Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report, as well as the audited financial statements and the related notes thereto, and the discussion under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” included in our Annual Report. This discussion contains forward-looking statements reflecting our current expectations, estimates, plans and assumptions concerning events and financial trends that involve risks and may affect our future operating results and financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the sections entitled “Forward-Looking Statements” and Part II, Item 1A. “Risk Factors” of this Quarterly Report and in the section entitled “Risk Factor Summary” and in Part I, Item IA. “Risk Factors” of our Annual Report.
Overview
We are a commercial-stage regenerative medicine company focused on creating the next generation of differentiated products and improving outcomes in patients undergoing surgery, concentrating on patients receiving implantable medical devices. From our proprietary tissue processing platforms, we have developed a portfolio of advanced regenerative medical products that are designed to be very similar to natural biological material. Our proprietary products, which we refer to as our Core Products, are designed to address the implantable electronic device/cardiovascular, orthopedic/spinal repair and soft tissue reconstruction markets, which represented a combined $3 billion market opportunity in the United States in 2020. To expand our commercial reach, we have commercial relationships with major medical device companies, such as Boston Scientific and Biotronik, to promote and sell some of our Core Products. We believe our focus on our unique regenerative medicine platforms and our Core Products will ultimately maximize our probability of continued clinical and commercial success and will create a long-term competitive advantage for us.
We estimate that, over the past two years, approximately two million patients per year in the United States are implanted with either medical devices, such as pacemakers, defibrillators, neuro-stimulators, spinal fusion and trauma fracture hardware or tissue expanders for breast reconstruction. This number is driven by advances in medical device technologies and an aging population with a growing incidence of comorbidities, including diabetes, obesity and cardiovascular and peripheral vascular diseases. These comorbidities can exacerbate various immune responses and other complications that can be triggered by a device implant.
Our Core Products are targeted to address unmet clinical needs with the goal of promoting healthy tissue formation and avoiding complications associated with medical device implants, such as scar-tissue formation, capsular contraction, erosion, migration, non-union of implants and implant rejection. We believe that we have developed the only biological envelope, which is covered by a number of patents that forms a natural, systemically vascularized pocket for holding implanted electronic devices. We have a proprietary processing technology for manufacturing bone regenerative products for use in orthopedic/spinal repair that preserves a cell’s ability to regenerate bone and decelerates cell apoptosis or programmed cell death. We have a patented cell removal technology that produces undamaged extracellular matrices for use in soft tissue reconstruction. In pre-clinical and clinical studies, our products have supported and, in some cases, accelerated tissue healing, and thereby improved patient outcomes.
Our Non-Core Products are those fulfilled through tissue processing contracts at our Richmond, California facility. These contracts serve to utilize as much as possible of the starting human biological material from which we produce our orthopedic/spinal repair and soft tissue reconstruction products, leverage our existing overhead and improve our cash flow. The resulting processed materials, including particulate bone, precision milled bone, cellular bone matrix, acellular dermis and other soft tissue products, are sold to medical/surgical companies as finished products and as a subcomponent of their products. Additionally, we process amniotic membrane as finished product for selected customers.
We process all of our products at our two manufacturing facilities in Roswell, Georgia and Richmond, California, and stock inventory of raw materials, components and finished goods at those locations. We rely on a single or limited number of suppliers for certain raw materials and components. Except for the porcine tissue supplier of our raw materials for our CanGaroo and cardiovascular products, which is Cook Biotech, we generally have no long-term supply agreements
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with our suppliers, as we obtain supplies on a purchase order basis. Specifically, we acquire donated human tissue directly through tissue procurement firms engaged by us. We primarily ship our Core Products from our facilities directly to hospital customers.
Since inception, we have financed our operations primarily through private placements of our convertible preferred stock, amounts borrowed under our credit facilities, sales of our products and, more recently, with proceeds from our IPO. We have devoted the majority of our resources to acquisitions and integration, manufacturing and administrative costs, research and development, clinical activity and investing in our commercial infrastructure through our direct sales force and our commercial partners in order to expand our presence and to promote awareness and adoption of our products. As of September 30, 2021, we had 176 employees, of which 34 were direct sales representatives.
