8-K12B/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K/A

(Amendment No. 2)

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

Date of report (Date of earliest event reported): January 22, 2020 (September 27, 2019)

MISONIX, INC.

(Exact name of Registrant as specified in its charter)

Delaware	001-10986	84- 1856018
(State or Other Jurisdiction	(Commission File Number)	(IRS Employer
of Incorporation)		Identification Number)

1938 New Highway, Farmingdale, New York	11735
(Address of Principal Executive Offices)	(Zip Code)

(631) 694-9555

(Registrant’s Telephone Number, Including Area Code)

Not Applicable

(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter).

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

Securities registered pursuant to Section 12(b) of the Act: 

Title of each class	Trading Symbol	Name of exchange on which registered
Common Shares, $0.0001 par value	MSON	The Nasdaq Global Market

EXPLANATORY NOTE

On September 27, 2019, Misonix, Inc. (the “Company”) filed a Current Report on Form 8-K12B (as amended on November 22, 2019, the “Initial Report”) with the Securities and Exchange Commission to report the completion of the Company’s business combination transaction with Solsys Medical, LLC (“Solsys”). This amendment to the Initial Report is being filed to (i) provide the below information under Item 8.01 and (ii) provide the consent of PBMares, LLP (“PBMares”), the independent registered public accounting firm of Solsys, to the incorporation by reference in certain of the Company’s registration statements, including the Company’s Registration Statement on Form S-3 (File No. 333-223878), of PBMares’ audit report with respect to the audited financial statements of Solsys, which comprise the balance sheets as of December 31, 2018 and 2017, the related statements of operations, changes in members’ deficit and cash flows for the years ended December 31, 2018 and 2017, and the related notes to the financial statements, which financial statements and audit report are filed as an exhibit to this amendment.

Item 8.01. Other Events.

The Company is filing information for the purpose of updating the risk factor disclosure contained in its prior public filings, including those discussed under the heading “Item 1A. Risk Factors” in its Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, filed with the SEC on November 7, 2019. The updated risk factor disclosures are filed herewith as Exhibit 99.1 and are incorporated herein by reference.

Item 9.01. Financial Statements and Exhibits.

(a) Financial Statements of businesses acquired.

The financial statements of Solsys Medical, LLC comprised of the balance sheets as of December 31, 2018 and 2017, the related statements of operations, changes in members’ deficit and cash flows for the years then ended, and related notes to the financial statements, together with the audit report of PBMares, LLP, independent registered public accounting firm with respect to Solsys Medical, LLC, are filed as Exhibit 99.2 hereto and are incorporated herein by reference.

(d) Exhibits

Exhibit No.	Description
23.1	Consent of PBMares, LLP, independent registered public accounting firm of Solsys Medical, LLC
99.1	Updated Risk Factor Disclosure
99.2	Financial statements of Solsys Medical, LLC

1

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Date: January 22, 2020	MISONIX, INC.
	By:	/s/ Joseph P. Dwyer
		Name:  Joseph P. Dwyer
		Title:    Chief Financial Officer

2

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the Registration Statements (Nos. 333-219348, 333-203944, 333-188554, 333-165088, 333-130874 and 333-63166) on Form S-8 and Registration Statement (No. 333-223878) on Form S-3 of Misonix, Inc., of our report dated April 11, 2019, with respect to the financial statements of Solsys Medical, LLC, which comprise the balance sheets as of December 31, 2018 and 2017, the related statements of operations, changes in members’ deficit and cash flows for the years then ended, and the related notes to the financial statements, which report appears in the Current Report on Form 8-K of Misonix, Inc. dated January 22, 2020.

/s/ PBMares LLP

January 22, 2020

EX-99.1

Exhibit 99.1

As used in this Exhibit 99.1, we refer to Misonix, Inc. and its subsidiaries (unless the context otherwise requires) as “we,” “us,” “our,” the “Company” or “Misonix.”

USE OF FORWARD-LOOKING STATEMENTS

This Exhibit 99.1 contain statements that we believe are “forward-looking statements” as that term is used in the Private Securities Litigation Reform Act of 1995 and are intended to enjoy protection of the safe harbor for forward-looking statements provided by that Act. These forward-looking statements are based on our current expectations, assumptions, estimates and projections about our business and our industry. Forward-looking statements include statements regarding our future financial position, performance and achievements, business strategy, and plans and objectives of management for future operations.

In some cases, you can identify forward-looking statements by terms such as “may,” “should,” “will,” “could,” “estimate,” “project,” “predict,” “potential,” “continue,” “anticipate,” “believe,” “plan,” “seek,” “expect,” “future” and “intend” or the negative of these terms or other comparable expressions which are intended to identify forward-looking statements. These statements are only predictions and are not guarantees of future performance. They are subject to known and unknown risks, uncertainties and other factors, some of which are beyond our control and difficult to predict and could cause our actual results to differ materially from those expressed or forecasted in, or implied by, the forward-looking statements. In evaluating these forward-looking statements, you should carefully consider the risks and uncertainties referred to below. Given these uncertainties, you should not place undue reliance on these forward-looking statements. In addition, these forward-looking statements reflect our view only as of the date they are made.

Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements.

RISK FACTORS

The following risk factors should be considered carefully in evaluating our business. Our business, financial condition and/or results of operations could be materially adversely affected by any of these risks. This section contains forward-looking statements. Additional risks not presently known to us or that we currently deem immaterial may also adversely affect our business, financial condition and/or results of operations. The following list sets forth many, but not all, of the factors that could impact our ability to achieve results discussed in any forward-looking statement. Investors should understand that it is not possible to predict or identify all such factors and should not consider this list to be a complete statement of all potential risks and uncertainties.

Risks Related to Our Business

The continued commercial success of TheraSkin will depend on the continued and future acceptance of such product by the medical community.

Allograft based technologies, including TheraSkin, a biologically active human skin allograft used to support healing of wounds, may never achieve broad market acceptance, which can be affected by numerous factors, including lack of clinical acceptance of allograft technologies, introduction of competitive treatment options which render allograft technologies too expensive or obsolete and difficulty training physicians in the use of allograft technologies.

Market acceptance will also depend on our ability to demonstrate that TheraSkin is an attractive treatment option. Our ability to do so will depend on physicians’ evaluations of the clinical safety, effectiveness, ease of use, reliability and cost-effectiveness of TheraSkin. For example, we believe that some individuals in the medical community may have lingering concerns over the risk of disease transmission through the use of human skin allografts.

Media reports or other negative publicity concerning both methods of tissue recovery from donors and actual or potential disease transmission from donated tissue may limit widespread acceptance by the medical community of human skin allografts, whether directed at those products generally or TheraSkin specifically. Unfavorable reports of improper or illegal tissue recovery practices by any participant in the industry, 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 based technologies by the medical community.

Furthermore, even if the medical community generally accepts TheraSkin, acceptance and recommendations by influential members of the medical community could have an impact on the broader commercial success of TheraSkin. If TheraSkin is not broadly accepted by the medical community, we may be unable to sell these products and could experience a significant adverse impact on our revenue.

We will depend on LifeNet Health, Inc. (“LifeNet”) as our single source of human tissue, and any failure to obtain tissue from LifeNet in a timely manner will interfere with our ability to process and distribute allografts.

We will rely exclusively on LifeNet for our supply of TheraSkin. We cannot be sure that LifeNet will be in a position to deliver TheraSkin to us at levels currently delivered or at amounts that will be sufficient to meet our future needs. If we are not able to obtain sufficient amounts of TheraSkin to meet our customers’ needs, we will have a shortage of TheraSkin and be unable to fill our customers’ orders which will result in our customers seeking products from our competitors. Any interruption of our business caused by a shortage of TheraSkin could significantly reduce our revenues and have a material adverse effect on our financial performance and condition.

If our sole supplier for TheraSkin, LifeNet, is not able to maintain sufficient quality controls, regulatory approvals of our products by the FDA or other relevant authorities could be delayed or denied and our sales and revenues would suffer.

LifeNet, our sole supplier of TheraSkin, our raw material suppliers, contract manufacturers and distributors, and other third parties that we contract with are subject to many or all of the risks and uncertainties to which we are subject. Similar to us, they are subject to ongoing, periodic, unannounced inspection by the U.S. Food and Drug Administration (the “FDA”) and corresponding state and foreign agencies or their designees to ensure strict compliance with applicable regulations and other governmental regulations and corresponding foreign standards. However, we do not control compliance with these regulations and standards by our suppliers, distributors and other third parties with which we contract. They might not be able to comply with these regulatory requirements. If they fail to comply with applicable regulations, the FDA or other regulatory authorities could issue orders of suspension, recall, destruction or cessation of manufacturing, or impose sanctions on us, including fines, injunctions, civil penalties, denial of any required marketing approval, delays, suspension or withdrawal of approvals, license revocation, product seizures or recalls, operating restrictions and criminal prosecutions. Any of these actions could significantly and adversely affect the supply and distribution of our products and could have a material adverse effect on our business, financial condition and results of operations.

