# Orchestra BioMed Holdings, Inc.: Form 10-Q for the period ended Jun 30, 2023

- Company: [Orchestra BioMed Holdings, Inc.](/companies/obio.md) (CIK 1814114)
- Form: 10-Q
- Filed: 2023-08-10
- Accepted by EDGAR: Aug 10, 2023, 16:06 ET
- Period: 2023-06-30
- Accession: 0001558370-23-014496
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1814114/000155837023014496/obio-20230630x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1814114/000155837023014496/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-04-01 to 2023-06-30 | $915.0k | us-gaap:Revenues |
| Revenue | 6 months, 2023-01-01 to 2023-06-30 | $2.1m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2023-04-01 to 2023-06-30 | $54.0k | us-gaap:CostOfRevenue |
| Cost of revenue | 6 months, 2023-01-01 to 2023-06-30 | $98.0k | us-gaap:CostOfRevenue |
| Research and development | 3 months, 2023-04-01 to 2023-06-30 | $8.5m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2023-01-01 to 2023-06-30 | $16.8m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2023-04-01 to 2023-06-30 | $5.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2023-01-01 to 2023-06-30 | $9.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-04-01 to 2023-06-30 | −$13.0m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2023-01-01 to 2023-06-30 | −$24.5m | us-gaap:OperatingIncomeLoss |
| Net income | 3 months, 2023-04-01 to 2023-06-30 | −$12.0m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2023-01-01 to 2023-06-30 | −$23.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-04-01 to 2023-06-30 | −$0.35 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2023-01-01 to 2023-06-30 | −$0.74 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-04-01 to 2023-06-30 | −$0.35 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2023-01-01 to 2023-06-30 | −$0.74 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-04-01 to 2023-06-30 | 34,613,466 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2023-01-01 to 2023-06-30 | 31,228,323 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2023-01-01 to 2023-06-30 | −$24.9m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2023-01-01 to 2023-06-30 | $62.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2023-06-30 | $16.4m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-06-30 | $119.6m | us-gaap:AssetsCurrent |
| Total assets | at 2023-06-30 | $125.9m | us-gaap:Assets |
| Current liabilities | at 2023-06-30 | $11.9m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-06-30 | $36.4m | us-gaap:Liabilities |
| Long-term debt | at 2023-06-30 | $10.0m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2023-06-30 | $89.4m | us-gaap:StockholdersEquityIncludingPortionAttributableToNoncontrollingInterest |

## Management's discussion and analysis

As filed, 66,842 characters.

*Unless otherwise indicated or the context otherwise requires, references to “Orchestra,” “Orchestra’s,” “the Company,” “we,” “its” and “our” refer to Orchestra BioMed Holdings, Inc. and its consolidated subsidiaries. All references to years, unless otherwise noted, refer to the Company’s fiscal years, which end on December 31.*

*The following discussion should be read together with “Special Note Regarding Forward-Looking Statements” and the Company’s unaudited condensed consolidated financial statements, together with the related notes thereto, included elsewhere in this Quarterly Report on Form 10-Q (the “Consolidated Financial Statements”), and the Company’s audited consolidated financial statements, together with the related notes thereto, included as Exhibit 99.1 to the Company’s Current Report on Form 8-K/A filed with the Securities and Exchange Commission on March 24, 2023.*

### Closing of Business Combination

Prior to January 26, 2023, the Company was a special purpose acquisition company formed for the purpose of entering into a merger, amalgamation, share exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more businesses or entities. On January 26, 2023, we consummated the business combination contemplated by the Agreement and Plan of Merger, dated as of July 4, 2022 (as amended by Amendment No. 1 to Agreement and Plan of Merger, dated July 21, 2022, and Amendment No. 2 to Agreement and Plan of Merger, dated November 21, 2022, the “Merger Agreement”) by and among Health Sciences Acquisitions Corporation 2, a special purpose acquisition company incorporated as a Cayman Islands exempted company in 2020 and Orchestra’s predecessor (“HSAC2”), HSAC Olympus Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of HSAC2 (“Merger Sub”), and Orchestra BioMed, Inc. (“Legacy Orchestra”). Pursuant to the Merger Agreement, (i) HSAC2 deregistered in the Cayman Islands in accordance with the Companies Act (2022 Revision) (As Revised) of the Cayman Islands and domesticated as a Delaware corporation in accordance with Section 388 of the Delaware General Corporation Law (the “Domestication”) and (ii) Merger Sub merged with and into Legacy Orchestra, with Legacy Orchestra as the surviving company in the merger and, after giving effect to such merger, continuing as a wholly owned subsidiary of Orchestra (the “Merger” and, together with the Domestication and the other transactions contemplated by the Merger Agreement, the “Business Combination”). As part of the Domestication, we changed our name from “Health Sciences Acquisitions Corporation 2” to “Orchestra BioMed Holdings, Inc.” On January 27, 2023, our common stock (“Company Common Stock”) began trading on The Nasdaq Global Market under the symbol “OBIO.” For additional information, see Note 3 to the Consolidated Financial Statements.

### Reverse Recapitalization

The Business Combination is accounted for as a reverse recapitalization (the “Reverse Recapitalization”) in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Under this method of accounting, HSAC2 is treated as the “acquired” company and Legacy Orchestra is treated as the acquirer for financial reporting purposes. As a result, the consolidated assets, liabilities and results of operations prior to the Reverse Recapitalization are those of Legacy Orchestra. Additionally, the shares and corresponding capital amounts and losses per share, prior to the Business Combination, have been retroactively restated based on shares reflecting the exchange ratio established in the Merger Agreement (the “Exchange Ratio”). For additional information on the Business Combination and the Exchange Ratio, see Note 3 to the Consolidated Financial Statements.

### Overview

We are a biomedical innovation company accelerating high-impact technologies to patients through risk-reward sharing partnerships with leading medical device companies. Our partnership-enabled business model focuses on forging strategic collaborations with leading medical device companies to drive successful global commercialization of products we develop. We are led by a highly accomplished, multidisciplinary management team and a board of directors with extensive experience in all phases of therapeutic device development. Our business was formed in 2018 by assembling a pipeline of multiple late-stage clinical product candidates originally developed by our founding team. Our flagship product candidates are BackBeat Cardiac Neuromodulation Therapy (“BackBeat CNT”) for the treatment of hypertension (“HTN”), a significant risk factor for death worldwide, and Virtue Sirolimus AngioInfusion Balloon (“Virtue SAB”) for the treatment of atherosclerotic artery disease, the leading cause of mortality worldwide.

Since Legacy Orchestra’s inception, we have devoted the substantial majority of our resources to performing research and development and clinical activities in support of our product development and collaboration efforts. We have funded our operations primarily through the issuance of convertible preferred stock and proceeds from the Business Combination, as well as through proceeds from our distribution agreement (the “Terumo Agreement”) with Terumo Medical Corporation (“Terumo”), borrowings under debt arrangements and, to a lesser extent, from product revenue from our subsidiary, FreeHold Surgical, Inc. (“FreeHold”). We have raised a cumulative $166.8 million in gross proceeds through the issuance of convertible preferred stock, $70.0 million in gross proceeds from the Business Combination, and have received $30.0 million from the Terumo Agreement through June 30, 2023. We have incurred net losses each year since inception. Our net losses were $12.0 million and $7.8 million for the three months ended June 30, 2023 and 2022, respectively, and $23.0 million and $13.6 million for the six months ended June 30, 2023 and 2022, respectively. We expect to continue to incur significant losses for the foreseeable future. As of June 30, 2023, we had an accumulated deficit of $222.7 million.

