# AVITA Medical, Inc. (RCEL) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from AVITA Medical, Inc.'s 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1762303/000095017025020026/rcel-20241231.htm
Accession: 0000950170-25-020026
Filing date: 2025-02-13
Report date: 2024-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/RCEL/
All MD&A years: /company/RCEL/mda/
Previous year: /company/RCEL/mda/fy2023/ (FY 2023)
Next year: /company/RCEL/mda/fy2025/ (FY 2025)

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

Objective

The purpose of this Management's Discussion and Analysis is to better allow our investors to understand and view our company from management's perspective. We are providing an overview of our business and strategy including a discussion of our financial condition and results of operations. The following discussion and analysis of our financial condition and results of operations for the years-ended December 31, 2024 and 2023, should be read in conjunction with our consolidated financial statements and related notes included in this Annual Report.

Overview

AVITA Medical, Inc. (“we”, “our”, “us”) is a leading therapeutic acute wound care company delivering transformative solutions. Our technologies are designed to optimize skin restoration procedures, effectively accelerating patient healing and recovery. Our solutions improve the healing outcomes for patients with traumatic injuries and surgical repairs, addressing critical healing needs that arise from unpredictable and life-changing events. At the forefront of our portfolio is our patented and proprietary RECELL® System (“RECELL System” or “RECELL”), approved by the U.S. Food & Drug Administration (the “FDA”) for the treatment of thermal burn wounds and full-thickness skin defects, and for repigmentation of stable depigmented vitiligo lesions. RECELL harnesses the regenerative properties of a patient’s own skin to create an autologous skin cell suspension, Spray-On Skin™Cells, delivering a transformative solution at the point of care. This breakthrough technology serves as the catalyst for a new treatment paradigm enabling improved clinical outcomes. In the United States, we also hold the rights to market, sell, and distribute PermeaDerm®, a biosynthetic wound matrix, under the terms of an exclusive multi-year distribution agreement (the “Stedical Agreement”) with Stedical Scientific, Inc. (“Stedical”). We also entered into an exclusive multi-year development and distribution agreement with Collagen Matrix, Inc. dba Regenity Biosciences (“Regenity”). Regenity will manufacture and supply Cohealyx™, an AVITA Medical-branded, FDA-cleared, collagen-based dermal matrix. Under the agreement, we will hold the exclusive rights to market, sell, and distribute Cohealyx in the U.S., with potential expansion into the European Union, Australia, and Japan.

The single-use RECELL Autologous Cell Harvesting Device (“RECELL Ease-of-Use” or “RECELL EOU”) is approved by the FDA for the treatment of thermal burn wounds and full-thickness skin defects, and repigmentation of stable depigmented vitiligo lesions. Our next-generation device, RECELL GO™ Autologous Cell Harvesting Device (“RECELL GO”), is FDA-approved to treat thermal burn wounds and full-thickness skin defects. RECELL GO introduces enhanced features that streamline the preparation of Spray-On Skin Cells and improves workflow efficiency in the operating room. It consists of two components: the RECELL GO Processing Device (the “RPD”) and the RECELL GO Preparation Kit (the “RPK”). The RPD is a multi-use, AC-powered device that controls the RPK. The RPK is a single-use cartridge that contains the RECELL Enzyme™. The RPD regulates the pressure applied to disaggregate the cells and precisely controls the incubation time of the RECELL Enzyme to optimize cell yield and promote cell viability.

We are focused on becoming the leading provider of therapeutic acute wound care solutions addressing unmet medical needs in burn injuries and full-thickness skin defects. We will continue to drive commercial revenue growth to generate free cash flow and achieve operating profit. To achieve these objectives, we intend to:

•
Become the standard of care in the U.S. burn care market by increasing penetration and adoption in burn centers with our recently FDA-approved RECELL GO

•
Expand adoption of RECELL technology for the treatment of full-thickness skin defects in the U.S. with RECELL GO

•
Launch RECELL GO mini, which is designed to address smaller wounds, following FDA approval in December of 2024

•
Launch Cohealyx™ after FDA 510(k) clearance received in December of 2024

•
Expand our global presence within Australia, the European Union, Japan, and the U.K.through the exclusive use of third-party distributors

•
Continue to grow commercial activities in Japan through our partnership with COSMOTEC Company, Ltd (“COSMOTEC”) by leveraging our current Pharmaceuticals and Medical Devices Act approval for RECELL with an indication in burns

•
Continue to pursue business development opportunities that are complementary to our core RECELL technology and/or our targeted markets, such as our exclusive distribution agreements with Stedical and Regenity

•
Expect post-market study, TONE, and the health care economics study, both related to our vitiligo initiative to be published in early 2025

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Business Environment and Current Trends

The macroeconomic environment may have unexpected adverse effects on businesses and healthcare institutions globally that may negatively impact our consolidated operating results. There remains significant uncertainty in the current macroeconomic environment due to factors including supply chain shortages, increased cost of healthcare, changes to inflation rates, a competitive labor market, and other related global economic conditions and geopolitical conditions. If these conditions continue or worsen, they could adversely impact our future operating results.