The FDA could stop or delay approval of production of products if LifeNet’s manufacturing facilities do not comply with applicable manufacturing requirements. The FDA quality system regulations impose extensive testing, control, documentation and other quality assurance requirements. Failure by LifeNet to comply with these requirements could prevent us from obtaining or retaining approval for and marketing of TheraSkin.

Should the FDA determine that TheraSkin does not meet regulatory requirements that permit qualifying human cell and/or tissue based products (“HCT/Ps”) to be processed, stored, labeled and distributed without pre-marketing approval, our supplier may be required by the FDA to stop processing and we may be required to stop distributing TheraSkin, or to narrow the indications for which TheraSkin is marketed, which, in turn, could have an adverse effect on our business.

The FDA has specific regulations governing HCT/Ps that are intended for implantation, transplantation, infusion or transfer into a human recipient. HCT/Ps that meet the criteria for regulation solely under Section 361 of the Public Health Service Act and 21 CFR 1271 (“361 HCT/Ps”) are subject to limited regulation, such as registration or listing, donor eligibility, and good tissue practices but are not subject to pre-market clearance or approval requirements.

As a biologically active, cryopreserved human skin allograft that does not contain any synthetic or non-human animal materials, we believe that TheraSkin qualifies as a 361 HCT/P. TheraSkin has also been listed with the FDA as a 361 HCT/P. However, no affirmative determination that TheraSkin qualifies as a 361 HCT/P has been made by the FDA and the FDA periodically reviews qualification standards and may in the future change its policy with respect to 361 HCT/P qualifications, or determine that our marketing claims exceed what would be permitted for a 361 HCT/P, or determine that TheraSkin does not qualify as a 361 HCT/P product. As a result, we or LifeNet may have to revise the labeling and other written or oral statements of use, or cease marketing TheraSkin or obtain approval or clearance from the FDA before we could continue to market the product in the United States.

2

We and our suppliers will be required to comply with current Good Manufacturing Practice, (“cGMPs”), and Good Tissue Practice, (“GTPs”), and could be subject to suspensions or product withdrawals if found non-compliant.

The FDA regulates the facilities, processes and procedures used to manufacture and market medical products in the United States. Manufacturing facilities must be registered with the FDA and all products made in such facilities must be manufactured in accordance with cGMP and/or GTPs, as applicable, which are regulations enforced by the FDA. Compliance with cGMP and/or GTPs regulations, as applicable, requires the dedication of substantial resources and requires significant expenditures. The FDA periodically inspects manufacturing facilities, including those of LifeNet with respect to TheraSkin, and procedures to assure compliance. The FDA may cause a suspension or withdrawal of product approvals if regulatory standards are not maintained. In the event an approved manufacturing facility for a particular HCT/P or medical device is required by the FDA to curtail or cease operations, or otherwise becomes inoperable, or a third party contract manufacturing facility faces manufacturing problems, obtaining the required FDA authorization to manufacture at the same or a different manufacturing site could result in production delays, which could adversely affect our business, results of operations, financial condition and cash flow.

We will require a significant amount of cash to service our indebtedness. This cash may not be readily available to us.

Our ability to make payments on, or repay or refinance, our indebtedness and fund planned capital expenditures will depend largely upon our future operating performance. Our future performance, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We cannot be certain that we will generate sufficient cash flow from operations or that future borrowings will be available in amounts sufficient to enable us to pay our indebtedness or to fund our other liquidity needs.

We have a recent history of net losses.

We have experienced losses from continuing operations during the last four fiscal years. The loss from continuing operations before income taxes was approximately $7.4 million for the 2019 fiscal year, and the accumulated deficit was approximately $20.1 million as of September 30, 2019. There can be no assurance that we will be able to return to operating profitability in the near-term or at all. As of September 30, 2019, we had a cash balance of approximately $12.9 million. Although we believe this amount is sufficient to finance our operations for at least the next 12 months, there can be no assurance that this will provide sufficient liquidity for longer-term operations or initiatives. Our cash flows may be impacted by a number of factors, including changing market conditions, market acceptance of our new and existing products, and the loss of one or more key customers. There can be no assurance that we will be successful in raising additional capital if the need arises. The failure to raise any necessary additional capital on acceptable terms, or at all, may have a material adverse effect on our future business and results of operations.

We may incur a certain indebtedness and will require cash to service any indebtedness we incur. This cash may not be readily available to us.

Our ability to make payments on, or repay or refinance, any indebtedness and fund planned capital expenditures will depend largely upon our future operating performance. Our future performance, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We cannot be certain we will generate sufficient cash flow from operations or that future borrowings will be available in amounts sufficient to enable us to pay any indebtedness or to fund our other liquidity needs.

We are subject to extensive medical device regulation which may impede or hinder the approval process for our products and, in some cases, may not ultimately result in approval or may result in the recall or seizure of previously approved products.

Our medical devices and our business activities are subject to rigorous regulation, including by the FDA, the U.S. Department of Justice (the “DOJ”) and numerous other federal, state and foreign governmental authorities including the imposition of international trade sanctions and tariffs. Certain state governments and the federal government have enacted legislation aimed at increasing transparency of our interactions with health care providers. Any failure to comply with these legal and regulatory requirements could impact our business.

3

These regulations include regulations pursuant to the Federal Food, Drug, and Cosmetic Act (the “FDC Act”) by the FDA and comparable agencies in foreign countries, and by other regulatory agencies and governing bodies. Under the FDC Act, medical devices must receive FDA clearance or approval before they can be commercially marketed in the United States. In addition, most major markets for medical devices outside the United States require clearance, approval or compliance with certain standards before a product can be commercially marketed. The process of obtaining marketing approval or clearance from the FDA for new products, or with respect to enhancements or modifications to existing products, could:

● take a significant amount of time;

● require the expenditure of substantial resources;

● involve rigorous pre-clinical and clinical testing;

● require changes to the products; and

● result in limitations on the proposed uses of the products.

Marketing approvals or clearances are not the only risk. The FDA, and other regulatory bodies, also can require the withdrawal of an approved or cleared product from commercial distribution due to failure to comply with regulatory standards or the occurrence of unforeseen problems.

As a medical device manufacturer, we are required to register with the FDA and are subject to periodic inspection by the FDA for compliance with the FDA’s Quality System Regulation requirements, which require manufacturers of medical devices to adhere to certain regulations, including testing, quality control and documentation procedures. In addition, FDA regulations require us to provide information to the FDA whenever there is evidence that reasonably suggests that a medical device may have caused or contributed to a death or serious injury or, if a malfunction were to occur, could cause or contribute to a death or serious injury. Compliance with applicable regulatory requirements is subject to continual review and is rigorously monitored through periodic inspections by the FDA. In the European Union and China, we are required to maintain certain ISO certifications in order to sell our products and must undergo periodic inspections by notified bodies to obtain and maintain these certifications. Failure to meet regulatory quality standards could have a material adverse effect on our business, financial condition or results of operations.

Consequently, there can be no assurance that we will receive the required clearances from the FDA or other regulatory bodies for new products or modifications to existing products on a timely basis or that any FDA approval will not be subsequently withdrawn. Later discovery of previously unknown problems with a product or manufacturer could result in fines, delays or suspensions of regulatory clearances, seizures or recalls of products, operating restrictions and/or criminal prosecution. The failure to receive product approval clearance on a timely basis, suspensions of regulatory clearances, seizures or recalls of products or the withdrawal of product approval by the FDA or other regulatory bodies could have a material adverse effect on our business, financial condition or results of operations.

We face intense competition and may not be able to keep pace with the rapid technological changes in the medical device industry.

The medical device product market is highly competitive. We encounter significant competition across our product lines and in each market in which our products are sold from various medical device companies, most of which have greater financial and marketing resources than we do.

Additionally, the medical device product market is characterized by extensive research and development and rapid technological change. Developments by other companies of new or improved products, processes or technology may make our products or proposed products obsolete or less competitive and may negatively impact our revenues. In some cases, foreign companies may attempt to copy our designs illegally. We are required to devote continued efforts and financial resources to develop or acquire scientifically advanced technologies and products, apply our technologies cost-effectively across product lines and markets, attract and retain skilled development personnel, obtain patent and other protection for our technology and products, obtain required regulatory and reimbursement approvals and successfully manufacture and market our products. Failure to develop new products or enhance existing products could have a material adverse effect on our business, financial condition or results of operations.

4

We may not be able to effectively protect our intellectual property rights.