Legacy Orchestra, our wholly owned subsidiary, was incorporated in Delaware in 2017 and completed a recapitalization and mergers with Caliber Therapeutics, Inc., a Delaware corporation that has, among other things, the rights to the Virtue SAB product candidate and BackBeat Medical, Inc., a Delaware Corporation that has, among other things, the rights to the Backbeat CNT product candidate, in 2018. Legacy Orchestra completed the conversions of Caliber Therapeutics, Inc. to Caliber Therapeutics, LLC, a Delaware limited liability company, and BackBeat Medical, Inc. to BackBeat Medical, LLC, a Delaware limited liability company, in 2019.

### Recent Developments

On August 8, 2023, we announced that the U.S. Food and Drug Administration (the “FDA”) granted investigational device exemption approval with conditions to initiate our planned Virtue ISR-US pivotal study evaluating the efficacy and safety of Virtue SAB for the treatment of patients with Coronary in-stent restenosis (“ISR”). We are permitted to begin enrollment of the study upon completion of standard clinical trial initiation activities including clinical center Institutional Review Board approvals. The conditional approval also requires us to submit additional information to the FDA.

### Components of Our Results of Operations

### Partnership Revenue

To date, our partnership revenues have related to the Terumo Agreement described below. In future periods, partnership revenues may also include revenues related to the Exclusive License and Collaboration Agreement, dated as of June 30, 2022, by and among, Legacy Orchestra, BackBeat Medical, LLC and Medtronic, Inc. (an affiliate of Medtronic plc) (the “Medtronic Agreement”), discussed in Note 5, *Medtronic Agreement*, to the Consolidated Financial Statements.

Legacy Orchestra entered into the Terumo Agreement in June 2019, and has determined that the arrangement represents a contract with a customer and is therefore in scope of ASC 606, *Revenues from Contracts with Customers (“*ASC 606”). Under the Terumo Agreement, Legacy Orchestra received an upfront payment of $30.0 million in 2019 and an equity commitment of up to $5 million of which $2.5 million was invested in June 2019 as part of the Legacy Orchestra Series B-1 financing and $2.5 million was invested in June 2022 as part of the Legacy Orchestra Series D-2 financing.

Under the Terumo Agreement, we were initially eligible for certain milestone payments in the amount of $65 million from Terumo upon completion of certain minimum enrollments in clinical studies, making certain filings and submissions, and obtaining certain regulatory approvals and certifications, and are also eligible to earn royalties on future sales by Terumo based on royalty rates ranging from 10 - 15%. Of these milestone payments, $35 million relate to achieving certain milestones by specified target achievement dates. As of the date of this filing, we have already passed the target achievement dates for two $5 million milestone payments, in each case, without achieving the related milestones. In addition, due to delays in our Virtue SAB program resulting from the COVID-19 pandemic, supply chain issues and unexpected regulatory delays and requirements, including increased testing and other activities related to chemistry, manufacturing, and control, increased nonclinical and good laboratory practice preclinical data requirements, including biocompatibility, as well as a requirement to repeat good laboratory practice preclinical studies already performed based on changes to source of component materials and a change in manufacturing site, that caused us to amend our original project plan, we are unlikely to be able to complete the remaining time-based milestones by the specified target achievement dates to earn the remaining $25 million in time-based milestone payments pursuant to the Terumo Agreement. Further, Terumo has the right to terminate the agreement, or certain of its obligations thereunder, if certain milestones are not achieved. Although we are currently negotiating with Terumo mutually agreeable adjustments to certain target achievement dates to reflect the regulatory and pandemic-related delays, there is no assurance as to the outcome of these negotiations with respect to any potential modifications to the milestone target achievement dates. In addition, we will manufacture, or have manufactured, SirolimusEFR and have exclusive rights to sell it on a per unit basis to Terumo for use in the Virtue SAB product, and Terumo may also request other services from us from time to time.

We recorded the $30.0 million upfront payment received in 2019 from Terumo within deferred revenue and are recognizing the upfront payment over time based on a proportional performance model based on the costs incurred to date relative to the total costs expected to be incurred through the completion of the development of the Coronary in ISR indication, for which we are primarily responsible. We have recognized $12.2 million in cumulative partnership revenues from 2019 through June 30, 2023. There were no other proceeds received pursuant to the Terumo Agreement from 2019 through June 30, 2023.

In June 2022, Legacy Orchestra entered into the Medtronic Agreement for the development and commercialization of BackBeat CNT for the treatment of HTN in patients indicated for a cardiac pacemaker. We have determined that the arrangement is a collaboration within the scope of *ASC 808, Collaborative Arrangements (“*ASC 808”). In addition, we concluded that Medtronic, Inc., an affiliate of Medtronic plc (“Medtronic”), is a customer for a good or service that is a distinct unit of account, and therefore, the transactions in the Medtronic Agreement should be accounted for under ASC 606. Through June 30, 2023, there have been no amounts recognized as revenue under the Medtronic Agreement.

### Product Revenue

Product revenues related to sales of FreeHold’s intracorporeal organ retractors and such revenues are recognized at a point-in-time upon the shipment of the product to the customer given payment terms are typically 30 days. FreeHold products are currently only sold in the United States.

### Cost of Product Revenue and Gross Margin

Cost of product revenue consists primarily of costs of finished goods components for use in FreeHold’s products and assembled, warehoused and inventoried by a third-party vendor. We expect cost of finished goods product revenue to increase in absolute terms as our revenue grows.

Our gross margin has been and will continue to be affected by a variety of factors, including finished goods manufactured component parts and the cost to assemble and warehouse the FreeHold product finished goods inventory.

### Research and Development Expenses

Research and development expenses consist of applicable personnel, consulting, materials and clinical study expenses. Research and development expenses include:

- Certain personnel-related expenses, including salaries, benefits, bonus, travel and stock-based compensation;
- Cost of clinical studies to support new products and product enhancements, including expenses for clinical research organizations and site payments;
- Product device materials and drug supply and manufacturing used for internal research and development and clinical activities;
- Allocated overhead including facilities and information technology expenses; and
- Cost of outside consultants who assist with device and drug development, regulatory affairs, clinical affairs and quality assurance.

Research and development costs are expensed as incurred. Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical studies. In the future, we expect research and development expenses to increase in absolute dollars as we continue to develop new products, enhance existing products and technologies, initiate clinical studies, manufacture drug supply for internal research and development and clinical trial supply and perform activities related to obtaining additional regulatory approvals. We do not track expenses by product candidate, unless tracking such expenses is required pursuant to the revenue recognition model for a collaborative arrangement.