Changes in reimbursement rates by third party payors may place additional financial pressure on hospitals and the broader healthcare system. Healthcare institutions may take actions to mitigate any persistent pressures on their budgets and such actions could impact the future demand for our products. Geopolitical conditions may also impact our operations. Although we do not have operations in Russia, Ukraine or in the Middle East, the continuation of the military conflicts in these regions and/or an escalation of the conflicts beyond their current scope may further weaken the global economy that could result in additional inflationary pressures or supply chain constraints.

Recent Developments

On January 10, 2024, we entered into an exclusive multi-year distribution agreement with Stedical to commercialize PermeaDerm® Biosynthetic Wound Matrix (“PermeaDerm”) in the United States. PermeaDerm is cleared by the FDA as a transparent matrix for use in the treatment of a variety of wound types until healing is achieved. Under the terms of the Stedical Agreement, we hold the exclusive rights to market, sell, and distribute PermeaDerm products, including any future enhancements or modifications, within the United States. The initial term is for five years, with the option to renew for an additional five years, contingent upon meeting certain minimum requirements.

On February 16, 2024, we amended our contract with the Biomedical Advanced Research and Development Authority (“BARDA”), under the Assistant Secretary for Preparedness and Response, within the U.S. Department of Health and Human Services, dated September 29, 2015, to extend the term through September 28, 2025. Under the modified contract, BARDA will have access to our RECELL inventory in the event of a national emergency. In the case of a national emergency, BARDA will pay for RECELL devices at a reduced price for the first 1,000 units and will then pay retail price for any additional units. No additional inventory build will be required as part of this modification as we have sufficient inventory in stock to fulfill this requirement. BARDA will pay us approximately $333,000 in maintenance fees over the term of the contract to ensure its first right of access to our RECELL inventory.

On May 29, 2024, the FDA approved our premarket approval (“PMA”) supplement for RECELL GO, our next generation autologous cell harvesting device, to treat thermal burn wounds and full-thickness skin defects. Following this approval, we shipped the first RECELL GO order on May 30, 2024, to accommodate the first case for its use on May 31, 2024.

On June 28, 2024, we submitted a PMA supplement for RECELL GO mini, which is designed to address small wounds up to 480 cm2. This version retains the same multi-use processing units as RECELL GO but features a smaller cartridge designed for the smaller donor skin samples needed for smaller wounds. This submission maintains the FDA Breakthrough Device designation from predecessor devices, providing a prioritized 180-day review period.

On July 31, 2024, we entered into a multi-year exclusive development and distribution agreement with Regenity to market, sell, and distribute Cohealyx, an AVITA-Medical branded collagen-based dermal matrix in the U.S., with the potential to commercialize the product in the European Union, Japan, and Australia.

On November 12, 2024, we entered into a partnership with Revolution Surgical Pty Ltd, to market and distribute the RECELL System in Australia and New Zealand.

On December 19, 2024, the FDA granted 510(k) clearance for Cohealyx. We plan to develop clinical data for Cohealyx in early 2025 to build on preclinical success and support the product’s full commercial launch. The post-market clinical study will assess Cohealyx’s performance in real-world settings, focusing on clinical efficacy and cost savings in the treatment of full-thickness wounds and burns. In the U.S., we expect to launch full commercialization efforts in the beginning of the second quarter of 2025.

On December 23, 2024, the FDA approved RECELL GO mini. We expect RECELL GO mini to serve as a growth driver within the broader RECELL GO platform, further advancing our strategy to expand our impact on patient care. Launch will begin with trauma and burn centers that currently treat smaller wounds during the first quarter of 2025.

31

Results of Operations

Year-Ended December 31, 2024, compared to the Year-Ended December 31, 2023

The table below summarizes the results of our operations for each of the periods presented (in thousands).

[[GREPCENT_TABLE]]
[["","","Year Ended"],["Statement of Operations Data:","","December 31, 2024","","December 31, 2023","","","$ Change","","","% Change"],["Sales revenue","","$","63,893","","$","50,143","","","","13,750","","","","27.4","%"],["Lease revenue","","","358","","","-","","","","358","","","","100.0","%"],["Total revenues","","","64,251","","","50,143","","","","14,108","","","","28.1","%"],["Cost of sales","","","(9,094",")","","(7,780",")","","","(1,314",")","","","(16.9",")%"],["Gross profit","","","55,157","","","42,363","","","","12,794","","","","30.2","%"],["BARDA income","","","-","","","1,428","","","","(1,428",")","","","(100.0",")%"],["Operating expenses:"],["Sales and marketing","","","(58,195",")","","(37,291",")","","","(20,904",")","","","(56.1",")%"],["General and administrative","","","(33,195",")","","(28,334",")","","","(4,861",")","","","(17.2",")%"],["Research and development","","","(20,360",")","","(20,821",")","","","461","","","","2.2","%"],["Total operating expenses","","","(111,750",")","","(86,446",")","","","(25,304",")","","","(29.3",")%"],["Operating loss","","","(56,593",")","","(42,655",")","","","(13,938",")","","","(32.7",")%"],["Interest expense","","","(5,361",")","","(1,143",")","","","(4,218",")","","*nm"],["Other income, net","","","163","","","8,483","","","","(8,320",")","","","(98.1",")%"],["Loss before income taxes","","","(61,791",")","","(35,315",")","","","(26,476",")","","","(75.0",")%"],["Income tax expense","","","(54",")","","(66",")","","","12","","","","(18.2",")%"],["Net loss","","$","(61,845",")","$","(35,381",")","","","(26,464",")","","","(74.8",")%"]]
[[/GREPCENT_TABLE]]