Patents, trademarks and other intangible proprietary rights are and will be essential to our business and our ability to compete effectively with other companies. We will also rely upon trade secrets, know-how, continuing technological innovations, strategic alliances and licensing opportunities to develop, maintain and strengthen our competitive position. We will pursue a policy of generally obtaining patent protection in both the United States and overseas for patentable subject matter in our proprietary devices and also attempt to review third-party patents and patent applications to the extent publicly available to develop an effective patent strategy, avoid infringement of third-party patents, identify licensing opportunities and monitor the patent claims of others. We also operate in an industry that is susceptible to significant intellectual property litigation and it has been common for companies in the medical device field to aggressively challenge the patent rights of other companies in order to prevent the marketing of new devices. Intellectual property litigation is expensive, complex and lengthy and its outcome is difficult to predict. Future patent litigation may result in significant royalty or other payments or injunctions that can prevent the sale of products and may significantly divert the attention of our technical and management personnel.

In addition, we may have to take legal action in the future to protect our patents, trade secrets or know-how or to assert our intellectual property rights against claimed infringement by others. Any legal action of that type could be costly and time consuming to us and no assurances can be made that any lawsuit will be successful.

The invalidation of key patents or proprietary rights that we own, or an unsuccessful outcome in lawsuits to protect our intellectual property, could have a material adverse effect on our business, financial condition or results of operations. In the event that our right to market any of our products is successfully challenged, or if we fail to obtain a required license or are unable to design around a patent, our business, financial condition or results of operations could be materially adversely affected.

eSecurity breaches, loss of data and other disruptions could compromise sensitive information related to our business, prevent us from accessing critical information or expose us to liability, which could adversely affect our business and reputation.

In the ordinary course of our business, we collect and store sensitive data, including patient health information, personally identifiable information about our employees, intellectual property, and proprietary business information. We manage and maintain applications and data utilizing on-site and off-site systems. These applications and data encompass a wide variety of business-critical information including research and development information, commercial information and business and financial information.

The secure processing, storage, maintenance and transmission of this critical information is vital to our operations and business strategy, and we devote resources to protecting such information. Although we take measures to protect sensitive information from unauthorized access or disclosure, our information technology and infrastructure may be vulnerable to attacks by hackers, viruses, breaches or interruptions due to employee error or malfeasance, terrorist attacks, hurricanes, fire, flood, other natural disasters, power loss, computer systems failure, data network failure, internet failure, or lapses in compliance with privacy and security mandates. Any such virus, breach or interruption could compromise our networks and the information stored there could be accessed by unauthorized parties, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, government enforcement actions and regulatory penalties. Unauthorized access, loss or dissemination could also interrupt our operations, including our ability to receive and ship orders from customers, bill our customers, provide customer support services, conduct research and development activities, process and prepare company financial information, manage various general and administrative aspects of our business and damage our reputation, any of which could adversely affect our business.

Future product liability claims and other litigation may adversely affect our business, reputation and ability to attract and retain customers.

The design, manufacture and marketing of medical device products of the types that we produce entail an inherent risk of product liability claims. A number of factors could result in an unsafe condition or injury to, or death of, a patient with respect to these or other products that we manufacture or sell, including component failures, manufacturing flaws, design defects or inadequate disclosure of product-related risks or product-related information. These factors could result in product liability claims, a recall of one or more of our products or a safety alert relating to one or more of our products. Product liability claims may be brought by individuals or by groups seeking to represent a class.

Anyone or any company can bring an action against us, including private securities litigation and shareholder derivative suits, and adverse litigation results could affect our business.

Our judicial system allows anyone, including shareholders, to bring a claim against us and force us to defend a claim even if the claim is baseless. The defense may or may not be covered by our insurance, the result of which could ultimately create a burden on us, dependent upon the outcome.

Litigation can be lengthy, expensive and disruptive to our operations, and results cannot be predicted with certainty. An adverse decision could result in monetary damages or injunctive relief that could affect our financial condition or results of operations.

5

On March 23, 2017, our former distributor in China, Cicel (Beijing) Science & Technology Co., Ltd., filed a lawsuit against us and certain of our officers and directors in the United States District Court for the Eastern District of New York, alleging that we improperly terminated its contract with the former distributor. The complaint sought various remedies, including compensatory and punitive damages, specific performance and preliminary and post judgment injunctive relief, and asserted various causes of action, including breach of contract, unfair competition, tortious interference with contract, fraudulent inducement, and conversion. On October 7, 2017, the court granted our motion to dismiss all of the tort claims asserted against us, and also granted the individual defendants’ motion to dismiss all claims asserted against them. The only claim currently remaining in the case is for breach of contract against us; the plaintiff has moved to amend its complaint to add tort claims, which we have opposed. The court has not yet ruled on the motion to amend. We believe that we have various legal and factual defenses to the allegations in the complaint and intend to vigorously defend the action. Fact discovery in the case is ongoing and there is no trial date currently set.

On June 6, 2017, Irving Feldbaum, an individual shareholder of the Company, filed a lawsuit in the U.S. District Court for the Eastern District of New York. The complaint alleges claims against our board of directors, our former CEO and CFO, certain of our former directors, and us as a nominal defendant for alleged violations of Section 14(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and state law claims for breach of fiduciary duty, waste of corporate assets, and unjust enrichment. The complaint alleges that we incurred damages as a result of alleged false and misleading statements in our securities filings concerning our business, operations, prospects and our internal control over financial reporting. The complaint also alleges that our February 4, 2016 Proxy Statement contained false and misleading statements regarding executive compensation. The complaint seeks the recovery of damages on behalf of the Company and the implementation of changes to corporate governance procedures. On June 16, 2017, Michael Rubin, another individual shareholder of the Company, filed a case alleging similar claims in the same district court. On July 21, 2017, the district court consolidated the two actions for all purposes. On July 26, 2019, the district court approved the settlement. Under the terms of the settlement, we have agreed to undertake and maintain in place certain corporate governance reforms for a period of time, and to pay counsel for Mr. Feldbaum and Mr. Rubin attorneys’ fee of $500,000, which has been paid by our insurance carrier.

Violation of anti-corruption laws could subject us to significant penalties which would materially affect our business and liquidity.

We are required to comply with the Foreign Corrupt Practices Act (the “FCPA”), and similar anti-corruption laws in other jurisdictions around the world where we do business. Compliance with these laws has been subject to increasing focus and activity by regulatory authorities in recent years.

With the assistance of outside counsel, beginning in 2016 we conducted a voluntary investigation into the business practices of the independent Chinese entity that previously distributed our products in China and our knowledge of those business practices, which may have had implications under the FCPA, as well as into various internal control issues identified during the investigation. We did not identify any information through the investigation or otherwise that suggests that our previously reported financial statements are incorrect. On September 27, 2016 and September 28, 2016, we voluntarily contacted the Securities and Exchange Commission (the “SEC”) and the DOJ, respectively, to advise both agencies of these potential issues. Thereafter, we provided documents and information to, and cooperated fully with, the SEC and the DOJ, in their investigations of these matters.

On June 18, 2019, we received a letter from the Division of Enforcement of the SEC advising us that the SEC had concluded its investigation of us and that, based on the information it had as of the date of the letter, it did not intend to recommend an enforcement action by the SEC against us. On August 14, 2019, we received a declination letter from the DOJ stating that the DOJ has closed its inquiry into us without any action.

Although neither the SEC nor the DOJ have taken any enforcement action in these matters, our investigative costs, including costs of shareholder litigation relating to these matters (which has now been settled), was approximately $3.9 million as of June 30, 2019, of which $0.8 million, $0.5 million and $2.4 million was charged to expense during each of the three years ended June 30, 2019, respectively.

Future actions by our employees, or third-party intermediaries acting on our behalf, in violation of anticorruption laws, including the FCPA, whether carried out in the United States or elsewhere in connection with the conduct of our business may expose us to liability for violations and significant costs and expenses in investigating such actions or defending against civil or criminal charges associated therewith and accordingly may have a material adverse effect on our reputation and our business, financial condition or results of operations.

6

Our future growth is dependent upon the development of new products and line extensions, which requires significant research and development, clinical trials and regulatory approvals, all of which are very expensive and time-consuming and may not result in a commercially viable product.

In order to develop new products and improve current product offerings, we focus our research and development programs largely on the development of next-generation and novel technology offerings across multiple programs and opportunities.

As a part of the regulatory process of obtaining marketing clearance from the FDA for new products, we conduct and participate in numerous clinical trials with a variety of study designs, patient populations and trial endpoints. Unfavorable or inconsistent clinical data from existing or future clinical trials conducted by us, by our competitors or by third parties, or the market’s perception of this clinical data, may adversely impact our ability to obtain product approvals from the FDA, our position in, and share of, the markets in which we participate and our business, financial condition, results of operations or future prospects.

New products may not be accepted by customers in the marketplace.

We are now, and will continue to be, developing new products and introducing them into the market. There can be no assurance that any new product will be accepted by the market. New products are sometimes introduced into the market in a prototype format and may need later revisions or design changes before they operate in a manner to be accepted in the market. As a result of the introduction of new products, there is some risk that revenue expectations may not be met and in some cases the product may not achieve market acceptance.

Consolidation in the healthcare industry could lead to demands for price concessions or the exclusion of us as supplier from certain of our significant market segments.