### Selling, General and Administrative Expenses

Selling, general and administrative expenses consist of personnel-related expenses, including salaries, benefits, bonus, travel and stock-based compensation. Other selling, general and administrative expenses include professional services fees, including legal, audit investor/press relations, non-income taxes, insurance costs, cost of outside consultants and employee recruiting and training costs. Moreover, we incur and expect to continue to incur additional expenses associated with operating as a public company, including legal, accounting, insurance, exchange listing and U.S. Securities and Exchange Commission (“SEC”) compliance and investor relations. We expect quarterly selling, general and administrative expenses, excluding stock compensation expense, to continue to increase as a public company.

### Interest Income (Expense), Net

Interest income reflects the income generated from marketable securities during the year. Interest expense is attributable to loan interest.

In June 2022, Legacy Orchestra entered into a Loan and Security Agreement with Avenue Venture Opportunities Fund I and II (the “2022 Loan and Security Agreement”). As part of the 2022 Loan and Security Agreement, Legacy Orchestra paid off the balance of the 2019 Loan and Security Agreement (as defined below) with Silicon Valley Bank. The terms of the 2022 Loan and Security Agreement include a term loan of up to $20 million available in two tranches with the first tranche of $10 million that was drawn at closing in June of 2022, and a second tranche of $10 million available at closing of the Series D-2 was not drawn. Additionally, we may have access to a third tranche of $30 million subject to certain financing milestones. The term loan matures on June 1, 2026 and accrues interest at a floating per annum rate equal to the Wall Street Journal prime rate plus 6.45%. The rate in effect at June 30, 2023 was 14.7%. Refer to Note 14 to the Consolidated Financial Statements.

In December 2019, Legacy Orchestra entered into a Loan and Security Agreement with Silicon Valley Bank for a term loan as described in Note 14 to the Consolidated Financial Statements (the “2019 Loan and Security Agreement”). The 2019 Loan and Security Agreement provided Legacy Orchestra with capital for development and general corporate purposes. On December 31, 2020, Legacy Orchestra borrowed $10 million under the 2019 Loan and Security Agreement.

### Gain (Loss) on Fair Value Adjustment of Warrant Liability

Certain of Legacy Orchestra’s outstanding warrants contained features that required the warrants to be accounted for as liabilities. The warrants were subject to re-measurement at each balance sheet date with gains and losses reported through Legacy Orchestra’s condensed consolidated statements of operations and comprehensive loss as gain (loss) on fair value adjustment of warrant liability. Upon closing of the Business Combination, all liability classified warrants of Legacy Orchestra became equity classified on that date as they are now considered “fixed for fixed.”

### Gain (Loss) on Fair Value of Strategic Investments

The gain (loss) on fair value of strategic investments represents a change in the fair value of our investment in Motus GI Holdings, Inc. (“Motus GI”), a publicly-held company and related party, and preferred shares and convertible notes of Vivasure Medical Limited (“Vivasure”), a privately-held company and related party. The shares held of Motus GI represent equity securities with a readily determinable fair value and are required to be measured at fair value at each reporting period using readily determinable pricing available on a securities exchange, in accordance with the provisions of ASU 2016-01, *Recognition and Measurement of Financial Assets and Liabilities*. The investments in Vivasure do not have readily determinable fair values and are recorded at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer.

### Results of Operations

### Comparison of the Six Months Ended June 30, 2023 and 2022

The following table presents our statement of operations data for the six months ended June 30, 2023 and 2022, and the dollar and percentage change between the two periods (in thousands):

| ​ ​ ​ Revenue: | ​ ​ | ​ ​ Six Months Ended June 30, 2023 ​ | ​ ​ | ​ ​ 2022 ​ | ​ ​ | ​ ​ Change $ ​ | ​ ​ | ​ Change % ​ | ​ ​ ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | --- | ---: |
| Partnership revenue | ​ | $1,747 | ​ | $945 | ​ | $802 | ​ | ​ | 85% |
| Product revenue | ​ | 332 | ​ | 322 | ​ | 10 | ​ |  | 3% |
| Total revenue | ​ | 2,079 | ​ | 1,267 | ​ | 812 | ​ |  | 64% |
| **Expenses:** | ​ |  | ​ |  | ​ |  | ​ |  | ​ ​ |
| Cost of product revenues | ​ | 98 | ​ | 102 | ​ | (4) | ​ |  | (4)% |
| Research and development | ​ | 16,753 | ​ | 8,503 | ​ | 8,250 | ​ |  | 97% |
| Selling, general and administrative | ​ | 9,729 | ​ | 5,424 | ​ | 4,305 | ​ |  | 79% |
| Total expenses | ​ | 26,580 | ​ | 14,029 | ​ | 12,551 | ​ |  | 89% |
| **Loss from operations** | ​ | (24,501) | ​ | (12,762) | ​ | (11,739) | ​ |  | (92)% |
| **Other income (expense):** | ​ |  | ​ |  | ​ |  | ​ |  | ​ ​ |
| Interest income (expense), net | ​ | 1,826 | ​ | (482) | ​ | 2,308 | ​ |  | 479% |
| Loss on fair value adjustment of warrant liability | ​ | (294) | ​ | (1,160) | ​ | 866 | ​ |  | 75% |
| Loss on debt extinguishment | ​ | ​ — | ​ | ​ (682) | ​ | ​ 682 | ​ | ​ | 100% |
| (Loss) gain on fair value of strategic investments | ​ | (17) | ​ | 1,510 | ​ | (1,527) | ​ |  | (101)% |
| Total other income (expense) | ​ | 1,515 | ​ | (814) | ​ | 2,329 | ​ |  | 286% |
| **Net loss** | ​ | $(22,986) | ​ | $(13,576) | ​ | $(9,410) | ​ | ​ | (69)% |

### Partnership Revenue

Partnership revenue increased by $802,000, or approximately 85%, to $1.7 million in the six months ended June 30, 2023 from $945,000 for the six months ended June 30, 2022. Partnership revenue relates to the recognition of the combined performance obligation for the license granted to Terumo and the ongoing research and development services over the estimated performance period for the Virtue SAB Coronary ISR indication, using a proportional performance model, based on the costs incurred relative to the total estimated costs of the research and development services. As of each quarterly reporting date, we evaluate our estimates of the total costs expected to be incurred through the completion of the combined performance obligation and update our estimates as necessary.

For the six months ended June 30, 2023 and 2022, the expenses incurred related to the Terumo Agreement were approximately $8.3 million and $6.6 million, respectively. The estimated total costs associated with the Terumo Agreement through completion increased by approximately 3% as of June 30, 2023 as compared to the estimates as of December 31, 2022, and increased by approximately 10% as of June 30, 2022, as compared to the estimates as of December 31, 2021.

While we believe we have estimated total costs associated with the Terumo Agreement through completion, these estimates encompass a broad range of expenses over a multi-year period and, as such, are subject to periodic changes as new information becomes available.

### Product Revenue

Product revenue increased by $10,000, or approximately 3%, to $332,000 in the six months ended June 30, 2023 from $322,000 for the six months ended June 30, 2022.

Product revenue consisted of the sale of FreeHold Duo and Trio intracorporeal organ retractors and revenue is recognized when product is shipped to customers. The increase in product revenue was primarily due to a increase in the purchase volume of FreeHold Duo and Trio intracorporeal organ retractors. There were no changes to the per unit sale price in either period presented.