*nm = not meaningful

Total revenues increased by 28%, or $14.1 million, to $64.3 million, compared to $50.1 million in the year-ended December 31, 2023. Our commercial revenue was $64.0 million for the year-ended December 31, 2024, an increase of $14.2 million, or 29%, compared to $49.8 million in the year-ended December 31, 2023. The growth in commercial revenues was largely driven by deeper penetration within customer accounts and new accounts for full-thickness skin defects.

Gross profit margin was 85.8% compared to 84.5% in the corresponding period in the prior year. This increase was largely driven by increases in both revenues and the volume of production.

BARDA income decreased to zero, compared to $1.4 million in the corresponding period in the prior year due to the ending of reimbursable clinical trials. BARDA income in the prior year consisted of funding received from the Biomedical Advanced Research and Development Authority, under the Assistant Secretary for Preparedness and Response, within the U.S. Department of Health and Human Services, under ongoing USG Contract No. HHSO100201500028C.

Total operating expenses increased by 29% or $25.3 million to $111.8 million, compared with $86.4 million in the year-ended December 31, 2023.

Sales and marketing expenses increased by 56%, or $20.9 million, to $58.2 million, compared to $37.3 million in the year-ended December 31, 2023. Higher costs in the current year were related to increases in salaries and benefits and personnel expenses of approximately $8.7 million, commissions expense of $7.4 million, stock-based compensation expense of $1.8 million, $1.2 million in professional fees, $0.6 million in other selling expenses, $0.6 million in travel expenses, and $0.2 million in rent expense, plus $0.4 million in all other expenses, net. The increase in salaries and benefits, personnel-related expenses, stock-based compensation, travel expenses, and other selling expenses are due to the expansion of the sales force to support our growing commercial capabilities. Higher commissions were directly associated with the increase in revenues. The increase in professional fees are primarily due to consulting expenses related to our foreign distribution network. The increase in rent is due to increased office space to accommodate our growing operations.

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General and administrative expenses increased by 17%, or $4.9 million, to $33.1 million, compared to $28.3 million in the year-ended December 31, 2023. The increase was attributable to increases in salaries and benefits and personnel expenses of $2.9 million, stock-based compensation of $2.4 million, and rent expense of $0.5 million, partially offset by lower deferred compensation expenses of $0.4 million, lower insurance expense of $0.3 million plus lower other corporate expenses, net of $0.3 million. The increase in salaries and benefits and stock-based compensation are primarily attributable to headcount growth to support the expansion of our business. The decrease in the deferred compensation expense is driven by a lower stock price used to calculate the deferred compensation liability for the deferred restricted stock awards.

Research and development expenses decreased by 2%, or $0.5 million, to $20.3 million, compared to $20.8 million in the year-ended December 31, 2023. The decrease in research and development expenses is primarily due to lower professional fees and development expenses of approximately $4.0 million related to RECELL GO and full-thickness skin defects plus lower other development expenses, net of $0.3 million, partially offset by an increase in salaries and benefits of $2.8 million, an increase in stock-based compensation of $0.7 million, and an increase of $0.3 million in travel expenses, primarily due to the increase in headcount resulting from the deployment of Medical Science Liaisons.

Interest expense increased approximately $4.2 million in comparison to the prior year due to the interest expense related to the long-term debt as part of the OrbiMed Credit Agreement for the full year, for an aggregate principal amount owed of $40.0 million.

Other income, net decreased by $8.3 million to $0.2 million. In the current year, other income, net consisted of $2.7 million in income related to our investments and $0.3 million in other gains, net offset by non-cash charges of $2.5 million due to the change in fair value of the debt and $0.3 million due to the change in fair value of warrant liability. In the prior period, income consisted of $3.1 million in income from our investment activities, dissolution of certain foreign subsidiaries that resulted in a $9.4 million gain, plus other gains, net of $0.3 million, partially offset by a loss on debt issuance of $1.2 million, debt issuance costs of $0.8 million and the change of fair value for our debt of $1.6 million and change in fair value of warrants for $0.7 million.

Net loss increased by $26.5 million, to $61.8 million, over the $35.4 million recognized in the year ended December 31, 2023. The increase in net loss was driven by the higher operating expenses and lower other income, net, partially offset by higher gross profit as described above.

Year-Ended December 31, 2023, compared to the Year-Ended December 31, 2022

The table below summarizes the results of our operations for each of the periods presented (in thousands).