The cost of healthcare has risen significantly over the past decade and numerous initiatives and reforms initiated by legislators, regulators and third-party payers to curb these costs have resulted in a consolidation trend in the healthcare industry, including hospitals. This in turn has resulted in greater pricing pressures and the exclusion of certain suppliers from important market segments as group purchasing organizations, independent delivery networks and large single accounts continue to consolidate purchasing decisions for some of our hospital customers. We expect that market demand, government regulation, third-party reimbursement policies and societal pressures will continue to change the worldwide healthcare industry, resulting in further business consolidations and alliances among our customers and competitors, which may reduce competition, exert further downward pressure on the prices of our products and may adversely impact our business, financial condition or results of operations.

We may experience disruption in supply due to our dependence on our suppliers to continue to ship product requirements and our inability to obtain suppliers of certain components for our products.

Our suppliers may encounter problems during manufacturing due to a variety of reasons, including poor business practices, failure to follow specific protocols and procedures, failure to comply with applicable regulations, equipment malfunctions, labor shortages or environmental factors. In addition, we purchase both raw materials used in our products and finished goods from various suppliers and may have to rely on a single source supplier for certain components of our products where there are no alternatives are available. Although we anticipate that we have adequate sources of supply and/or inventory of these components to handle our production needs for the foreseeable future, if we are unable to secure on a timely basis sufficient quantities of the materials we depend on to manufacture our products, if we encounter delays or contractual or other difficulties in our relationships with these suppliers, or if we cannot find suppliers at an acceptable cost, then the manufacture of our products may be disrupted, which could increase our costs and have a material adverse effect on our business. For example, in fiscal 2019, we experienced certain supply chain disruptions due to suppliers not being able to keep pace with our demand for materials and product. These disruptions caused us to not be able to ship certain customer orders on time, creating a sales backlog which was higher than normal.

If we fail to manage any expansion or acquisition, our business could be impaired.

We may in the future acquire one or more technologies, products or companies that complement our business. We may not be able to effectively integrate these into our business and any such acquisition could bring additional risks, exposures and challenges to us. In addition, acquisitions may dilute our earnings per share, disrupt our ongoing business, distract our management and employees, increase our expenses, subject us to liabilities and increase our risk of litigation, all of which could harm our business. If we use cash to acquire technologies, products, or companies, such use may divert resources otherwise available for other purposes. If we use our common stock to acquire technologies, products, or companies, our shareholders may experience substantial dilution. If we fail to manage any expansions or acquisition, our business could be impaired. For specific risks related to the acquisition of Solsys Medical, LLC (“Solsys”), see “Risks Related to the Acquisition of Solsys.”

7

Our agreements and contracts entered into with partners and other third parties may not be successful.

We signed in the past and may pursue in the future agreements and contracts with third parties to assist in our marketing, manufacturing, selling and distribution efforts. We cannot assure you that any agreements or contracts entered into will be successful.

The fluctuation of our quarterly results may adversely affect the trading price of our common stock.

Our revenues and results of operations have in the past and will likely vary in the future from quarter to quarter due to a number of factors, many of which are outside of our control and any of which may cause our stock price to fluctuate. You should not rely on quarter-to-quarter comparisons of our results of operations as an indication of our future performance. It is likely that in some future quarters, our results of operations may be below the expectations of our public market analysts and investors. In this event, the price of our common stock may fall.

We may not be able to attract and retain additional key management, sales and marketing and technical personnel, or we may lose existing key management, sales and marketing or technical personnel, which may delay our development and marketing efforts.

We depend on a number of key management, sales and marketing and technical personnel. The loss of the services of one or more key employees could delay the achievement of our development and marketing objectives. Our success will also depend on our ability to attract and retain additional highly qualified management, sales and marketing and technical personnel to meet our growth goals. We face intense competition for qualified personnel, many of whom are often subject to competing employment offers, and we do not know whether we will be able to attract and retain such personnel.

Future changes in financial accounting standards or practices or existing taxation rules or practices may cause adverse or unexpected revenue fluctuations and affect our reported results of operations.

A change in accounting standards or practices or a change in existing taxation rules or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements and taxation rules and varying interpretations of accounting pronouncements and taxation practice have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business.

Risk of reprocessing disposables.

In some jurisdictions around the world, culture and practice encourages reuse of disposable products when the product is clearly labeled for single use. Such reuse may expose us to liability in these jurisdictions.

Our management has concluded that our disclosure controls and procedures and internal control over financial reporting are ineffective due to the existence of a material weakness in our internal control over financial reporting. If we are unable to establish and maintain effective disclosure controls and internal control over financial reporting, our ability to produce accurate financial statements on a timely basis could be impaired, and the market price of our securities may be negatively affected.

A material weakness (as defined in Rule 12b-2 under the Exchange Act) is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis. We carried out an evaluation, under the supervision and with the participation of management, of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2019. Based upon this evaluation, management has identified a deficiency related to the design of a process level control to address the completeness and accuracy of unrecorded liabilities at June 30, 2019.

Specifically, we identified one invoice related to legal fees which was properly approved and submitted to the accounts payable department for posting, however such invoice was erroneously posted into the month of July 2019 instead of June 2019 as the result of a keypunch error. Our finance personnel failed to promptly identify this error and this deficiency allowed for the potential for other invoices to be misapplied.

8

To remediate this weakness, we have implemented controls to review and verify that open accounts payable invoices, in addition to invoices paid after period end, are entered into the correct accounting period. This error was corrected and impacted the balance sheet only, and did not impact the statement of operations. If we are unable to remediate this material weakness in our internal control over financial reporting, or if we identify additional material weaknesses in our internal control over financial reporting, our management will be unable to assert in future reports that our disclosure controls and procedures and our internal control over financial reporting are effective. This could cause investors, counterparties and customers to lose confidence in the accuracy and completeness of our financial statements and reports and have a material adverse effect on our liquidity, access to capital markets and perceptions of our creditworthiness and/or a decline in the market price of our common stock. In addition, we could become subject to investigations by The Nasdaq Stock Market LLC, the SEC or other regulatory authorities, which could require additional financial and management resources. These events could have a material adverse effect on our business, financial condition and results of operations.

Risks Related to the Acquisition of Solsys

Our future results following the acquisition will suffer if we do not effectively manage the expanded operations or successfully integrate the businesses of Solsys.

Our future success will depend, in part, upon our ability to manage the expanded business, including challenges related to the management and monitoring of new operations and associated increased costs and complexity. If we are not able to successfully combine our business with the business of Solsys in an efficient and effective manner, the anticipated benefits may not be realized fully, or at all, or may take longer to realize than expected, and the value of our common stock may be affected adversely. An inability to realize the full extent of the anticipated benefits of the acquisition, as well as any delays encountered in the integration process, could have an adverse effect upon on our business, financial condition or results of operations. In addition, the actual integration may result in additional and unforeseen expenses.

Uncertainties associated with the transactions may cause employees to leave and may otherwise affect our future business and operations.

Our success after completion of the acquisition depends in part upon our ability to retain key employees. Following the acquisition, our current and prospective employees may experience uncertainty about their future roles and choose to pursue other opportunities, which could have an adverse effect on our business, financial condition or results of operations. If key employees depart, the integration of Solsys may be more difficult and our business following the acquisition could be adversely affected.

 9

EX-99.2

Exhibit 99.2

INDEPENDENT AUDITOR’S REPORT

To the Board of Directors

Solsys Medical, LLC

Newport News, Virginia

Report on the Financial Statements

We have audited the accompanying financial statements of Solsys Medical, LLC (the Company), which comprise the balance sheets as of December 31, 2018 and 2017, the related statements of operations, changes in members’ deficit and cash flows for the years then ended, and the related notes to the financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

1

Emphasis of Matter Regarding Going Concern

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 9 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raises substantial doubt about its ability to continue as a going concern. Management’s evaluation of the events and conditions and management’s plans regarding these matters are also described in Note 9. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter.

/s/ PBMares, LLP

Newport News, Virginia

April 11, 2019

2

SOLSYS MEDICAL, LLC

(A Delaware Limited Liability Company)

BALANCE SHEETS

	December 31,
	2018		2017
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	819,442	$	6,124,918
Accounts receivable, net of allowance for doubtful accounts		3,887,215		918,634
Inventory		19,371		10,023
Prepaid expenses		303,952		162,906
Total current assets		5,029,980		7,216,481
PROPERTY AND EQUIPMENT
Computer equipment and software		75,075		54,275
Machinery and equipment		753,145		507,159
Furniture and fixtures		54,131		46,416
Leasehold improvements		27,736		27,736
		910,087		635,586
Less accumulated depreciation		548,703		452,453
Total property and equipment		361,384		183,133
Total assets	$	5,391,364	$	7,399,614

See Notes to Financial Statements.