### Cost of Product Revenue

Cost of product revenue decreased by $4,000, or approximately 4%, to $98,000 in the six months ended June 30, 2023 from $102,000 for the six months ended June 30, 2022. The decrease was primarily due to decreased production costs of FreeHold Duo and Trio intracorporeal organ retractors.

### Research and Development Expenses

The following table summarizes our research and development expenses for the six months ended June 30, 2023 and 2022 (in thousands):

| ​ ​ ​ | ​ ​ | ​ ​ Six Months Ended June 30, 2023 | ​ | ​ ​ 2022 |
| --- | --- | ---: | --- | ---: |
| Personnel and consulting costs | ​ | $8,088 | ​ | $3,908 |
| Non-clinical development costs | ​ | ​ 6,601 | ​ | 3,856 |
| Clinical development costs | ​ | 2,064 | ​ | 739 |
| Total research and development expenses | ​ | $16,753 | ​ | $8,503 |

Research and development expenses increased by $8.3 million, or approximately 97%, to $16.8 million for the six months ended June 30, 2023 from $8.5 million for the six months ended June 30, 2022. This is primarily due to an increase in support of ongoing work to advance BackBeat CNT and Virtue SAB into planned pivotal studies during 2023 and included an increase in personnel related expenses of $3.2 million due to increased headcount and associated expenses, along with increased stock-based compensation of $932,000, an increase of $2.7 million in research and development program costs, supplies, and testing, and an increase of $1.3 million in clinical development costs.

The total research and development expenses summarized above include $8.2 million for the six months ended June 30, 2023 and $6.3 million for the six months ended June 30, 2022 related to the Terumo Agreement. The increase of $1.9 million is due to increased expense activity related to the Terumo Agreement during the 2023 period.

### Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $4.3 million, or approximately 79%, to $9.7 million for the six months ended June 30, 2023, from $5.4 million of expense for the six months ended June 30, 2022. The increase was primarily due to an increase in headcount which resulted in a $232,000 increase in salary and medical benefit costs, along with increased stock-based compensation of $2.0 million, and an increase of $1.3 million of accounting, finance, legal expenses, investor relations and public relations expenses incurred in connection with the overall growth of the business and in preparation for becoming and being a public company.

### Interest Income (Expense), Net

Interest income (expense), net, increased by $2.3 million, or approximately 479%, to $1.8 million of income for the six months ended June 30, 2023, from $482,000 of expense for the six months ended June 30, 2022. The net interest income in the 2023 period consisted primarily of interest earned from marketable securities offset by monthly interest expense incurred resulting from the 2022 Loan and Security Agreement. The net interest expense in the 2022 period consisted primarily of interest expense incurred resulting from the December 31, 2020 drawdown of the $10.0 million tranche from the 2019 Loan and Security Agreement.

### Loss on Fair Value Adjustment of Warrant Liability

The loss on fair value adjustment of warrant liability was a loss of $294,000 for the six months ended June 30, 2023, as compared to a loss of $1.2 million for the six months ended June 30, 2022. The change year over year is primarily a result of the change in the fair value of our outstanding warrants due to an increase in the fair value of the underlying common stock.

### Loss on Debt Extinguishment

The loss on debt extinguishment was $682,000 for the six months ended June 30, 2022. The loss was due to recognition of unamortized debt discount as well as early termination payments related to the early termination and repayment of the existing 2019 Loan and Security Agreement in June 2022.

### (Loss) Gain on Fair Value of Strategic Investments

The loss in fair value of strategic investments was $17,000 for the six months ended June 30, 2023, as compared to a gain of $1.5 million for the six months ended June 30, 2022. The amounts recognized for the six months ended June 30, 2023 related to the change in fair value in our common stock holdings of Motus GI. The amount recognized for the six months ended June 30, 2022, relates to a gain on our strategic investment in Vivasure of $1.9 million, partially offset by the change in fair value in our common stock holdings of Motus GI. The gain on our strategic investment in Vivasure was attributable to an observable price change for an identical investment due to a new third-party investment. Therefore, the investment was measured at fair value and a gain was recognized.

### Comparison of the Three Months Ended June 30, 2023 and 2022

The following table presents our statement of operations data for the three months ended June 30, 2023 and 2022, and the dollar and percentage change between the two periods (in thousands):

| ​ ​ ​ Revenue: | ​ ​ | ​ ​ Three Months Ended June 30, 2023 ​ | ​ ​ | ​ ​ 2022 ​ | ​ ​ | ​ ​ Change $ ​ | ​ ​ | ​ ​ ​ ​ Change % ​ ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| Partnership revenue | ​ | $728 | ​ | $229 | ​ | $499 | ​ | $218% |
| Product revenue | ​ | 187 | ​ | 172 | ​ | 15 | ​ | 9% |
| Total revenue | ​ | 915 | ​ | 401 | ​ | 514 | ​ | 128% |
| **Expenses:** | ​ |  | ​ |  | ​ |  | ​ | ​ ​ |
| Cost of product revenues | ​ | 54 | ​ | 60 | ​ | (6) | ​ | (10)% |
| Research and development | ​ | 8,499 | ​ | 5,029 | ​ | 3,470 | ​ | 69% |
| Selling, general and administrative | ​ | 5,318 | ​ | 2,946 | ​ | 2,372 | ​ | 81% |
| Total expenses | ​ | 13,871 | ​ | 8,035 | ​ | 5,836 | ​ | 73% |
| **Loss from operations** | ​ | (12,956) | ​ | (7,634) | ​ | (5,322) | ​ | (70)% |
| **Other income (expense):** | ​ |  | ​ |  | ​ |  | ​ | ​ ​ |
| Interest income (expense), net | ​ | 941 | ​ | (246) | ​ | 1,187 | ​ | 483% |
| Loss on fair value adjustment of warrant liability | ​ | — | ​ | (1,015) | ​ | 1,015 | ​ | 100% |
| Loss on debt extinguishment | ​ | ​ — | ​ | ​ (682) | ​ | ​ 682 | ​ | ​ 100% |
| (Loss) gain on fair value of strategic investments | ​ | (31) | ​ | 1,730 | ​ | (1,761) | ​ | (102)% |
| Total other income (expense) | ​ | 910 | ​ | (213) | ​ | 1,123 | ​ | 527% |
| **Net loss** | ​ | $(12,046) | ​ | $(7,847) | ​ | $(4,199) | ​ | $(54)% |

### Partnership Revenue

Partnership revenue increased by $499,000, or approximately 218%, to $728,000 in the three months ended June 30, 2023 from $229,000 for the three months ended June 30, 2022. Partnership revenue relates to the recognition of the combined performance obligation for the license granted to Terumo and the ongoing research and development services over the estimated performance period for the Virtue SAB Coronary ISR indication, using a proportional performance model, based on the costs incurred relative to the total estimated costs of the research and development services. As of each quarterly reporting date, we evaluate our estimates of the total costs expected to be incurred through the completion of the combined performance obligation and update our estimates as necessary.

For the three months ended June 30, 2023 and 2022, the expenses incurred related to the Terumo Agreement were approximately $4.5 million and $3.9 million, respectively. The estimated total costs associated with the Terumo Agreement through completion increased by approximately 3% as of June 30, 2023 as compared to the estimates as of March 31, 2023, and increased by approximately 10% as of June 30, 2022, as compared to the estimates as of March 31, 2022.

