Revenue

The Company adopted the guidance in the FASB’s Accounting Standards Codification (ASC)

Revenue from Contracts with Customers

(ASC

606

) using the modified retrospective method effective

January 1, 2018.

The adoption of ASC

606

was applied to all contracts

not

completed as of the date of adoption. The adoption did

not

have a material impact on the amount and timing of revenue recognized in the condensed consolidated financial statements. The Company made

adjustments to our previously reported total and product revenue, as those periods continue to be presented in accordance with the Company’s historical accounting practices under Topic,

605,

Revenue Recognition

Pursuant to ASC

606,

revenue is recognized by the Company when a customer obtains control of promised goods or services. The amount of revenue that is recorded reflects the consideration that the Company expects to receive in exchange for those goods or services. The Company applies the following

five

-step model in order to determine this amount: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are capable of being distinct or distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.

Product Revenues

The Company sells its products principally to a number of distributors (i.e., its customers) under legally enforceable executed contracts. The Company’s distributors subsequently resell the products to sub-distributors and health care providers, among others. The Company recognizes revenue from product sales when the distributor obtains control of the Company’s product, which typically occurs upon shipment to the distributor, in return for agreed-upon fixed price consideration. Performance obligations are generally settled quickly after purchase order acceptance; therefore, the value of unsatisfied performance obligations at the end of any reporting period is generally immaterial.

The Company’s payment terms are consistent with prevailing practice in the respective markets in which the Company does business. Distributors make payments based on fixed-price contract terms, which are

not

affected by contingent events that could impact the transaction price. Payment terms fall within the

one

-year guidance for the practical expedient which allows the Company to forgo adjustment of the contractual payment amount of consideration for the effects of a significant financing component. The Company’s contracts with customers do

not

customarily provide a right of return, unless certain product quality standards are

not

met.

To identify variable consideration and determine the transaction price, the Company has reviewed its standard contractual terms and conditions and its customary business practices. Volume based discounts with tiered pricing are generally prospective in nature. These prospective discounts together with any free-of-charge sample units offered are evaluated as potential material rights. If the discounts or free of charge sample units are considered significant in the context of the contract, revenue is deferred.

The Company receives payments from its customers based on billing schedules established in each contract. Up-front payments and fees are recorded as deferred revenue upon receipt or when due, and

may

require deferral of revenue recognition to a future period until the Company performs its obligations under these arrangements. Amounts are recorded as accounts receivable when the Company’s right to consideration is unconditional. As of

June 30, 2018,

deferred revenue was

$0.1

million.

Generally, distributor contracts contain Free on Board (FOB) shipping point or Ex-Works terms where the customer pays the shipping company directly for all shipping and handling costs. In those contracts in which the Company pays for the shipping and handling, the associated costs are generally recorded along with the product sale at the time of shipment in cost of product revenue when control over the products has transferred to the customer. The Company does

not

collect sales tax on its product sales as it is

not

applicable. Value-add and other taxes collected by the Company concurrently with revenue-producing activities are excluded from revenue. The Company’s general product warranty does

not

extend beyond an assurance that the product or services delivered will be consistent with stated contractual specifications, which does

not

create a separate performance obligation. The Company recognizes the incremental costs of obtaining contracts as an expense when incurred as the amortization period of the assets that the Company otherwise would have recognized is

one

year or less in accordance with the practical expedient in paragraph ASC

340

These costs are included in selling, general and administrative expenses.

Included as a component of product revenue is sales-based royalty revenue, which represents the utilization of our intellectual property licensed by our commercial partners. The Company does

not

have future performance obligations under license arrangements as described in more detail below. The license is deemed to be the predominant item to which the royalties relate, and thus the constraints on variable consideration are applied. The Company records royalty revenues based on estimated net sales of licensed products as reported to us by our commercial partners. Differences between actual and estimated royalty revenues have

not

been material and are typically adjusted in the following quarter when the actual amounts are known.