For the three and nine months ended September 30, 2021, we incurred net losses of $8.3 million and $15.8 million, respectively, and as of September 30, 2021, we had an accumulated deficit of $96.0 million. We expect to continue to incur significant expenses and operating losses for the foreseeable future as we seek to grow our sales organization and expand our product development and clinical and research activities. In addition, we expect to continue to incur additional costs and expenses associated with operating as a public company.
Our ability to achieve profitability will depend on our ability to generate sales from existing or new products sufficient to exceed our ongoing operating expenses and capital requirements. Because of the numerous risks and uncertainties affecting product sales and our ongoing commercialization and product development efforts, we are unable to predict with any certainty whether we will be able to increase sales of our products or the timing or amount of ongoing expenditures we will be required to incur. Accordingly, even if we are able to increase sales of our products, we may not become profitable.
As further described in Note 6 to the condensed consolidated financial statements included elsewhere in this Quarterly Report, our Term Debt Facility (“Term Debt”) and Revolving Line of Credit (the “Revolver”) include monthly revenue covenants, the non-compliance of which would permit our lenders to accelerate the repayment of these outstanding borrowings. In October 2021, we were informed by Medtronic that they would no longer be distributing cellular bone products such as FiberCel and, as such, the two companies are working towards a mutual termination of the associated FiberCel distribution agreement (“FiberCel Agreement”). Such termination will follow the suspension of all FiberCel purchases by Medtronic after Aziyo’s voluntary recall pertaining to a single donor lot of FiberCel in June 2021 as described further below. Given the associated revenues derived from the FiberCel Agreement, its suspension and then termination may negatively affect our future revenues. As such, while we are currently in compliance with all revenue covenants, our ability to comply with these covenants in the future is uncertain. Additionally, in August 2021, we commenced the principal repayment of the Term Debt with such repayments totaling approximately $556,000 per month.
In order to mitigate the current and potential future liquidity issues caused by the matters noted above, we may seek to raise capital through the issuance of common stock and to either refinance or restructure the Term Debt and Revolver. However, we may not be able to raise additional equity or refinance the Term Debt and Revolver on acceptable terms, or at all. As such, based on our current operating plans, we believe there is uncertainty as to whether our future cash flows along with our existing cash, availability under the Revolver and cash generated from expected future sales will be sufficient to meet our anticipated operating needs through twelve months from the financial statement issuance date. Due to these factors, there is substantial doubt about our ability to continue as going concern within one year after the issuance of the financial statements.
Impact of COVID-19
We continue to closely monitor the impact of the pandemic related to COVID-19 and its variants such as Delta on our business. In March 2020, the World Health Organization declared COVID-19 a global pandemic and recommended various containment and mitigation measures worldwide. Since that time, the number of procedures performed using our products has decreased significantly, as governmental authorities in the United States have recommended, and in certain cases required, that elective, specialty and other non-emergency procedures and appointments be suspended or canceled and the access of our sales representatives to the associated healthcare facilities has been curtailed in order to avoid patient exposure to medical environments and the risk of potential infection with COVID-19, and to focus limited resources and
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personnel capacity on the treatment of COVID-19 patients. As a result, beginning in March 2020, a significant number of procedures using our products have been postponed or cancelled, which has negatively impacted sales of our products. These measures and challenges will likely continue for the duration of the pandemic, which is uncertain, and will likely continue to reduce our net sales and negatively impact our business, financial condition and results of operations while the pandemic continues.
In addition, numerous state and local jurisdictions, including those where our facilities are located, imposed, and others in the future may impose or re-impose, “shelter-in-place” orders, quarantines, executive orders and similar government orders and restrictions for their residents to control the spread of COVID-19. Such orders or restrictions resulted in reduced operations at our manufacturing facilities, travel restrictions and cancellation of events, and have restricted the ability of our sales representatives and those of our commercial partners and independent sales agents to attend procedures in which our products are used, among other effects, thereby significantly and negatively impacting our operations.