While we believe we have estimated total costs associated with the Terumo Agreement through completion, these estimates encompass a broad range of expenses over a multi-year period and, as such, are subject to periodic changes as new information becomes available.

### Product Revenue

Product revenue increased by $15,000, or approximately 9%, to $187,000 in the three months ended June 30, 2023 from $172,000 for the three months ended June 30, 2022.

Product revenue consisted of the sale of FreeHold Duo and Trio intracorporeal organ retractors and revenue is recognized when product is shipped to customers. The increase in product revenue was primarily due to a increase in the purchase volume of FreeHold Duo and Trio intracorporeal organ retractors. There were no changes to the per unit sale price in either period presented.

### Cost of Product Revenue

Cost of product revenue decreased by $6,000, or approximately 10%, to $54,000 in the three months ended June 30, 2023 from $60,000 for the three months ended June 30, 2022. The decrease was primarily due to decreased production costs of FreeHold Duo and Trio intracorporeal organ retractors.

### Research and Development Expenses

The following table summarizes our research and development expenses for the three months ended June 30, 2023 and 2022 (in thousands):

| ​ ​ ​ | ​ ​ | ​ ​ Three Months Ended June 30, 2023 | ​ | ​ ​ 2022 |
| --- | --- | ---: | --- | ---: |
| Personnel and consulting costs | ​ | $3,868 | ​ | $2,030 |
| Non-clinical development costs | ​ | ​ 3,871 | ​ | 2,517 |
| Clinical development costs | ​ | 760 | ​ | 482 |
| Total research and development expenses | ​ | $8,499 | ​ | $5,029 |

Research and development expenses increased by $3.5 million, or approximately 69%, to $8.5 million for the three months ended June 30, 2023, from $5.0 million for the three months ended June 30, 2022. This is primarily due to an increase in support of ongoing work to advance BackBeat CNT and Virtue SAB into planned pivotal studies during 2023 and included an increase in personnel related expenses of $1.4 million due to increased headcount and associated expenses, along with increased stock-based compensation of $399,000, an increase of $1.4 million in research and development program costs, supplies, and testing, and an increase of $278,000 in clinical development costs.

The total research and development expenses summarized above include $4.4 million for the three months ended June 30, 2023 and $3.8 million for the three months ended June 30, 2022 related to the Terumo Agreement. The increase of $657,000 is due to increased expense activity related to the Terumo Agreement during the 2023 period.

### Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $2.4 million, or approximately 81%, to $5.3 million for the three months ended June 30, 2023, from $2.9 million of expense for the three months ended June 30, 2022. The increase was primarily due to an increase in stock-based compensation of $1.1 million, and an increase of $691,000 of accounting, finance, legal expenses, investor relations and public relations expenses incurred in connection with the overall growth of the business and in preparation for becoming and being a public company.

### Interest Income (Expense), Net

Interest income (expense), net, increased by $1.2 million, or approximately 483%, to $941,000 of income for the three months ended June 30, 2023, from $246,000 of expense for the three months ended June 30, 2022. The net interest income in the 2023 period consisted primarily of interest earned from marketable securities offset by monthly interest expense incurred resulting from the 2022 Loan and Security Agreement. The net interest expense in the 2022 period consisted primarily of interest expense incurred resulting from the December 31, 2020 drawdown of the $10.0 million tranche from the 2019 Loan and Security Agreement.

### Loss on Fair Value Adjustment of Warrant Liability

The loss on fair value adjustment of warrant liability was a loss of $1.0 million for the three months ended June 30, 2022. There were no additional charges for the adjustment of fair value for warrant liability in the three months ended June 30, 2023 as it had been settled in the first quarter with the close of the Business Combination.

### Loss on Debt Extinguishment

The loss on debt extinguishment was $682,000 for the three months ended June 30, 2022. The loss was due to recognition of unamortized debt discount as well as early termination payments related to the early termination and repayment of the existing 2019 Loan and Security Agreement in June 2022.

### (Loss) Gain on Fair Value of Strategic Investments

The loss in fair value of strategic investments was $31,000 for the three months ended June 30, 2023, as compared to a gain of $1.7 million for the three months ended June 30, 2022. The amounts recognized for the three months ended June 30, 2023 related to the change in fair value in our common stock holdings of Motus GI. The amount recognized for the three months ended June 30, 2022, relates to a gain on our strategic investment in Vivasure of $1.9 million, partially offset by the change in fair value in our common stock holdings of Motus GI. The gain on our strategic investment in Vivasure was attributable to an observable price change for an identical investment due to a new third-party investment. Therefore, the investment was measured at fair value and a gain was recognized.

### Liquidity and Capital Resources

From inception through June 30, 2023, we have incurred significant operating losses and negative cash flows from our operations. Our net losses were $23.0 million and $13.6 million for the six months ended June 30, 2023 and June 30, 2022, respectively. As of June 30, 2023, we had an accumulated deficit of $222.7 million. We have funded our operations primarily through the issuance of convertible preferred stock and proceeds from the Business Combination, as well as through proceeds from the Terumo Agreement, borrowings under debt arrangements and, to a lesser extent, from FreeHold product revenue. We have raised a cumulative $166.8 million in gross proceeds through the issuance of convertible preferred stock, $70.0 million in gross proceeds from the Business Combination, and have received $30.0 million from the Terumo Agreement through June 30, 2023. We had $16.4 million in cash and cash equivalents at June 30, 2023, which consisted primarily of bank deposits and money market funds. We also had $101.3 million of short-term marketable securities at June 30, 2023, which consisted primarily of our investments in corporate and government debt securities.

### Funding Requirements

We expect our operating expenses to increase significantly as we continue to develop and seek regulatory approvals and along with our partners, prepare for potential commercialization of our product candidates. Our research and development spending is expected to increase from historical levels during 2023 as we perform enabling work in preparation for the BackBeat CNT and Virtue SAB pivotal studies, commence enrollment of both planned studies and execute additional planned research and development activities. In addition, we expect our selling, general and administrative expenses to increase due to increases in headcount along with expenses associated with being a public company.

Based on current clinical development and other research and development plans and budget estimates, we anticipate that our cash and cash equivalents and marketable securities are sufficient to fund our operations into 2026. The amount and timing of our future funding requirements may change from current estimates and will depend on many factors, including the cost and pace of execution of clinical studies and research and development activities, the strength of results from clinical studies for our flagship product candidates and other research, development, manufacturing and commercial activities as well as the potential receipt of revenues under the Terumo Agreement, the Medtronic Agreement and/or future collaborations. We may seek additional funding through the issuance of new equity, may make drawdowns on our existing or new loan facilities, may receive milestone payments from the Terumo Agreement or through payments from collaborations or partnerships with other companies, and/or may realize cash from the sale of some or all of our strategic holdings, although there are no assurances in this regard.