3

SOLSYS MEDICAL, LLC

(A Delaware Limited Liability Company)

BALANCE SHEETS, (CONTINUED)

	December 31.
	2018			2017
LIABILITIES AND MEMBERS’ DEFICIT
CURRENT LIABILITIES
Accounts payable	$	1,197,837		$	301,618
Accrued sales commissions		1,394,195			776,436
Accrued interest		277,749			236,501
Accrued exit fee		436,041			352,608
Current maturities of notes payable, net of unamortized debt issuance costs		889,490			—
Accrued expenses		170,090			—
Total current liabilities		4,365,402			1,667,163
LONG-TERM LIABILITIES
Notes payable, net of unamortized debt issuance costs, less current maturities		14,029,118			14,872,469
MEMBERS’ DEFICIT		(13,003,156	)		(9,140,018	)
Total liabilities and members’ deficit	$	5,391,364		$	7,399,614

See Notes to Financial Statements.

4

SOLSYS MEDICAL, LLC

(A Delaware Limited Liability Company)

STATEMENTS OF OPERATIONS

	Year Ending December 31,
	2018			2017
Net sales	$	10,133,332		$	29,423
Cost of goods sold		2,859,460			55,154
Gross income (loss)		7,273,872			(25,731	)
Other revenue — TheraSkin® revenue share		6,937,968			9,560,076
Other revenue — shipping and handling revenue		29,181			—
Income before operating expenses		14,241,021			9,534,345
Operating expenses:
Selling and marketing expenses		14,671,528			10,263,295
General and administrative expenses		5,739,248			3,781,485
Research and development expenses		1,659,858			578,634
Total operating expenses		22,070,634			14,623,414
Operating loss		(7,829,613	)		(5,089,069	)
Other income (expense):
Interest income		22,153			268
Interest expense		(2,054,395	)		(2,758,053	)
Miscellaneous income		4,504			—
Loss on disposal of equipment		(5,787	)		(160,597	)
Debt forgiveness		—			433,548
Total other expenses		(2,033,525	)		(2,484,834	)
Net loss	$	(9,863,138	)	$	(7,573,903	)

See Notes to Financial Statements.

5

SOLSYS MEDICAL, LLC

(A Delaware Limited Liability Company)

STATEMENTS OF CHANGES IN MEMBERS’ DEFICIT

	Common			Series A Preferred			Series B Preferred			Series C Preferred			Series D Preferred		Series E Preferred			Series F Preferred		Total
Balance, December 31, 2016	$	(11,469,912	)	$	(4,438,094	)	$	(2,619,502	)	$	(227,896	)	$	—	$	—		$	—	$	(18,755,404	)
Exercise of common unit warrants		329			—			—			—			—		—			—		329
Issuance of Series E Preferred Units, net of syndication costs (see Note 3)		—			—			—			—			—		17,188,960			—		17,188,960
Net loss		(2,459,714	)		(835,204	)		(2,209,156	)		(1,178,129	)		—		(891,700	)		—		(7,573,903	)
Balance, December 31, 2017		(13,929,297	)		(5,273,298	)		(4,828,658	)		(1,406,025	)		—		16,297,260			—		(9,140,018	)
Issuance of Series E Preferred Units		—			—			—			—			—		6,000,000			—		6,000,000
Net loss		(1,341,387	)		(455,677	)		(1,205,275	)		(643,077	)		—		(6,217,722	)		—		(9,863,138	)
Balance, December 31, 2018	$	(15,270,684	)	$	(5,728,975	)	$	(6,033,933	)	$	(2,049,102	)	$	—	$	16,079,538		$	—	$	(13,003,156	)

See Notes to Financial Statements.

6

SOLSYS MEDICAL, LLC

(A Delaware Limited Liability Company)

STATEMENTS OF CASH FLOWS

	Year Ending December 31,
	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(9,863,138	)	$	(7,573,903	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		96,250			96,979
Loss on disposal of equipment		5,787			160,597
Amortization of debt issuance costs		46,139			97,048
Change in bad debt reserve		75,000			—
Debt forgiveness		—			(433,548	)
Accrued interest capitalized on SWK note payable		—			1,697,378
(Increase) decrease in assets:
Accounts receivable		(3,043,581	)		(125,113	)
Inventory		(9,348	)		31,532
Prepaid expenses		(141,046	)		(162,281	)
(Decrease) increase in liabilities:
Accounts payable		896,219			(172,667	)
Accrued sales commissions		617,759			98,033
Accrued interest		41,248			43,214
Accrued exit fee		83,433			164,344
Accrued expenses		170,090			—
Deferred liabilities		—			(291,515	)
Net cash used in operating activities		(11,025,188	)		(6,369,902	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment		(280,288	)		—
Net cash used in investing activities		(280,288	)		—
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Series E preferred units		6,000,000			19,000,000
Net repayments on notes payable		—			(4,991,585	)
Issuance of common units		—			329
Syndication costs		—			(1,811,040	)
Payment of financing costs		—			(95,852	)
Net cash provided by financing activities		6,000,000			12,101,852
Net (decrease) increase in cash and cash equivalents		(5,305,476	)		5,731,950
Cash and cash equivalents, beginning		6,124,918			392,968
Cash and cash equivalents, ending	$	819,442		$	6,124,918
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for interest	$	1,883,575		$	756,069

SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES

During the year ended December 31, 2017, $433,548 of debt was forgiven as part of the Company’s debt payoff agreement with Alliqua (see Note 2).

During the year ended December 31, 2017, accrued interest of $1,697,378 was capitalized into the principal of the SWK note balance (see Note 2).

See Notes to Financial Statements.

7

SOLSYS MEDICAL, LLC

(A Delaware Limited Liability Company)

NOTES TO FINANCIAL STATEMENTS

Years Ended December 31, 2018 and 2017

Note 1. Nature of Business and Significant Accounting Policies

Nature of business:

Solsys Medical, LLC (the Company) was a Virginia limited liability company formed on November 24, 1999 under the laws of the state of Virginia. The Company previously operated under the name Soluble Systems during the year ended December 31, 2017 but changed its name to SolSys Medical, LLC in February 2018. During October 2017, the Company converted to a Delaware limited liability company. The Company distributes human skin tissue allograft under the brand name TheraSkin^® through a distribution agreement with LifeNet Health. The Company also manufactured and marketed a line of advanced sterile wound care dressings under the brand name TheraGauze™. TheraGauze™ was manufactured in a certified clean room environment under strict quality protocols in Hampton, Virginia. During the year ended December 31, 2017, the Company ceased production of TheraGauze™ but sold finished goods inventory in 2018. The Company’s products are sold to customers throughout the United States of America, and its corporate office is located in Newport News, Virginia.

Significant accounting policies:

Basis of accounting:

The financial statements of the Company are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America.

Cash and cash equivalents:

The Company considers all cash accounts, which are not subject to withdrawal restrictions or penalties, and all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.

Accounts receivable:

Trade receivables are stated at the amount management expects to collect from balances outstanding at year-end. Management provides an allowance for doubtful accounts which is based upon a review of outstanding receivables, historical collection information and existing economic conditions. The allowance for doubtful accounts was $75,000 as of December 31, 2018. Management determined no allowance was necessary as of December 31, 2017. Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received. Trade receivables are considered past due if any portion of the receivable balance is outstanding for more than sixty days. Interest is not charged on past due receivables.

Inventory:

Inventories are stated at the lower of cost or net realizable value. Cost is determined by the average cost method. All inventory at December 31, 2018 and 2017 consisted of finished goods inventory.

Notes continued on next page.

8

SOLSYS MEDICAL, LLC

(A Delaware Limited Liability Company)

NOTES TO FINANCIAL STATEMENTS

Years Ended December 31, 2018 and 2017

Note 1. Nature of Business and Significant Accounting Policies (continued)

Property and equipment:

Property and equipment are stated at cost. Repairs and maintenance are charged to expense when incurred; renewals and betterments are capitalized. Depreciation is computed using the straight-line method over the following estimated useful lives:

	Years
Computer equipment and software	2 - 5
Machinery and equipment	5 - 7
Furniture and fixtures	7
Leasehold improvements	7 - 39

When property is sold or retired, the cost and related accumulated depreciation are removed from the balance sheet and any gain or loss is included in the statement of operations.

Impairment of long-lived assets:

Management reviews long-lived assets for impairment when circumstances indicate the carrying amount of an asset may not be recoverable based on the undiscounted future cash flows of the asset. If the carrying amount of an asset may not be recoverable, a write-down to fair value is recorded. Fair values are determined based on the discounted cash flows, quoted market values, or external appraisals, as applicable. Long-lived assets are reviewed for impairment at the individual asset or the asset group level for which the lowest level of independent cash flows can be identified. No impairment was noted on long-lived assets for the years ended December 31, 2018 and 2017.

Debt issuance costs:

Costs incurred in connection with obtaining notes payable for the Company are recognized as interest expense over the term of the related notes payable using the straight-line method.

Revenue recognition:

The Company recognizes TheraGauze^® revenue when the product is shipped to customers.