[[GREPCENT_TABLE]]
[["","","Year-Ended","","Year-Ended","","","$","","","%"],["Statement of Operations Data:","","December 31, 2023","","December 31, 2022","","","Change","","","Change"],["Revenues","","$","50,143","","$","34,421","","","","15,722","","","","46","%"],["Cost of sales","","","(7,780",")","","(6,041",")","","","(1,739",")","","","(29",")%"],["Gross profit","","","42,363","","","28,380","","","","13,983","","","","49","%"],["BARDA income","","","1,428","","","3,215","","","","(1,787",")","","","(56",")%"],["Operating expenses:"],["Sales and marketing","","","(37,291",")","","(21,913",")","","","(15,378",")","","","(70",")%"],["General and administrative","","","(28,334",")","","(23,330",")","","","(5,004",")","","","(21",")%"],["Research and development","","","(20,821",")","","(13,857",")","","","(6,964",")","","","(50",")%"],["Total operating expenses","","","(86,446",")","","(59,100",")","","","(27,346",")","","","(46",")%"],["Operating loss","","","(42,655",")","","(27,505",")","","","(15,150",")","","","(55",")%"],["Interest expense","","","(1,143",")","","(16",")","","","(1,127",")","","*nm"],["Other income, net","","","8,483","","","892","","","","7,591","","","*nm"],["Loss before income taxes","","","(35,315",")","","(26,629",")","","","(8,686",")","","","(33",")%"],["Income tax expense","","","(66",")","","(36",")","","","(30",")","","","(83",")%"],["Net loss","","$","(35,381",")","$","(26,665",")","","","(8,716",")","","","(33",")%"]]
[[/GREPCENT_TABLE]]

*nm = not meaningful

33

Total net revenues increased by 46%, or $15.7 million, to $50.1 million, compared to $34.4 million in the year-ended December 31, 2022. Our commercial revenue, which excludes BARDA revenue, was $49.8 million for the year-ended December 31, 2023, an increase of $15.8 million, or 46%, compared to $34 million in the year-ended December 31, 2022. The growth in commercial revenues was largely driven by deeper penetration within individual customer accounts and the full-thickness skin defects launch along with the commencement of commercial sales with our partner COSMOTEC in Japan.

Gross profit margin increased by 2% to 84.5% compared to 82.4% in the year-ended December 31, 2022. The increase in gross profit margin was largely driven by higher production along with lower shipping costs.

BARDA income consisted of funding from BARDA, under the Assistant Secretary for Preparedness and Response, within the U.S. Department of Health and Human Services, under ongoing USG Contract No. HHSO100201500028C. BARDA income decreased 56% or $1.8 million to $1.4 million, compared to $3.2 million in the year-ended December 31, 2022, due to reimbursable clinical trials winding down.

Total operating expenses increased by 46% or $27.3 million to $86.4 million, compared with $59.1 million in the year-ended December 31, 2022.

Sales and marketing expenses increased by 70%, or $15.4 million, to $37.3 million, compared to $21.9 million incurred in the year-ended December 31, 2022. Higher costs in the current year were primarily attributed to higher salaries and benefits, commissions, recruitment fees and travel costs. The increase in salaries and benefits and recruitment fees were due to the preparation of the commercial launch of full-thickness skin defects in June 2023. Higher commissions and travel costs were directly associated with the increase in revenues.

General and administrative expenses increased by 21%, or $5.0 million, to $28.3 million, compared to $23.3 million incurred in the year-ended December 31, 2022. The increase was attributable to salaries and benefits, deferred compensation expense, stock-based compensation, and severance costs. Higher salary and benefits are driven by the increase in headcount. The increase in deferred compensation expense was driven by our deferred compensation liability which generally tracks the movements in the stock market. Severance costs in the current year were due to the termination of three former executive officers, partially offset by the termination of a former executive officer in the prior year.

Research and development expenses increased by 50%, or $6.9 million, to $20.8 million, compared to $13.9 million incurred in the year-ended December 31, 2022. The increase was primarily due to higher clinical trial costs associated with the TONE study as well as other research and development costs associated with furthering our pipeline, and the development of the next generation RECELL GO for preparation of Spray-On Skin Cells, which resulted in a PMA submission in June 2023. We also had increased expenses associated with building out a team of Medical Science Liaisons in support of the new full-thickness skin defects indication.

Interest expense increased by $1.1 million due to the new Credit Agreement entered into with OrbiMed Advisors, LLC on October 18, 2023.