### Cash Flows

The following table summarizes our cash flow data for the periods indicated (in thousands):

| ​ ​ ​ | ​ ​ | ​ ​ Six Months Ended June 30, 2023 | ​ | ​ ​ 2022 |
| --- | --- | ---: | --- | ---: |
| Net cash used in operating activities | ​ | $(24,871) | ​ | $(13,289) |
| Net cash used in investing activities | ​ | (35,411) | ​ | (521) |
| Net cash provided by financing activities | ​ | 56,907 | ​ | 110,845 |
| Net (decrease) increase in cash and cash equivalents | ​ | $(3,375) | ​ | $97,035 |

### Comparison of the Six Months Ended June 30, 2023 and 2022

### Net Cash Flows from Operating Activities

Net cash used in operating activities for the six months ended June 30, 2023 was $24.9 million and primarily consisted of our net loss of $23.0 million and changes in net operating assets and liabilities of $3.8 million, which was offset by non-cash charges of $1.9 million. Our non-cash charges primarily consisted of a loss on fair value adjustment of warrant liability of $294,000 and stock-based compensation of $3.2 million, offset by $2.1 million related to accretion and interest of marketable securities. The net change in operating assets and liabilities were primarily due to a decrease in accounts payable and accrued expenses of $1.0 million, an increase in prepaid expenses and other assets of $723,000, and a decrease in deferred revenue of $1.7 million and various other immaterial changes.

Net cash used in operating activities for the six months ended June 30, 2022, was $13.3 million and primarily consisted of our net loss of $13.6 million, and changes in net operating assets and liabilities of $830,000, which was offset by non-cash charges of $1.1 million. Our non-cash charges primarily consisted of a loss on fair value adjustment of warrant liability of $1.2 million, loss on debt extinguishment of $682,000, stock-based compensation of $289,000, amortization of deferred financing costs of $91,000 and non-cash lease expense of $269,000, offset by a $1.5 million gain on the fair value of strategic investments. The net change in operating assets and liabilities were primarily due to a decrease in deferred revenue of $945,000 and an increase in prepaid expenses and other assets of $485,000, offset by an increase in accounts payable, accrued expenses and other liabilities of $672,000 and various other immaterial changes

### Net Cash Flows from Investing Activities

Net cash used in investing activities for the six months ended June 30, 2023 was $35.4 million, which primarily consisted of the purchase of $99.5 million of marketable securities offset by the sale of $64.2 million of marketable securities.

Net cash used in investing activities for the six months ended June 30, 2022, was $521,000, which consisted of the purchase of $313,000 of property and equipment and the purchase of $208,000 of strategic investments.

### Net Cash Flows from Financing Activities

Net cash provided by financing activities of $56.9 million for the six months ended June 30, 2023 was primarily attributable to net proceeds from the Business Combination. For additional information, see Note 3 to the Consolidated Financial Statements.

Net cash provided by financing activities of $110.8 million for the six months ended June 30, 2022, was attributable to gross proceeds from the Series D-1 private equity financing, and the Series D-2 private equity financing totaling $110 million, and proceeds from the 2022 Loan and Security Agreement with Avenue Venture Opportunities Fund I and II of $10 million. These proceeds were offset by $2.7 million of deferred financing costs and principal repayment of $6.4 million, inclusive of debt extinguishment costs, from the termination of the 2019 Loan and Security Agreement with Silicon Valley Bank.

### Contractual Obligations and Commitments

The following table summarizes our contractual obligations and commitments as of June 30, 2023 (in thousands):

| ​ ​ ​ ​ | ​ ​ ​ | ​ ​ Payments Due by Period ​ ​ Total | ​ ​ | ​ ​ Less than 1 Year | ​ ​ | ​ ​ 1-3 Years | ​ ​ | ​ ​ 3-5 Years | ​ ​ | ​ ​ More than 5 Years |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| Operating lease obligations | ​ | $2,284 | ​ | $833 | ​ | $835 | ​ | $616 | ​ | $— |
| Debt, principal and interest(1) |  | ​ 13,776 |  | ​ 1,495 |  | ​ 12,281 |  | ​ — |  | ​ — |
| Total | ​ | $16,060 | ​ | $2,328 | ​ | $13,116 | ​ | $616 | ​ | $— |

(1) In June 2022, Legacy Orchestra entered into the 2022 Loan and Security Agreement with Avenue Venture Opportunities Fund I and II. As part of the 2022 Loan and Security Agreement, Legacy Orchestra paid off the balance of the 2019 Loan and Security Agreement with Silicon Valley Bank. The 2022 Loan and Security Agreement will mature in June 2026. Refer to Note 14 to the Consolidated Financial Statements for additional information.

In addition, we enter into agreements in the normal course of business with clinical research organizations for work related to clinical trials and with vendors for preclinical studies and other services and products for operating purposes, which are cancelable at any time by us, generally upon 30 days prior written notice. These payments are not included in the above table of contractual obligations and commitments.

### Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with U.S. GAAP. The preparation of the financial statements in conformity with U.S. GAAP requires our management to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. We evaluate our significant estimates on an ongoing basis, including estimates related to the total costs expected to be incurred though the completion of the combined performance obligation of the Terumo Agreement, research and development prepayments, accruals and related expenses and stock-based compensation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.

We believe that the accounting policies described below involve a significant degree of judgment and complexity. Accordingly, we believe these are the most critical to aid in fully understanding and evaluating our financial condition and results of operations. For further information, see Note 2 to the Consolidated Financial Statements.

### Revenue Recognition

We recognize revenue under the core principle according to ASC 606 to depict the transfer of control to our customers in an amount reflecting the consideration we expect to be entitled to. In order to achieve that core principle, we apply the following five step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when a performance obligation is satisfied.

Our revenues are currently comprised of product revenue from the sale of FreeHold’s intracorporeal organ retractors and partnership revenues under the Terumo Agreement related to the development and commercialization of Virtue SAB.

### Product Revenues

Product revenues related to sales of FreeHold’s intracorporeal organ retractors are recognized at a point-in-time upon the shipment of the product to the customer, and there are no significant estimates or judgments related to estimating the transaction price. The product revenues consist of a single performance obligation, and the payment terms are typically 30 days. Product revenues are recognized solely in the United States.

### Partnership Revenues

To date, our partnership revenues have related to the Terumo Agreement described below. In future periods, partnership revenues may also include revenues related to the Medtronic Agreement, discussed in Note 5 to the Consolidated Financial Statements.

Legacy Orchestra entered into the Terumo Agreement as further described in Note 4 to the Consolidated Financial Statements. We assessed whether the Terumo Agreement fell within the scope of ASC 808 based on whether the arrangement involved joint operating activities and whether both parties have active participation in the arrangement and are exposed to significant risks and rewards. We determined that the Terumo Agreement did not fall within the scope of ASC 808. We then analyzed the arrangement pursuant to the provisions of ASC 606 and determined that the arrangement represents a contract with a customer and is therefore within the scope of ASC 606.

The promised goods or services in the Terumo Agreement include (i) license rights to our intellectual property and (ii) research and development services. We also have optional additional items in the Terumo Agreement, which are considered marketing offers and are accounted for as separate contracts with the customer if such option is elected by the customer, unless the option provides a material right which would not be provided without entering into the contract. Performance obligations are promised goods or services in a contract to transfer a distinct good or service to the customer. Promised goods or services are considered distinct when (i) the customer can benefit from the good or service on its own or together with other readily available resources or (ii) the promised good or service is separately identifiable from other promises in the contract. In assessing whether promised goods or services are distinct in the Terumo Agreement, we considered factors such as the stage of development of the underlying intellectual property, the capabilities of the customer to develop the intellectual property on their own or whether the required expertise is readily available.