Prior to July 2018 the Company received a revenue share based on gross sales of TheraSkin^® sold by LifeNet Health as vendor of record under a supply and distribution agreement with Skin Wound and Allograft Institute, LLC (LifeNet Health). In July 2018 LifeNet Health and the Company began transitioning the sales, billing and collections of TheraSkin^® from LifeNet Health to the Company as the new vendor of record. The transition of customers to the Company as vendor of record was virtually complete by the end of 2018. For customers that the Company is vendor of record for sales of TheraSkin^®, the Company recognizes TheraSkin^® revenue when the product is shipped to such customers. The supply and distribution agreement has a current term through October 26, 2027; however, the agreement contains a unilateral right for the Company to extend the term up to three (3) years to October 26, 2030 (see Note 6).

Notes continued on next page.

9

SOLSYS MEDICAL, LLC

(A Delaware Limited Liability Company)

NOTES TO FINANCIAL STATEMENTS

Years Ended December 31, 2018 and 2017

Note 1. Nature of Business and Significant Accounting Policies (continued)

Shipping and handling costs:

Shipping and handling costs incurred by the Company, primarily for paying LifeNet Health for shipping and handling fees for the Company’s sale of TheraSkin^® to customers as vendor of record as required by their supply and distribution agreement, the purchase of dry ice, and payment of shipping costs for products returned to LifeNet Health, amounted to $1,371,047 and $143,297, respectively, for the years ended December 31, 2018 and 2017, and are included in general and administrative expenses in the accompanying statements of operations.

Advertising:

Advertising costs are expensed as incurred. Advertising expense of $168,011 and $76,421 for the years ended December 31, 2018 and 2017, respectively, is included in the selling and marketing expenses in the accompanying statements of operations.

Research and development:

Research and development costs are expensed as incurred.

Income taxes:

The Company is a limited liability company and, as such, its income or loss passes directly to its members. Therefore, no provision or liability for income taxes has been included in the financial statements.

Under the provisions of the pronouncement for “Accounting for Uncertainty in Income Taxes,” if there are uncertain and potentially material tax positions identified, the resulting estimated liability, including any related interest and penalties, will be recorded as miscellaneous expense in the general and administrative expense category.

Use of estimates in the preparation of financial statements:

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Recent accounting pronouncements:

In December 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers” (ASU 2016-20). In May 2016, the FASB issued Accounting Standards Update 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” (ASU 2016-12). In April 2016, the FASB issued Accounting Standards Update 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing” (ASU-2016-10). In March 2016, the FASB issued Accounting Standards Update

Notes continued on next page.

10

SOLSYS MEDICAL, LLC

(A Delaware Limited Liability Company)

NOTES TO FINANCIAL STATEMENTS

Years Ended December 31, 2018 and 2017

Note 1. Nature of Business and Significant Accounting Policies (continued)

Recent accounting pronouncements (continued):

2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross verses Net)” (ASU-2016-08). These updates provide additional clarification and implementation guidance on the previously issued Accounting Standards Update 2014-09, “Revenue from Contracts with Customers (Topic 606)” (ASU 2014-09). Collectively, these updates require a company to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. These updates supersede almost all existing revenue recognition guidance under GAAP, with certain exceptions. ASU 2014-09 provides two methods of retrospective application. The first method would require the Company to apply ASU 2014-09 to each prior reporting period presented. The second method would require the Company to retrospectively apply ASU 2014-09 with the cumulative effect recognized at the date of initial application. ASU 2014-09 will be effective for the Company in the year beginning January 1, 2019. The Company is currently evaluating the impact of adopting the available methodologies of ASU 2014-09 upon its financial statements in future reporting periods. The Company has not yet selected a transition method. The Company is in the process of evaluating the new standard against its existing accounting policies, including the timing of revenue recognition, and its contracts with customers to determine the effect the guidance will have on its financial statements and what changes to systems and controls may be warranted.

In July 2018, the FASB issued Accounting Standards Update 2018-11, “Leases (Topic 842): Targeted Improvements” (ASU 2018-11), and Accounting Standards Update 2018-10, “Codification Improvements to Topic 842, Leases” ASU 2018-10). The amendments in ASU 2018-11 provide for an additional and optional transition method that allows an entity to initially apply ASC Topic 842 at the adoption date and recognize a cumulative effect adjustment to its opening balance of retained earnings in the period of adoption and continue its reporting for the comparative periods presented in accordance with the current lease guidance, ASC Topic 840. The amendments in ASU 2018-10 provide additional clarification and implementation guidance on certain aspects of the previously issued Accounting Standards Update 2016-02, “Leases (Topic 842)” (ASU 2016-02), and have the same effective and transition requirements as ASU 2016-02. Upon the effective date, ASU 2016-02 will supersede the current lease guidance in ASC Topic 840. Under the new guidance, lessees will be required to recognize for all leases, with the exception of short-term leases, a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis. Concurrently, lessees will be required to recognize a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company plans to apply the optional transition method at the adoption date and is currently evaluating the effects the adoption of ASU 2016-02 will have on the financial statements.

In August 2016, FASB issued ASU 2016-15, “Statement of Cash Flows — Classification of Certain Cash Receipts and Cash Payments (Topic 230)” (“ASU 2016-15”). The standard reduces diversity in practice of how certain transactions are classified in the statement of cash flows. The new guidance

Notes continued on next page.

11

SOLSYS MEDICAL, LLC

(A Delaware Limited Liability Company)

NOTES TO FINANCIAL STATEMENTS

Years Ended December 31, 2018 and 2017

Note 1. Nature of Business and Significant Accounting Policies (continued)

Recent accounting pronouncements (continued):

clarifies the classification of cash activity related to debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate and bank-owned life insurance policies, distributions received from equity-method investments, and beneficial interests in securitization transactions. The standard also describes a predominance principle in which cash flows with aspects of more than one class that cannot be separated should be classified based on the activity that is likely to be the predominant source of use of cash flow. ASU 2016-15 will be effective for the Company in the year beginning January 1, 2019.

In March 2016, the FASB issued ASU No. 2016-09, “Compensation — Stock Compensation (Topic 718): Improvements to Share-Based Payment Accounting” (“ASU 2016-09”). The standard is intended to simplify several areas of accounting for share based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. The Company adopted ASU 2016-09 during the year ended December 31, 2018 which had no material impact on the financial statements. In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718) Scope of Modification Accounting (“ASU 2017-09”). This ASU clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The standard was adopted on January 1, 2018. The adoption of ASU 2017-09 did not have any impact on the financial position, results of operations, or cash flows.

Reclassifications:

Certain reclassifications have been made to the December 31, 2017 financial statement presentation to correspond to the current year’s format. Previously reported members’ deficit and net loss are unchanged due to these reclassifications.

Note 2. Notes Payable

Notes payable consists of the following as of December 31:

	2018		2017
SWK Funding, LLC note payable	$	15,094,878	$	15,094,878
Less unamortized debt issuance costs		176,270		222,409
		14,918,608		14,872,469
Less current maturities, net of unamortized debt issuance costs		889,490		—
	$	14,029,118	$	14,872,469

Notes continued on next page.

12

SOLSYS MEDICAL, LLC

(A Delaware Limited Liability Company)

NOTES TO FINANCIAL STATEMENTS

Years Ended December 31, 2018 and 2017

Note 2. Notes Payable (continued)

Following are the scheduled maturities of the notes payable for the years ending December 31:

2019	$	900,000
2020		3,600,000
2021		3,600,000
2022		6,994,878
	$	15,094,878

The Company has a $12,000,000 promissory note syndicated by SWK Funding, LLC (SWK) on the behalf of multiple lenders as defined in the note agreement. During May 2016, the promissory note was amended. As part of the amendment, $397,500 of accrued interest was capitalized into the principal of the note balance. During May 2017, the promissory note was amended to add additional principal of $1,000,000. During October 2017, the promissory note was again amended. As part of this amendment, $1,697,378 of accrued interest was capitalized into the principal of the note balance. The amended note accrues interest at a variable rate of the greater of 1.5% or the three month LIBOR, with a maximum variable rate of 3%, plus 10.25% (13.06% at December 31, 2018) payable quarterly. The Company is required to make revenue-based principal payments based on aggregate revenue as defined in the credit agreement. The revenue based payments require quarterly the Company to pay 12.5% of aggregate annual revenue up to $15,000,000 and 10% of any aggregate annual revenue greater than $15,000,000. Beginning November 2019, scheduled principal payments of $900,000 plus accrued interest are due quarterly, with all remaining principal and unpaid accrued interest due October 26, 2022. The note is secured by substantially all assets of the Company, and is guaranteed by two members of the Company up to $5,000,000. At December 31, 2018 and 2017, interest related to this note of $277,749 and $236,501, respectively, remains in accrued interest on the accompanying balance sheets. As part of the amendment, the note calls for an exit fee in the amount equal to 5% of the total principal borrowings and capitalized interest on the note to be paid to SWK upon the earlier of the maturity date, as defined, or the full repayment of the note. The Company recognized $83,433 and $164,344, respectively, of expense related to the exit fee during the years ended December 31, 2018 and 2017 which is included in interest expense in the accompanying statements of operations. Accrued exit fees of $436,041 and $352,608, respectively, were outstanding and included on the accompanying balance sheets as of December 31, 2018 and 2017.