The extent to which the COVID-19 pandemic impacts our future financial condition and results of operations will depend on future events and developments, which are highly uncertain and cannot be predicted, including the severity and spread of the disease and the effectiveness of actions to contain the disease or treat its impact, among others. As new information regarding COVID-19 continues to emerge, and, as variants of COVID-19 emerge, it is difficult to predict the degree to which this disease will ultimately affect our business.
FiberCel Recall Update
As previously reported, we issued a voluntary recall on June 2, 2021 pertaining to a single donor lot of our FiberCel Fiber Viable Bone Matrix after learning of post-surgical infections reported in several patients treated with the product, including some patients that tested positive for tuberculosis.
Since issuing the recall, we have been working with the U.S. Food and Drug Administration (“FDA”) and the U.S. Centers for Disease Control and Prevention (“CDC”) to identify and secure all unused product, ascertain the medical status of patients treated with the recalled product, understand whether there is any relationship between the post-surgical infections and the recalled product lot and determine the medical cause of these infections.
At this time, we have identified the 154 units comprising the single product lot in question. Based on information from the CDC, 136 units within this product lot were implanted into 113 patients and the remaining 18 units were returned to either us or the CDC. Of these 113 patients, CDC has identified at least 75 patients who have exhibited clinical or diagnostic findings consistent with tuberculosis infection.
The CDC has advised us that the CDC, working with state health agencies, has contacted all patients treated with the recalled lot of FiberCel to help ensure they are directed to appropriate medical treatment and has informed us that all patients were started on standard four-drug treatment for tuberculosis. We have learned from the CDC that eight patients who received the product from the recalled lot have died; however, the cause of death for each patient is still being determined.
Samples of the recalled product have now undergone PCR analysis by a lab contracted by the CDC and tested positive for the presence of Mycobacterium tuberculosis. Cell culture testing of the recalled product was also conducted by the same lab that showed the presence of Mycobaterium tuberculosis, and this testing corroborated the PCR testing results. Eleven lots of FiberCel produced both before and after the single donor lot at issue have undergone PCR analysis and cell culture testing and have all tested negative for Mycobacterium tuberculosis. Based on these findings, we have no reason to believe that other units of FiberCel have been affected.
As part of our continuing cooperation with the FDA and CDC and our efforts to conduct a prompt and fulsome investigation into this matter, we have reviewed the processes for screening donors and producing FiberCel and have not identified any deviations from our established protocols, which are designed to comply with industry standards established by the American Association of Tissue Banks (“AATB”) as well as applicable FDA requirements and guidelines.
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To date, our investigation into the available medical records for the donor at issue indicates: (1) the donor’s emergency department documentation 10 days before his decease reported “Never had TB”; (2) the donor had a negative tuberculosis skin test approximately four months before decease; (3) a Tuberculosis Risk Assessment Questionnaire administered approximately four months before the donor deceased was reported as showing negative for clinical or physical evidence of a tuberculosis infection; (4) multiple chest x-rays taken during a period of approximately 33 months before the donor deceased were all interpreted as negative for tuberculosis; and (5) a CT abdominal scan taken prior to the donor deceasing was interpreted as showing no evidence of swelling of lymph nodes.
To help ensure the safety of future production lots, we are currently evaluating a number of potential safeguards against Mycobacterium tuberculosis that we believe exceed applicable industry standards and currently available FDA-approved testing. We have already implemented additional donor screening procedures to include screening for any donor utilizing hemodialysis for an extended period of time and to request additional background and information on any time spent by the donor outside the United States. In addition, we are actively developing a potential methodology for testing tissue products for Mycobacterium tuberculosis. As far as we are aware, there are no commercially available testing methods authorized by the FDA for detecting the presence of Mycobacterium tuberculosis in donor tissue. For an update on the legal proceedings related to the FiberCel Recall, see Part II, Item 1, “Legal Proceedings” and Note 9 to the condensed consolidated financial statements included elsewhere in this Quarterly Report.
