessary before we implement the change,
which could cause substantial delays.
Certain
of our products are dependent on the availability of tissue from human donors, and any disruption in supply could adversely affect
our business, financial condition and results of operations.
The products we manufacture
for the orthopedic/spinal repair and soft tissue reconstruction markets, as well as our contract manufacturing products, require
that we obtain human tissue. The success of our business depends, in part, on the availability of tissue from human donors. Any
inability to obtain tissue from our sources will interfere with our ability to effectively meet demand for these products. The
recovery of human tissue for our products is very labor-intensive, and it is, therefore, difficult to maintain a steady supply
stream. In addition, the availability of acceptable donors is relatively limited and may be impacted by regulatory changes, general
public opinion of the donation process and the reputation of our company and the third-party procurement firms with which we partner
to manage the donation process. Media reports or other negative publicity concerning both improper methods of tissue recovery from
donors and disease transmission from donated tissue, including bones and dermis, may limit widespread acceptance of our products.
Unfavorable reports of improper or illegal tissue recovery practices, both in the United States and internationally, as well as
incidents of improperly processed tissue leading to transmission of disease, may broadly affect the rate of future tissue donation
and market acceptance of allograft technologies and donated tissue use. Potential patients may not be able to distinguish our products,
technologies and tissue recovery and processing procedures from others engaged in tissue recovery. In addition, unfavorable reports
about us or any of our third-party procurement firms may make families of potential donors or donors themselves, from whom we are
required to obtain consent before processing tissue, reluctant to agree to donate tissue to for-profit tissue processors. Any disruption
in the supply of any human tissue component could materially harm our ability to manufacture our products until a new source of
supply, if any, could be found. We may be unable to find a sufficient alternative supply channel within a reasonable period of
time, on commercially reasonable terms or at all, which would have a material adverse effect on our business, financial condition
and results of operations.
Increased
prices for raw materials used in our products could adversely affect our business, financial condition and results of operations.
Our profitability
is affected by the prices of the raw materials used in the manufacture of our products. These prices may fluctuate based on a number
of factors beyond our control, including changes in supply and demand, general economic conditions, labor costs, delivery costs,
competition, import duties, excises and other indirect taxes, currency exchange rates and government regulation. Due to the highly
competitive nature of the healthcare industry and the cost containment efforts of our customers and third-party payors, we may
be unable to pass along cost increases for key components or raw materials through higher prices to our customers. If the cost
of key components or raw materials increases, and we are unable to fully recover these increased costs through price increases
or offset these increases through other cost reductions, we could experience lower margins and profitability. Significant increases
in the prices of raw materials that cannot be recovered through productivity gains, price increases or other methods could adversely
affect our business, financial condition and results of operations.
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If we are
not able to accurately forecast demand for our products and manage our inventory, our margins could decrease and we could lose
sales, either of which could have a material adverse effect on our business, financial condition and results of operations.
While we must maintain
sufficient inventory levels to operate our business successfully and meet customer demand for our products, we must be careful
to avoid amassing excess inventory. To ensure adequate inventory supply, we must forecast inventory needs and place orders with
our suppliers based on our estimates of future demand for our products. Demand for our products can change rapidly and unexpectedly,
including during the time between when raw materials are ordered from our suppliers and the finished product is offered for sale.
Our ability to accurately forecast demand for our products could be negatively affected by a number of factors, many of which are
beyond our control, including our failure to accurately manage our expansion strategy, product introductions by competitors, an
increase or decrease in customer demand for our products or for products of our competitors, our failure to accurately forecast
customer acceptance of new products, unanticipated changes in general market conditions, reimbursement or regulatory matters and
weakening of economic conditions. Inventory levels that exceed the demand for our products may result in inventory write-downs
or write-offs, which would adversely affect our gross margins. For example, in 2019, our launch of SimpliDerm resulted in reduced
demand for certain of our other dermis inventory and resulted in inventory write-downs. Conversely, if we underestimate demand
for our products, additional supplies of raw materials or additional manufacturing capacity may not be available when required
on terms that are acceptable to us or at all, and suppliers or our third-party manufacturer may not be able to allocate sufficient
capacity in order to meet our increased requirements. As a result, we may not be able to meet customer demand for our products,
resulting in lost sales and potential damage to our reputation and customer relationships, any of which would adversely affect
our business, financial condition and results of operations.
In addition, while
we seek to maintain sufficient levels of inventory in order to protect ourselves from supply interruptions, our products generally