Under the terms of the promissory note syndicated by SWK, the Company is required to meet certain financial covenants. During the year ended December 31, 2018, the Company failed to meet quarterly covenants associated with its debt agreement. Subsequent to year end, the Company and SWK entered into a forbearance agreement as a result of the covenant violation. The forbearance agreement is effective until the earlier of April 15, 2019 or the occurrence of another event of default as defined in the agreement.

As part of the issuance of the SWK note and subsequent amended and restated warrant agreements, 1,209,068 detachable warrants for Series D Preferred units were issued to SWK with an exercise price of $.99 per unit with an additional 2,284,793 of additional warrant units for Series D Preferred units with an exercise price of $.89 per unit. The warrants expire at the earlier of May 10, 2027, or an exercise event as described in the amended and restated warrant agreement. No Series D Preferred Units warrants had been exercised as of December 31, 2018.

Notes continued on next page.

13

SOLSYS MEDICAL, LLC

(A Delaware Limited Liability Company)

NOTES TO FINANCIAL STATEMENTS

Years Ended December 31, 2018 and 2017

Note 2. Notes Payable (continued)

No discount or premium was recognized upon issuance of the detachable warrants and convertible notes, and at December 31, 2018 and 2017, respectively, there is no carrying amount related to the detachable warrants as management determined that their fair value was equal to zero.

The Company had a $1,000,000 promissory note with Alliqua Biomedical, Inc (“Alliqua”). In January 2017, the Company entered into an additional $350,000 promissory note with Alliqua as part of Alliqua’s Contribution and Merger Agreement with the Company. The notes accrued interest at 6% with all accrued interest payable in arrears to Alliqua on the maturity date, which was defined in the notes as the earlier of the termination of the Contribution and Merger Agreement, the closing date of the Contribution and Merger Agreement, or an event of default. On February 27, 2017, Alliqua terminated the Contribution and Merger Agreement, resulting in all outstanding amounts becoming due at the time of termination. During October 2017, the Company entered into a payoff agreement with Alliqua to satisfy all principal and outstanding accrued interest under the promissory notes for a total of $1,000,000. As a result of the payoff agreement, the Company recognized $433,458 of debt forgiveness income which is included in the accompanying statement of operations for the year ended December 31, 2017.

The Company issued various convertible promissory notes in principal amounts ranging from $20,000 to $1,000,000. During the year ended December 31, 2017, the Company issued additional convertible promissory notes in the aggregate principal amount of $330,000. A majority of the notes outstanding were with members of the Company (see Note 5). The notes bore interest at a fixed rate of 16% per annum, payable at maturity. The convertible notes, along with all accrued and unpaid interest, were due on the earliest of May 31, 2020, the day of a change of control transaction as defined in the note agreements, or the date that is six months after the payoff of the Company’s promissory note to SWK. The terms of conversion of the outstanding debt into Series D Preferred Units were governed by the individual note purchase agreements at a conversion rate equal to $20,177,707 divided by the number of Units of the Company outstanding immediately prior to the conversion of the first Series D Convertible Note. These notes were paid in full during the year ended December 31, 2017.

During the years ended December 31, 2018 and 2017, the Company incurred interest expense of $1,924,823 and $2,496,661, respectively, on the notes payable. Additionally, amortization of debt issuance costs of $46,139 and $97,048, respectively, is included in interest expense for the years ended December 31, 2018 and 2017.

Notes continued on next page.

14

SOLSYS MEDICAL, LLC

(A Delaware Limited Liability Company)

NOTES TO FINANCIAL STATEMENTS

Years Ended December 31, 2018 and 2017

Note 3. Members’ Deficit

Effective October 26, 2017, the Company amended and restated its existing operating agreement to create a class of Series E Preferred Units to be issued by the Company. The restatement includes each Member’s status as Common, Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred, Series E Preferred Units, and Series F Preferred Units, along with the number of units held by each member. Additionally, the restatement provided for the Company to issue up to a maximum of 13,498,187 Series F Preferred units as incentive compensation for certain key executives of the Company in consideration for those employees entering into employment agreements with the Company. The Series F Preferred units vest over a four year period and the total number of Series F units are subject to the exercise of outstanding warrants for Series D Preferred Units (see Note 6).

The amended operating agreement allows for Series E Preferred Members to require the Company to redeem for cash all of the then outstanding Series E Preferred Units at any time during or after October 2021. The redemption rate will be at a purchase price equal to the greater of the fair market value of the Series E Preferred Units at time of the redemption or the original Series E Preferred purchase price plus an aggregate internal rate of return of 8% per annum. If the Company is unable to redeem the Series E Preferred Units within 180 days after receiving notice of the redemption request, the Company may be forced to engage an investment bank to direct the sale of the Company in order to satisfy the redemption obligations.

During the years ended December 31, 2018 and 2017, the Company issued a total of 49,923,118 units of Series E Preferred units for a total of $6,000,000 and $19,000,000, respectively. These units are recorded net of syndication fees of $1,811,040 incurred during the year ended December 31, 2017. No syndication fees were incurred during the year ended December 31, 2018.

The Company has a total of 71,736,864 units issued, of which 9,760,419 units are common units, 3,314,401 units are Series A Preferred Members, 8,764,741 units are Series B Preferred Members, 4,676,263 units are Series C Preferred Members, and 45,221,040 units are Series E Preferred members. In addition, there are outstanding warrants exercisable for up to 3,493,861 Series D Preferred Units as of December 31, 2018. During the year ended December 31, 2017, warrants were exercised by a related party for 1,000 common units for a total of $329.

Profit and loss allocations are made in accordance with the operating agreement and follow the distribution schedule as outlined below.

Distributions:

Distributions of net cash flow will be paid in accordance with the terms of the operating agreement. No distributions were paid during 2018 and 2017.

Allocation of profit from operations and distributions of net cash flow resulting from a liquidation event follow waterfall schedules as outlined in the operating agreement. Allocations of loss from operations will be made in accordance with ownership percentage, subject to certain limitations as defined in the operating agreement.

Limited liability company dissolution:

The Company shall be dissolved upon the consent of the Board of Managers and the Series E Preferred Members or upon the occurrence of other events as defined in the amended and restated operating agreement.

Notes continued on next page.

15

SOLSYS MEDICAL, LLC

(A Delaware Limited Liability Company)

NOTES TO FINANCIAL STATEMENTS

Years Ended December 31, 2018 and 2017

Note 4. Operating Leases

The Company leases its office facilities and equipment through operating leases with various terms through May 2024. Office space is leased on a month-to-month lease from an entity for which a member of the Company is president (see Note 5). Rent expense under the related party lease totaled $80,593 and $77,364, respectively, for the years ended December 31, 2018 and 2017. Rent expense under unrelated party leases totaled $46,019 and $41,629, respectively, for the years ended December 31, 2018 and 2017.

Minimum lease payments required under these lease agreements for the years ending December 31 are as follows:

2019	$	30,216
2020		21,820
2021		20,172
2022		18,293
2023		18,177
Thereafter		7,574
	$	116,252

Note 5. Related Party Transactions

The Company had issued various notes payable to members and other related parties to finance operations. During the year ended December 31, 2017 the Company issued additional convertible promissory notes to members in the aggregate principal amount of $330,000. Interest expense on related party notes totaled $519,505 during the year ended December 31, 2017. These notes were paid in full during the year ended December 31, 2017.

The Company’s promissory note is syndicated by SWK Holdings who holds outstanding warrants exercisable in the Company for up to 3,493,861 Series D Preferred Units as of December 31, 2018 (see Notes 2 and 3).

During the years ended December 31, 2018 and 2017, the Company leased office space from an entity for which a member of the Company is president (see Note 4).

The Company has a distribution and supply agreement with LifeNet Health from which substantially all revenue is derived with LifeNet Health as vendor of record, or substantially all product is sourced with LifeNet Health as supplier to the Company after the Company became vendor of record (see Notes 8 and 9). LifeNet Health is a member of the Company, owning 1,000 common units as of December 31, 2018 and 2017. Additionally, the Chief Financial Officer of LifeNet Health serves on the Company’s Board of Directors.

Notes continued on next page.

16

SOLSYS MEDICAL, LLC

(A Delaware Limited Liability Company)

NOTES TO FINANCIAL STATEMENTS

Years Ended December 31, 2018 and 2017

Note 6. Commitments and Contingencies

During the year ended December 31, 2017, the Company amended its supply and distribution agreement with LifeNet Health and contemporaneously entered into a Services Agreement with LifeNet Health. As part of the amended agreement, the Company and LifeNet Health agreed to an exclusive purchase arrangement in which the Company purchases all TheraSkin^® product during the term of the agreement from LifeNet Health, and LifeNet Health agreed to not supply or provide rights to a third party for TheraSkin nor any competing product as defined in the agreement. Additionally, the amended agreement modifies the existing revenue share agreement based on approved gross profit margin ranges as defined in the agreement.