We estimate the transaction price for the Terumo Agreement performance obligations based on the amount expected to be received for transferring the promised goods or services in the contract. The consideration includes both fixed consideration and variable consideration. At the inception of the Terumo Agreement, as well as at each reporting period, we evaluate the amount of potential payment and the likelihood that the payments will be received. We utilize either the most likely amount method or expected amount method to estimate the amount expected to be received based on which method better predicts the amount expected to be received. If it is probable that a significant revenue reversal would not occur, the variable consideration is included in the transaction price.

The Terumo Agreement contains development and regulatory milestone payments. At contract inception and at each reporting period, we evaluate whether the milestones are considered probable of being reached and estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. At the end of each subsequent reporting period, we re-evaluate the probability of achievement of such development milestones and any related constraint, and if necessary, adjust our estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect partnership revenues and earnings in the period of adjustment.

The Terumo Agreement also includes sales-based royalties and the license is deemed to be the predominant item to which the royalties relate. Accordingly, we will recognize royalty revenue when the related sales occur. To date, we have not recognized any royalty revenue under the arrangement.

We have determined that intellectual property licensed to Terumo and the research and development services to be provided through the premarket approval by the FDA for the ISR indication represent a combined performance obligation that is satisfied over time, and that the appropriate method of measuring progress for purposes of recognizing revenues relates to a proportional performance model that measures the proportional performance based on the costs incurred to date relative to the total costs expected to be incurred through the completion of the performance obligation. We evaluate the measure of progress at each reporting period and, if necessary, adjust the measure of performance and related revenue recognition.

In the six months ended June 30, 2023, we updated our estimates of the total costs expected to be incurred through the completion of the combined performance obligation. The impact of the changes in estimates resulted in a reduction in partnership revenues of $303,000, which resulted in a $0.01 effect on net loss per share, basic and diluted. In the six months ended June 30, 2022, the impact of the changes in estimates resulted in reduction of partnership revenues of $847,000, which resulted in a $0.05 effect on net loss per share, basic and diluted.

We receive payments from Terumo based on billing schedules established in the contract. Such billings for milestone related events have 10-day terms from the date the milestone is achieved, royalty payments are 20-day terms after the close of each quarter, any optional services are 20 days after receipt of an invoice and sales of the SirolimusEFR are within 30 days after receipt of the shipping invoices. Upfront payments are recorded as deferred revenue upon receipt or when due until we perform our obligations under these arrangements. Amounts are recorded as accounts receivable when the right to consideration is unconditional.

In June 2022, Legacy Orchestra, BackBeat Medical, LLC and Medtronic entered into the Medtronic Agreement for the development and commercialization of BackBeat CNT for the treatment of HTN in patients indicated for a cardiac pacemaker. We determined that the arrangement is a collaboration within the scope of ASC 808. In addition, we concluded Medtronic is a customer for a good or service that is a distinct unit of account, and therefore the transactions in the Medtronic Agreement should be accounted for under ASC 606. Through June 30, 2023, there have been no amounts recognized as revenue under the Medtronic Agreement.

### Research and Development Prepayments, Accruals and Related Expenses

We incur costs of research and development activities conducted by our third-party service providers, which include the conduct of preclinical and clinical studies. We are required to estimate our prepaid and accrued research and development costs at each reporting date. These estimates are made as of the reporting date of the work completed over the life of the individual study in accordance with agreements established with our service providers. We determine the estimates of research and development activities incurred at the end of each reporting period through discussion with internal personnel and outside service providers, as to the progress or stage of completion of trials or services, as of the end of the reporting period, pursuant to contracts with the third parties and the agreed upon fee to be paid for such services. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are deferred and capitalized. The capitalized amounts are expensed as the related goods are accepted by us or the services are performed. Accruals are recorded for the amounts of services provided that have not yet been invoiced.

### Warrants

We evaluate our warrants to determine if the contracts qualify as liabilities in accordance with ASC 480-10, *Distinguishing Liabilities from Equity,* and ASC 815, *Derivatives and Hedging*. If the warrant is determined to meet the criteria to be liability classified, the warrant liability is marked-to-market each balance sheet date and recorded as a liability, with the change in fair value recorded in our condensed consolidated statements of operations and comprehensive loss as gain (loss) on fair value adjustment of warrant liability within other income or expense.

In bundled transactions, the proceeds received from any debt instruments and liability classified warrants are allocated to the warrant at fair value first, and the residual value is then allocated to the debt instrument. Upon conversion or exercise of a warrant that is subject to liability treatment, the instrument is marked to fair value at the conversion or exercise date and the fair value is reclassified to equity. Equity classified warrants are recorded within additional paid-in capital at the time of issuance at fair value as of the issuance date and are not subject to subsequent remeasurement.

### Stock-Based Compensation

We account for share-based payments at fair value. The fair value of stock options is measured using the Black-Scholes option-pricing model and the fair value of restricted stock is measured based on the fair value of the Company Common Stock underlying the award as of the grant date, described further below. For share-based awards that vest subject to the satisfaction of a service requirement, the fair value measurement date for stock-based compensation awards is the date of grant and the expense is recognized on a straight-line basis, over the vesting period. We account for forfeitures as they occur.

Prior to the Business Combination, due to the absence of an active market for Legacy Orchestra’s common stock, Legacy Orchestra utilized methodologies, approaches, and assumptions consistent with the American Institute of Certified Public Accountants’ Audit and Accounting Practice Guide: Valuation of Privately-Held Company Equity Securities Issued as Compensation to estimate the fair value of its common stock. The fair value of Legacy Orchestra’s common stock was determined based upon a variety of factors, including valuations of Legacy Orchestra’s common stock performed with the assistance of independent third-party valuation specialists; Legacy Orchestra’s stage of development and business strategy, including the status of research and development efforts of its product candidates, and the material risks related to its business and industry; Legacy Orchestra’s business conditions and projections; Legacy Orchestra’s results of operations and financial position, including its levels of available capital resources; the valuation of publicly traded companies in the life sciences and biotechnology sectors, as well as recently completed mergers and acquisitions of peer companies; the lack of marketability of Legacy Orchestra’s common stock as a private company; the prices of Legacy Orchestra’s convertible preferred stock sold to investors in arm’s length transactions and the rights, preferences and privileges of its convertible preferred stock relative to those of its common stock; the likelihood of achieving a liquidity event for the holders of Legacy Orchestra’s common stock, such as an initial public offering or a sale of Legacy Orchestra given prevailing market conditions; trends and developments in its industry; the hiring of key personnel and the experience of management; and external market conditions affecting the life sciences and biotechnology industry sectors. Significant changes to the key assumptions underlying the factors used could result in different fair values of Legacy Orchestra’s common stock at each valuation date. In determining the exercise prices for options granted and fair value of restricted stock, we have considered the fair value of the common stock as of the grant date.

Prior to the Business Combination, valuation analyses were conducted utilizing a probability weighted expected return method, in which the probability of a public company scenario was considered via either an initial public offering or special purpose acquisition company transaction. Subsequent to the Business Combination, fair value was determined by market prices of the Company Common Stock.