License, Milestone and Contract Revenues

The Company has agreements with DePuy Synthes Mitek Sports Medicine, a division of DePuy Orthopaedics, Inc. (“Mitek”) that include the grant of certain licenses, performance of development services, and supply of product. Revenues from the agreements with Mitek represent

72%

and

73%

of total Company revenues for the

three

- and

six

-month periods ended

June 30, 2018,

respectively. The Company has agreements with other customers that

may

include the delivery of a license and supply of product. The adoption of ASC

606

did

not

impact the accounting for these agreements.

The agreements with Mitek include variable consideration such as contingent development and regulatory milestones, sales-based milestones, and royalties. The Company completed the performance obligations related to granted licenses and development services under these agreements in prior years. Agreements that include a promise for future supply of product at the customer’s discretion are generally considered as options. The Company assesses if these options provide a material right to the licensee and if so, they are accounted for as separate performance obligations.

Variable consideration is included in the transaction price only to the extent a significant reversal in the amount of cumulative revenue recognized is

not

probable to occur when the uncertainty associated with the variable consideration is subsequently resolved. Sales-based milestones and royalties for these arrangements are excluded from this assessment and are only recognized when the later of the underlying sale occurs or the performance obligation to which some or all of the sales-based royalty has been allocated has been satisfied (or partially satisfied). This is generally in the same period that the Company’s licensees complete their product sales in their territory, for which the Company is contractually entitled to a percentage-based royalty. Revenue from sales-based royalties is included in product revenues as discussed above. Future revenue from sales-based or regulatory milestones will be subject to the constraints around variable consideration and will generally be recognized at the time the milestone is achieved.

There was

cumulative effect to relevant balance sheet accounts upon adopting the new standard using the modified retrospective method.

The following tables provide the disaggregated revenue by primary geographical market and major product group. Product revenue by product group is as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
Orthobiologics	$	26,192	$	24,468	$	45,681	$	44,695
Surgical		1,263		1,335		2,509		2,631
Dermal		623		453		83		878
Other		2,464		2,084		3,527		3,517
Product Revenue	$	30,542	$	28,340	$	51,800	$	51,721

Total revenue by geographic location and as a percentage of overall total revenue for the

three

- and

six

-month periods ended

June 30, 2018

and

2017

is as follows:

	Three Months Ended June 30,
	2018					2017
	Total Revenue		Percentage of Revenue			Total Revenue		Percentage of Revenue
Geographic Location:
United States	$	24,773		81	%	$	27,447		82	%
Europe		3,498		11	%		4,060		12	%
Other		2,277		8	%		1,955		6	%
Total Revenue	$	30,548		100	%	$	33,462		100	%

	Six Months Ended June 30,
	2018					2017
	Total Revenue		Percentage of Revenue			Total Revenue		Percentage of Revenue
Geographic Location:
United States	$	41,682		81	%	$	46,377		82	%
Europe		5,889		11	%		6,889		12	%
Other		4,241		8	%		3,582		6	%
Total Revenue	$	51,812		100	%	$	56,848		100	%

May 2, 2018,

the Company publicly disclosed a voluntary recall of certain lots of its HYAFF-based products, HYALOFAST, HYALOGRAFT C, and HYALOMATRIX. The Company initiated the recall after internal quality testing, which indicated that the products were at risk of

not

maintaining certain measures throughout their entire shelf life. While there is

indication of any safety or efficacy issue related to the products at this time, the Company remains committed to the highest standards of quality and is removing the products from the field as a precautionary measure. During the

three

-month period ended

March 31, 2018

the Company recorded a revenue reserve for this voluntary recall of

$1.1

million of which

$0.9

million was related to revenue recorded in prior periods. The adjustments related to the initial revenue reserve during the

three

-month period ended

June 30, 2018

were immaterial. The revenue reserves impacted Dermal and Orthobiologics product groups and all geographic locations.