The Services Agreement provides for two services that the Company may choose to have LifeNet Health provide: 1) LifeNet Health will charge the Company a service fee equal to 10% of total aggregate net sales of TheraSkin^® in exchange for LifeNet Health invoicing on behalf of the Company on all TheraSkin^® sales and/or 2) LifeNet Health will charge the Company a shipping fee equal to 10% of the net sales of TheraSkin^® to customers until the earlier of the termination of the agreement or 30 days following the Company providing an assumption of shipping responsibility notice to LifeNet Health. In July 2018 LifeNet Health and the Company began transitioning the invoicing function from LifeNet Health to the Company. The transition of all customers to the Company as vendor of record was virtually complete by the end of 2018. LifeNet Health continues to perform the shipping function under the supply and distribution agreement for the Company to customers it is vendor of record, until such time as the Company elects to take over shipping of TheraSkin^®.

As a result of LifeNet Health agreeing to the amended supply and distribution agreement and the occurrence of a change of control event as defined in the agreement, the Company paid LifeNet Health a $1,200,000 modification fee. This fee is included in general and administrative expenses in the accompanying statement of operations for the year ended December 31, 2017.

The Company has equity appreciation rights agreements with certain current and past employees. For common unit equity appreciation rights, the equity appreciation rights represent the right to receive for each common unit the excess of the fair market value of the common unit over the base value per common unit, which is defined as $1. For Series F Unit appreciation rights, the equity appreciation rights represent the right to receive for each Series F Unit the fair market value of the Series F unit as defined in the respective agreements. The Series F Unit appreciation rights are subject to a vesting schedule as described in Note 3 of the financial statements. The appreciation rights occur upon the occurrence of a change in control event as defined in the agreement. As of December 31, 2018 and 2017, 1,192,000 and 1,259,000, respectively, of common unit equity appreciation rights were outstanding. At December 31, 2018, 1,146,750 of Series F Unit equity appreciation rights were outstanding. No Series F Unit equity appreciation rights were outstanding as of December 31, 2017. Based on a valuation of the Company, management believes that the value of the equity appreciation rights to be $0 and, as a result, no expense accrual has been recorded for the equity appreciation rights as of December 31, 2018 and 2017.

Notes continued on next page.

17

SOLSYS MEDICAL, LLC

(A Delaware Limited Liability Company)

NOTES TO FINANCIAL STATEMENTS

Years Ended December 31, 2018 and 2017

Note 7. Retirement Plan

The Company has a defined contribution plan (the Plan) under section 401(k) of the Internal Revenue Code for eligible employees. Under the Plan, employees are entitled to contribute a portion of their compensation each Plan year up to IRS limitations. For each Plan year, the Company makes a matching contribution of up to 4% of the participant’s contribution, as determined by the Company. Contributions made to the Plan by the Company were $280,509 and $193,285, respectively, for the years ended December 31, 2018 and 2017.

Note 8. Concentrations of Credit Risk

During 2018 and 2017, substantially all revenues and outstanding accounts receivable and source of product for resale were derived from transactions with LifeNet Health or from third party customers through the Company supply and distribution agreement with LifeNet Health (see Note 6).

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalent accounts in financial institutions. Amounts in excess of federally insured limits at December 31, 2018 and 2017 totaled $1,407,915 and $6,168,939, respectively.

Note 9. Management Plans

The Company’s financial statements have been presented on a basis that its business is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

The Company incurred net losses of $9,863,138 and $7,573,903 for the years ended December 31, 2018 and 2017, respectively. These losses reduced working capital and increased members’ deficit, resulting in the need to secure new capital to fund operations in 2019 and beyond. As a result, there is substantial doubt about the Company’s ability to continue as a going concern. If management’s plans are realized, then the substantial doubt about the Company’s ability to continue as a going concern may be alleviated.

The planned merger of the Company and Alliqua pursuant to that certain sale/merger agreement dated October 5, 2016 (the “Sale/Merger Agreement”) did not close due to Alliqua’s inability to raise the required capital to close the transaction. The Sales/Merger Agreement terminated by its own terms on or about February 27, 2017. Prior to the termination of the Sale/Merger Agreement, and pursuant to its terms, Alliqua advanced the Company unsecured loan proceeds totaling $1,350,000 (the “Alliqua Loan”) (see Note 2), which assisted the Company in funding its continuing operations.

Based on the strong sales performance that the Company experienced in 2016 during the aforementioned sale/merger process, the Company’s management, its Board of Directors and its investment banker, Canaccord Genuity, believed the Company could raise new growth equity capital to continue operations and growth. The formal process conducted by Canaccord Genuity resulted in the $25,000,000 growth equity investment from 1315 Capital (“1315”) and SV Health Investors (“SV”) that closed on or about October 26, 2017, of which $19,000,000 was funded at closing and the remaining $6,000,000 was funded in June 2018.

Notes continued on next page.

18

SOLSYS MEDICAL, LLC

(A Delaware Limited Liability Company)

NOTES TO FINANCIAL STATEMENTS

Years Ended December 31, 2018 and 2017

Note 9. Management Plans (continued)

During 2019, the Company also secured a working line of credit of $5,000,000 from Silicon Valley Bank to support the anticipated revenue growth in addition to transitioning responsibility of order-to-cash process from LifeNet Health to the Company (see Note 10). Additionally, 1315 and SV funded an additional $3,000,000 equity investment in the Company in February 2019 that was contemplated in the original agreement between 1315, SV and the Company, and are contemplating another $4,000,000 equity investment in the second quarter of 2019 into the Company (see Note 10). Lastly, SWK Funding has offered to increase its $15,000,000 loan to $20,000,000 in Q2 2019.

The new growth equity investment allowed the Company to expand the number of direct sales representatives to approximately 55 at the end of calendar year 2018. Although 1315 and SV are not contractually obligated to fund new product acquisition and/or licensing, they and management are actively seeking new product additions to the TheraSkin^® product line to provide direct sales representatives more products to sell at the same point of sales to create greater sales efficiency per direct sales representative. The Company believes the expansion of the sales force will contribute significant sales growth going forward.

TheraSkin^® continues to maintain nationwide Medicare coverage, extensive private insurance coverage and Medicaid coverage in 42 States and the District of Columbia. Expanding Medicaid and private insurance coverage for TheraSkin^® continues to be a strategic priority for the Company. Management is pursuing Medicaid coverage in the remaining 8 States that do not currently cover Thera Skin^® for Medicaid patients and is actively pursuing coverage by WellPoint Anthem, Aetna and Humana and second tier private insurance companies.

An independent general surgeon recently published a clinical study that involved a non-industry sponsored prospective randomized clinical trial comparing head-to-head TheraSkin^® and Apligraf in treatment of venous leg ulcers. The Company plans to submit this new clinical evidence to private and Medicaid payors to seek new coverage determinations for TheraSkin^®. Additionally, the Company is working on other clinical study efforts to both defensively protect and offensively expand TheraSkin^® payor coverage policy.

Based on the foregoing, management believes that if its plans are successful, the Company will have adequate funds to continue its operations and execute its sales and marketing strategy for its primary wound care product, TheraSkin^®. However, there can be no assurances that the Company will be able to secure all additional funding.

Note 10. Subsequent Events

Subsequent to year end, the Company entered into a $5,000,000 line of credit agreement with Silicon Valley Bank. Under the line of credit agreement, interest on borrowings is calculated at the greater of the prime rate plus .25% or 5.25%. Borrowings on the line are limited to 85% of eligible accounts receivable as defined in the line of credit agreement. The line is secured by substantially all assets of the Company. Additionally, the agreement calls for a final payment fee of $75,000 to be paid at the earlier of the maturity date or the termination of the agreement. The Company is required to meet certain financial covenants as defined in the line of credit agreement. The line of credit agreement matures on January 22, 2021.

Notes continued on next page.

19

SOLSYS MEDICAL, LLC

(A Delaware Limited Liability Company)

NOTES TO FINANCIAL STATEMENTS

Years Ended December 31, 2018 and 2017

Note 10. Subsequent Events (continued)

Subsequent to year end, the Company entered into a forbearance agreement with SWK dated March 4, 2019 as a result of covenant violations on its credit agreement as of December 31, 2018. Under the terms of the forbearance agreement, SWK agreed to forbear in exercising any right or remedy available to it under the loan agreement as it relates to defaults on the line of credit as of December 31, 2018. The forbearance agreement is effective until the earlier of April 15, 2019 or the occurrence of another event of default as defined in the agreement (see Note 2).

Subsequent to year end, the Company issued 5,426,525 of Series E Preferred member units to 1315 and SV raising an additional $3,000,000 equity investment in the Company.

Management has evaluated subsequent events through April 11, 2019, the date the financial statements were available to be issued.

20