We classify stock-based compensation expense in our condensed consolidated statements of operations and comprehensive loss in the same manner in which the award recipients’ payroll costs are classified or in which the award recipients’ service payments are classified.

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model, which is based on the assumptions discussed below. Each of these inputs is subjective and generally requires significant judgment and estimation by management.

- *Expected Term —* The expected term represents the period that stock-based awards are expected to be outstanding. Our historical share option exercise information is limited due to a lack of sufficient data points and does not provide a reasonable basis upon which to estimate an expected term. The expected term for option grants is therefore determined using the “simplified” method, as prescribed in the SEC’s Staff Accounting Bulletin (SAB) No. 107. The simplified method deems the expected term to be the midpoint between the vesting date and the contractual life of the stock-based awards.
- *Expected Volatility —* The expected volatility was derived from the historical stock volatilities of comparable peer public companies within our industry that are considered to be comparable to our business over a period equivalent to the expected term of the stock-based awards, since there was no trading history of Legacy Orchestra’s common stock and limited trading history of the Company.
- *Risk-Free Interest Rate —* The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant for zero-coupon U.S. Treasury notes with maturities approximately equal to the stock-based awards’ expected term.
- *Expected Dividend Yield —* The expected dividend yield is zero as neither the Company nor Legacy Orchestra has paid, and we do not anticipate paying, any dividends on the Company Common Stock in the foreseeable future.
- *Common Stock Valuation —* Prior to the Business Combination, given the absence of a public trading market for Legacy Orchestra’s common stock, Legacy Orchestra’s board of directors considered numerous subjective and objective factors to determine the best estimate of fair value of Legacy Orchestra’s common stock underlying the stock options granted to its employees and non-employees. In determining the grant date fair value of Legacy Orchestra’s common stock, Legacy Orchestra’s board considered, among other things, contemporaneous valuations of its common stock prepared by an unrelated third-party valuation firm in accordance with the guidance provided by the American Institute of Certified Public Accountants 2013 Practice Aid, *Valuation of Privately-Held-Company Equity Securities Issued as Compensation*. Following the Business Combination, our board of directors determines the fair value of the Company Common Stock based on the closing price of the Company Common Stock on or around the date of grant.

During the three months ended June 30, 2023 and 2022, stock-based compensation was $1.7 million and $219,000, respectively. During the six months ended June 30, 2023 and 2022, stock-based compensation was $3.2 million and $289,000, respectively. As of June 30, 2023, we had approximately $6.6 million of total unrecognized stock-based compensation, which we expect to recognize over a weighted-average period of approximately 3 years.

### Recently Issued Accounting Pronouncements

A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2, Summary of Significant Accounting Policies, to the Consolidated Financial Statements.

### Emerging Growth Company and Smaller Reporting Company Status

We are an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933 (the “Securities Act”), as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”)., As such, we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that an emerging growth company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. We have elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of our Consolidated Financial Statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.

We will remain an emerging growth company until the earliest of (1) the last day of the fiscal year following the fifth anniversary of the closing of the initial public offering of HSAC2, (2) the last day of the fiscal year in which we have total annual gross revenue of at least $1.235 billion, (3) the last day of the fiscal year in which we are deemed to be a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of the Company Common Stock held by non-affiliates exceeded $700.0 million as of the last business day of the second fiscal quarter of such year, or (4) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.

We are also a “smaller reporting company” as defined in the Exchange Act. We may continue to be a smaller reporting company even after we are no longer an emerging growth company. We may take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these scaled disclosures for so long as (i) the market value of our voting and non-voting Company Common Stock held by non-affiliates is less than $250.0 million measured on the last business day of our second fiscal quarter, or (ii)(a) our annual revenue is less than $100.0 million during the most recently completed fiscal year and (b) the market value of our voting and non-voting Company Common Stock held by non-affiliates is less than $700.0 million measured on the last business day of our second fiscal quarter.

## Controls and procedures

As filed, 3,100 characters.

Upon the closing of the Merger on January 26, 2023, the sole business conducted by us is the business previously conducted by Legacy Orchestra. Also, as a result of the Merger, the internal control over financial reporting utilized by Legacy Orchestra prior to the Business Combination became the internal control over financial reporting of the combined company.

#### Evaluation of Disclosure Controls and Procedures.

We maintain “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), that are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2023, the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2023.

#### Changes in Internal Control Over Financial Reporting.

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended June 30, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting, except that management has added resources to its accounting department and implemented a number of process changes to improve the overall control environment as a result of Legacy Orchestra becoming a public company.

#### Inherent Limitation on the Effectiveness of Internal Control.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures, or our internal controls, will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected.

## Risk factors

As filed, 3,040 characters.

Our operations and financial results are subject to various risks and uncertainties, including those described under the heading “Item 1A. Risk Factors” in the Q1 10-Q, which could adversely affect our business, financial condition, results of operations, liquidity and the trading price of our common stock. Except as set forth below, there have been no material changes from the risk factors previously disclosed in the Q1 10-Q.

***We did not meet the target achievement dates relating to certain milestone payments, and we may not meet other target achievement dates relating to additional milestone payments, under our manufacturing and distribution agreement with Terumo, which may have an adverse effect on our relationship with Terumo and our results of operations***

In June 2019, we entered into a strategic partnership with Terumo (the “Terumo Partnership”) for the manufacture and distribution of our product Virtue SAB. Under the agreement with Terumo, we were initially eligible for certain milestone payments in the amount of $65 million from Terumo upon completion of certain minimum enrollments in clinical studies, making certain filings and submissions, and obtaining certain regulatory approvals and certifications. Of these milestone payments, $35 million relate to achieving certain milestones by specified target achievement dates, and, as of the date of this Quarterly Report on Form 10-Q, we have already passed the target achievement dates for two $5 million milestone payments, in each case, without achieving the related milestones. In addition, due to delays in our Virtue SAB program resulting from the COVID-19 pandemic, supply chain issues and unexpected regulatory delays and requirements, we are unlikely to be able to complete the remaining time-based milestones by the specified target achievement dates to earn the remaining $25 million in time-based milestone payments pursuant to our agreement with Terumo.

Further, Terumo has the right to terminate the agreement, or certain of its obligations thereunder, if certain milestones are not achieved. If Terumo elects to terminate the agreement, our development and commercialization plans for Virtue SAB could be adversely impacted, and this could have a material adverse effect on our business, financial condition, results of operations and prospects.

Although we are currently negotiating with Terumo mutually agreeable adjustments to certain target achievement dates to reflect the regulatory and pandemic-related delays, there is no assurance as to the outcome of these negotiations with respect to any potential modifications to the milestone target achievement dates. If we are unable to complete such milestone negotiations to our satisfaction or to the satisfaction of Terumo, our development and commercialization plans for Virtue SAB and/or our relationship with Terumo could be adversely impacted. In addition, our failure to earn milestone payments under our agreement with Terumo will have an adverse effect on our results of operations.

Filed Aug 10, 2023.
Source: SEC EDGAR, the filing index for accession 0001558370-23-014496. Last ingested by Listed: Nov 2, 2026, 11:52 ET. No prices; not investment advice.