Other income, net increased by $7.6 million in the current year primarily due to an increase of $2.1 million in income from our investment activities, wind down of certain foreign subsidiaries that resulted in a $9.4 million gain, partially offset by a loss on debt issuance of $1.2 million, debt issuance costs of $0.8 million and the change of fair value for our debt of $1.6 million and change in fair value of warrants for $0.7 million. We had an increase of approximately $2.1 million in interest income due to higher investment yields. By the end of the fourth quarter of 2023 the business activities of AVITA Medical Pty Limited, AVITA Medical Europe Limited, Visiomed Group Pty Ltd, C3 Operations Pty Ltd and Infamed Pty Ltd were essentially dissolved. As part of the liquidation the company recognized $9.4 million of non-cash foreign currency exchange gains associated with the elimination of the foreign subsidiaries. The gains were offset by expenses related to issuance of debt. We recognized approximately $1.2 million loss on debt issuance as the fair value of the debt and the warrants on the issuance date exceeded the proceeds received on October 18, 2023, the closing date. In addition, we incurred approximately $0.8 million in debt issuance costs. We also recognized $1.6 million and $0.7 million of non-cash charges due to the change in fair value of the debt and the warrant liability, respectively. As permitted under ASC 825, we elected the fair value option to account for the debt, and recorded the debt and warrants at fair value with changes in fair value recorded in the Consolidated Statements of Operations. Changes in fair value related to instrument specific credit risk for the debt are included in Other comprehensive income in the Consolidated Balance Sheets.

Net loss increased by $8.8 million, to $35.4 million, over the $26.7 million recognized in the year ended December 31, 2022. The increase in net loss was driven by the higher operating expenses, partially offset by higher revenues and the non-cash charges as described above.

34

Liquidity and Capital Resources

Overview

We expect to utilize cash reserves until U.S. sales of our products reach a level sufficient to fund ongoing operations. AVITA Medical has funded its research and development activities, and more recently its substantial investment in sales and marketing activities, through the issuance of debt. As of December 31, 2024, the Company had approximately $14.1 million in cash and cash equivalents and $21.8 million in marketable securities.

On October 18, 2023 (the “Closing Date”), the Company entered into a Credit Agreement (the “Credit Agreement”), by and between the Company, as borrower, and an affiliate of OrbiMed Advisors, LLC, as the lender and administrative agent (the “Lender”). The Credit Agreement provides for a five-year senior secured credit facility in an aggregate principal amount of up to $90.0 million (the “Loan Facility”), of which $40.0 million was borrowed on the Closing Date, less certain fees and expenses payable to or on behalf of the Lender. On November 7, 2024, the Lender and the Company mutually agreed to a third amendment (the “Third Amendment”) to the Credit Agreement. Under the terms of the Third Amendment and subject to the payment by the Company of a consent fee to the Lender, the Company and the Lender mutually agreed to (1) terminate two additional tranches of available debt in the aggregate amount of $50.0 million and (2) remove the trailing 12-month revenue covenant for the fourth quarter of 2024, which was set at $67.5 million. All revenue covenants for subsequent quarters remain in effect. The indebtedness under the Credit Agreement is secured by substantially all of our assets and will accrue interest at a rate equal to the greater of (a) forward-looking one-month term SOFR rate and (b) four percent (4%) per annum, plus eight percent (8%). In the event that the Company does not meet certain twelve-month trailing revenue targets at the end of future fiscal quarters, the outstanding balance of the loan must be repaid in equal quarterly installments of 5% of the funded amount through the maturity date. In addition, if we don’t maintain a minimum cash and cash equivalents balance at the end of each reporting period, we may have to repay amounts outstanding in full as a result of an event of default. The Credit Agreement contains representations, warranties and covenants that are customary for this type of agreement.

On the Closing Date, we issued to an affiliate of the Lender a warrant (the “Warrant”) to purchase up to 409,661 shares of our common stock, at an exercise price of $10.9847 per share, with a term of 10 years from the issuance date. The Warrant contains customary share adjustment provisions, as well as weighted average price protection in certain circumstances.

Subsequent to December 31, 2024, on February 13, 2025, we entered into a fourth amendment to the Credit Agreement (the “Fourth Amendment”), which amended the trailing 12-month revenue covenant to $73.0 million for the quarter ending March 31, 2025, to $78.0 million for the quarter ending June 30, 2025, to $84.0 million for the quarter ending September 30, 2025, to $92.0 million for the quarter ending December 31, 2025 and to $103.0 million for the quarter ending March 31, 2026. The $115.0 million revenue covenant for all subsequent quarters through the date of debt maturity remains in effect.

As a condition to the execution of the Fourth Amendment, we issued to the Lender a warrant to purchase up to 145,180 shares of our common stock, at an exercise price of $0.01 per share, with a term of 10 years from the issuance date.

As of the date these financial statements were issued, we believe we have sufficient cash reserves to fund operations for the next 12 months.

The following table summarizes our cash flows for the periods presented:

[[GREPCENT_TABLE]]
[["","","Year Ended"],["(in thousands)","","December 31, 2024","","","December 31, 2023"],["Net cash used in operations","","$","(48,939",")","","$","(38,011",")"],["Net cash provided by investing activities","","","37,363","","","","1,607"],["Net cash provided by financing activities","","","3,508","","","","40,374"],["Effect of foreign exchange rate on cash and cash equivalents","","","-","","","","(16",")"],["Net increase/(decrease) in cash and cash equivalents","","","(8,068",")","","","3,954"],["Cash and cash equivalents at beginning of the period","","","22,118","","","","18,164"],["Cash and cash equivalents at end of the period","","","14,050","","","","22,118"]]
[[/GREPCENT_TABLE]]

Net cash used in operating activities was $48.9 million and $38.0 million during the years-ended December 31, 2024 and 2023, respectively. The increase primarily resulted from higher operating costs, partially offset by increased revenues.

Net cash provided by investing activities was $37.4 million and $1.6 million during the years-ended December 31, 2024 and 2023, respectively. The increase in cash provided by investing activities is primarily attributable to lower cash outflows from purchases of marketable securities offset by lower cash inflows from maturities of marketable securities and an increase in cash

35

outflow for capital expenditures in the current year compared to the prior year. The increase in capital expenditures in the current year is primarily related to the leasehold improvement in the Ventura production facility to enhance manufacturing output and materials related to our RECELL GO RPDs.

Net cash provided by financing activities was $3.5 million and $40.4 million for the years-ended December 31, 2024 and 2023, respectively. The decrease in cash provided by financing activities was due to the issuance of debt in the prior year offset by increases in the proceeds from the exercises of stock options and purchases of stock under the ESPP in the current year.

Capital Management and Material Cash Requirements

We aim to manage capital to maintain optimal returns to stockholders and benefits for other stakeholders. We also aim to maintain a capital structure that ensures the lowest cost of capital available to us. We regularly review our capital structure and seek to take advantage of available opportunities to improve outcomes for us and our stockholders.

For the year-ended December 31, 2024, there were no dividends paid and we have no plans to commence the payment of dividends. On December 19, 2024, Regenity received 510(k) clearance, as such, we accrued $2.0 million to be paid in January 2025 and recorded $3.0 million in Contingent liability and $5.0 million in Intangible assets, net in the Consolidated Balance Sheets. Under the terms of our exclusive development and distribution agreement with Regenity, we have a further obligation to make up to an additional $3.0 million payment on or before January 4, 2026 to guarantee development and manufacturing capacity (and related resources), contingent on positive results of certain clinical studies. With the exception of the milestone payments related to our exclusive development and distribution agreement with Regenity, we do not have any other purchase commitments or long-term contractual obligations, except for lease obligations as of December 31, 2024. Refer to Note 7 of our Consolidated Financial Statements for further details on our lease obligations.

In addition, we have no material off-balance sheet arrangements (as defined in the applicable rules and regulations established by the SEC) that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. While we have no committed plans to issue further shares on the market, we will continue to assess market conditions.

Critical Accounting Policies and Estimates

The SEC defines “critical accounting policies” as those that require the application of management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.

The preparation of consolidated financial statements in conformity with U.S. Generally Accepted Accounting Practices, or U.S. GAAP, requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We base those estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates.

The following listing is not intended to be a comprehensive list of all of our accounting policies. Our significant accounting policies are described in Note 2 to our Consolidated Financial Statements contained elsewhere in this Annual Report. In many cases, the accounting treatment of a particular transaction is dictated by U.S. GAAP, with no need for our judgment in its application. There are also areas in which our judgment in selecting an available alternative would not produce a materially different result. We have identified the following as our critical accounting policies.

Revenue Recognition

We generate revenues primarily from:

•
The sale of RECELL EOU, RPK, and PermeaDerm products to hospitals, other treatment centers, and distributors.

•
Maintenance fee received from BARDA to ensure first right of access to our inventory. In the prior year, the Company recorded service revenue for the emergency preparedness services provided to BARDA.

•
Lease revenue for the RPD.

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Our sale of the RECELL EOU and PermeaDerm products are accounted for under ASC 606, Revenue from contracts with customers (“ASC 606”). Revenue for the RECELL GO system is disaggregated between two accounting standards: (1) ASC 606 for the RPK and (2) ASC 842, Leases (“ASC 842”) for the RPD. Revenues from BARDA are accounted for under ASC 606, and are included in Sales revenues within the Consolidated Statements of Operations.

To determine revenue recognition for arrangements that are within the scope of Topic 606, Revenue from contracts with customers, (“ASC 606”), we perform the following five steps:

1.
Identify the contract with a customer

2.
Identify the performance obligations

3.
Determine the transaction price

4.
Allocate the transaction price to the performance obligations

5.
Recognize revenue when/as performance obligation(s) are satisfied

In order for an arrangement to be considered a contract, it must be probable that we will collect the consideration to which it is entitled for goods or services to be transferred. We then assess the goods or services promised within the contract to determine whether each promised good or service is a performance obligation. Performance obligations are promises in a contract to transfer a distinct good or service to the customer that (i) the customer can benefit from on its own or together with other readily available resources, and (ii) is separately identifiable from other promises in the contract.

We determine the transaction price based on the amount of consideration we expect to receive for providing the promised goods or services in the contract. Consideration may be fixed, variable, or a combination of both. At contract inception for arrangements that include variable consideration, we estimate the probability and extent of consideration we expect to receive under the contract utilizing either the most likely amount method or expected amount method, whichever best estimates the amount expected to be received. We then consider any constraints on the variable consideration and include in the transaction price variable consideration to the extent it is deemed probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

When accounting for a contract that contains multiple performance obligations, we must develop judgmental assumptions to determine the estimated stand-alone selling price ("SSP") for each performance obligation identified in the contract. We utilize the observable SSP when available, which represents the price charged for the promised product or service when sold separately. When the SSP for our products or services are not directly observable, we determine the SSP using relevant information available and apply suitable estimation methods including, but not limited to, the cost-plus margin approach. We then allocate the transaction price to each performance obligation based on the relative SSP and recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) control is transferred to the customer and the performance obligation is satisfied.

Most of our contracts have a single performance obligation. As such, we recognize revenue when our customers obtain control of promised goods or services, in an amount that reflects the consideration which we expect to be entitled in exchange for those goods or services. Revenue is recognized net of volume discounts (variable consideration). For our contracts that have an original duration of one year or less, since contract inception and customer payment occur within the same period we do not consider the time value of money. Further, because of the short duration of these contracts, we have not disclosed the transaction price for the remaining performance obligations as of each reporting period or when we expect to recognize this revenue. We have further applied the practical expedient to exclude sales tax in the transaction price and expense contract acquisition costs such as commissions and shipping and handling expenses as incurred.

Revenue recognition for contracts that are within the scope of ASC 606 and ASC 842

We enter into contracts with customers where we receive consideration for the RPK and do not receive additional consideration for the RPD. As a result, judgment and analysis are required to determine the appropriate accounting, including: (i) whether the arrangement contains an embedded lease, and if so, whether such embedded lease is a sales-type lease or an operating lease, (ii) the amount of the total consideration, as well as variable consideration, (iii) the identification of the distinct performance obligations contained within the arrangement, (iv) how the arrangement consideration should be allocated to each performance obligation when multiple performance obligations exist, including the determination of standalone selling price, and (v) when to recognize revenue on the performance obligations.

For these contracts we consider the guidance under ASC 842 to determine if furnishing the RPD to the customer during the period of use establishes an embedded lease. To determine if the contract contains a lease, we evaluate the customer’s rights and ability to control the use of the underlying equipment throughout the contract term, including any equipment substitution rights

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retained by us. As the contract conveys the right to control the use of an identified asset for a period of time, the contract was determined to contain a lease. We then evaluated the lease classification based on the below:

•
Pursuant to ASC 842-30, we will classify a lease as a sales-type lease if: (i) the lease transfers ownership of the underlying asset to the lessee by the end of the lease term, (ii) the lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise, (iii) the lease term is for the major part of the remaining economic life of the underlying asset, (iv) the present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments equals or exceeds substantially all (90% or more) of the fair value of the underlying asset, or (v) the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term.

•
Pursuant to ASC 842-30, when none of the sales-type lease classification criteria are met, a lessor would classify the lease as a direct financing lease when both of the following criteria are met: (i) the present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments and/or any other third party unrelated to the lessor equals or exceeds substantially all (90% or more) of the fair value of the underlying asset and (ii) it is probable that the lessor will collect the lease payments plus any amount necessary to satisfy a residual value guarantee.

•
Pursuant to ASC 842-30, a lessor would classify a lease as an operating lease when none of the sales-type or direct financing lease classification criteria are met. Further, per ASC 842, a lessor is required to classify a lease with variable lease payments that do not depend on an index or rate as an operating lease at lease commencement if the lease would have been classified as a sales-type lease or a direct financing lease in accordance with the classification criteria of ASC 842 and the lessor would have otherwise recognized a loss at the lease commencement date.

In determining whether the lease components are related to a sales-type lease or an operating lease, we evaluate if the lease transfers ownership at the end of the lease term, the existence of purchase options, the lease term in relation to the economic life of the asset, if the lease payments exceed the fair value of the asset, and if the asset is of a specialized nature. We also evaluate if the lease results in a loss at the lease commencement date. As the lease term is for the major part of the economic life, the lease meets the classification criteria for sales-type lease. However, to determine if the contract results in a loss at the lease commencement date we evaluated the consideration in the contract. The consideration at lease commencement does not contain fixed payments, purchase options, penalty payments or residual value guarantees. The variable consideration is related to the sale of the RPK. As the variable lease payments are not dependent on an index or rate, the variable consideration is excluded from consideration at contract inception resulting in a loss at lease commencement. As such, we classify the lease as an operating lease.

The contracts contain a lease component, the RPD, and a non-lease component, the RPK. The lease component will be accounted for under ASC 842 and the non-lease component will be accounted for under ASC 606, as described above. In accordance with ASC 842, the consideration in the contract will be allocated to each separate lease component and non-lease component of the contract. The consideration is allocated to these lease and non-lease components based on the SSP (as described above for contracts within the scope of ASC 606). In accordance with ASC 842, variable lease payments will be recognized once the sale of the RPK occurs and control has transferred to the customer. Consideration will be allocated to the RPD and RPK based on the SSP. Consideration related to the RPD will be recognized as Lease revenue and consideration related to the RPK will be recognized as Sales revenues in accordance with guidance in ASC 606, as described above, upon transfer of control of the RPK, which generally occurs at the time the product is shipped or delivered depending on the customer's shipping terms.

Assets in our lease program are reported in Plant and equipment, net on our Consolidated Balance Sheets and are depreciated over the useful life of the RPD device's 200 uses, as indicated in the Instructions for Use that were approved by the FDA and expensed as Costs of goods sold in the Consolidated Statements of Operations. The RPD depreciation has a direct relationship to the number of RPK units sold. Based on customer usage, each purchase of an RPK unit results in a 1/200 depreciation to the RPD.

See Note 5 to our Consolidated Financial Statements included in this Annual Report for additional detail on revenue recognition.

Share-Based Compensation

We measure and recognize compensation expense on a graded-vesting method, for stock options and restricted stock units (“RSUs”), to employees, directors and consultants over the vesting period based on their grant date fair values. Compensation expense for performance-based awards is measured based on the number of shares ultimately expected to vest, estimated at each reporting date based on management’s expectations regarding the relevant performance criteria. We estimate the fair value of stock options on the

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date of grant using the Black-Scholes option pricing model. The fair value of RSUs is based on the closing stock price as determined per Nasdaq at the date of grant.

Determining the estimated fair value at the grant date requires judgment in determining the appropriate valuation model and assumptions, including, risk-free rate, volatility rate, annual dividend yield and the expected term.

The following assumptions were used in the valuation of stock options:

•
Expected volatility – determined using the historical volatility using daily intervals over the expected term.

•
Expected dividends – None, based on the fact that we have never paid cash dividends and do not expect to pay any cash dividends in the foreseeable future.

•
Expected term – the expected term of our stock options for tenure-only vesting has been determined utilizing the “simplified” method as described in the SEC’s Staff Accounting Bulletin No. 107 relating to stock-based compensation. The simplified method was chosen because we have limited historical option exercise experience due to its short operating history of awards granted, the first plan was established in 2016 and was primarily used for Executives awards. Further, we do not have sufficient history of exercises in the U.S. market given our re-domiciliation from Australia to the United States in 2020.

•
Risk-free interest rate – the risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant for a period approximately equal to the expected term of the award.

See Note 14 to our Consolidated Financial Statements included in this Annual Report for additional detail on share-based compensation.

Warrants

Warrants are accounted for in accordance with applicable accounting guidance provided in ASC 815, Derivatives and Hedging – Contracts in Entity’s Own Equity (“ASC 815”), as a liability based on the specific terms of the warrant agreement and recorded at fair value. The warrants are subject to re-measurement at each settlement date and at each balance sheet date and any change in fair value is recognized in earnings. The fair value of the warrant liability, which is reported within Warrant liability on the Consolidated Balance Sheets, is estimated by us based on the Black-Scholes option pricing model with the following inputs (Level 3):

•
Price of common stock

•
Estimated expected term

•
Estimated exercise price

•
Estimated expected volatility

•
Estimated risk free interest rate

•
Estimated expected dividend rate

Long-term debt

We elected the fair value option (“FVO”) of accounting under ASC 825-10, Financial Instruments (“ASC 825”), to account for the debt. ASC 825 provides FVO election that allows companies an irrevocable election to use fair value at the date of issuance and subsequently remeasure every reporting period. The fair value of the debt is reported in the Consolidated Balance Sheets. Changes in fair value are reported in earnings in Other income in the Consolidated Statements of Operations. Any changes in fair value caused by instrument-specific credit risk are presented separately in other comprehensive income. We have elected to present interest expense separately from changes in fair value and therefore will present interest expense associated with the debt. All costs associated with the issuance of the Credit Agreement accounted for using the fair value option were expensed upon issuance. Refer to Note 6 for further details.

The fair value of the debt was determined using a Monte Carlo simulation in order to capture the probability of different potential cash flows outcomes associated with the contractual terms of the instrument. The below assumptions were used in the Monte Carlo simulation (Level 3):

•
Estimated risk free interest rate

•
Estimated revenue volatility

•
Estimated revenue discount rate

•
Estimated future revenue projection

•
Estimated expected dividend rate

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Income Taxes

Income taxes are accounted for using the liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance if it is more-likely-than-not that a portion of the deferred tax asset will not be realized.

We review our uncertain tax positions regularly. An uncertain tax position represents our expected treatment of a tax position taken in a filed return or planned to be taken in a future tax return or claim that has not been reflected in measuring income tax expense for financial reporting purposes. We recognize the tax benefit from an uncertain tax position when it is more-likely-than-not that the position will be sustained upon examination on the basis of the technical merits or the statute of limitations for the relevant taxing authority to examine and challenge the tax position has expired.

See Note 15 to our Consolidated Financial Statements included in this Annual Report for additional detail on income taxes.

Recent accounting pronouncements

See discussion of recent accounting pronouncements in Note 2 of the Consolidated Financial Statements located in Item 8 in this Annual Report.

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