Components of Our Results of Operations
Net Sales
We recognize revenue on the sale of our Core Products and our Non-Core Products. With respect to our Core Products, CanGaroo and our cardiovascular products are sold to hospitals and other healthcare facilities primarily through our direct sales force, commercial partners or independent sales agents. Our orthopedic/spinal repair products are sold through commercial partners. Our soft tissue reconstruction product SimpliDerm is sold directly to hospitals and other healthcare facilities through direct sales and independent sales agents. Our contract manufacturing products are sold directly to corporate customers. Gross to net sales adjustments include sales returns and prompt payment and volume discounts.
Expenses
In recent years, we have incurred significant costs in the operation of our business. We expect our expenses to continue to increase for the foreseeable future as we grow our sales and marketing organization, expand our product development and clinical activities and increase our administrative infrastructure. As a result, we will need to generate significant net sales in order to achieve profitability. Below is a breakdown of our main expense categories and the related expenses incurred in each category:
Costs of Goods Sold
Our cost of goods sold relate to purchased raw materials and the processing and conversion costs of such raw materials consisting primarily of salaries and benefits, supplies, quality control testing and the manufacturing overhead incurred at our processing facilities in Richmond, California and Roswell, Georgia. Both facilities have additional capacity, which if utilized, would further leverage our fixed overhead. Cost of goods sold also includes the amortization of intangibles generated from the CorMatrix Acquisition in 2017.
Sales and Marketing Expenses
Sales and marketing expenses are primarily related to our direct sales force, consisting of salaries, commission compensation, fringe benefits, meals and other expenses. Auto and travel costs have also historically contributed to sales and marketing expenses, albeit to a lesser extent due to the COVID-19 pandemic. Outside of our direct sales force, we incur significant expenses relating to commissions to our CanGaroo commercial partners and independent sales agents. Additionally, this expense category includes distribution costs as well as market research, trade show attendance,
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advertising and public relations and customer service expenses. We expect sales and marketing expenses to grow commensurate with sales increases and the continued expansion of our CanGaroo direct sales force.
General and Administrative Expenses
General and administrative (“G&A”) expenses consist primarily of compensation, consulting, legal, human resources, information technology, accounting, insurance and general business expenses. G&A expenses also include any expenses we incur associated with the FiberCel Litigation described in Note 9 to the condensed consolidated financial statements included elsewhere in this Quarterly Report. We expect our G&A expenses to increase as a result of operating as a public company, especially as a result of hiring additional personnel and incurring greater director and officer insurance premiums, greater investor and public relations costs, and additional costs associated with accounting, legal, tax-related and other services associated with maintaining compliance with exchange listing and SEC requirements. G&A expenses will also increase to the extent any future costs associated with the FiberCel Litigation are incurred.
Research and Development Expenses
Research and development (“R&D”) expenses consist primarily of salaries and fringe benefits, laboratory supplies, clinical trials and outside service costs. Our product development efforts primarily relate to new offerings in support of the orthopedic/spinal repair market and activities associated with the development of a CanGaroo Envelope with anti-infective properties. We also conduct clinical trials to validate the performance characteristics of our products and to capture patient data necessary to support our commercial efforts.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform with current year financial statement presentation. The reclassifications relate to certain executive compensation costs and technical operations expenses at our Richmond, California plant. As follows are the total amounts reclassified for the three and nine months ended September 30, 2020 along with the line items in the condensed consolidated statement of operations that were impacted (in thousands).
Increase (Decrease) From Previously Reported Amounts
Three Months Ended
Nine Months Ended
September 30,
September 30,
2020
2020
Sales and marketing
$
127
$
374
General and administrative
(528)
(1,544)
Research and development
401
1,170
These reclassifications did not impact our consolidated earnings or assets for the three and nine months ended September 30, 2020.
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Results of Operations
Comparison of the Three Months Ended September 30, 2021 and 2020
Three Months Ended September 30,
2021
2020
Change 2020 / 2021
% of Net
% of Net
(in thousands, except percentages)
Amount
Sales
Amount
Sales
$
%
Net sales
$
11,485
100.0
%
$
11,774
100.0
%
$
(289)
(2.5)
%
Cost of goods sold
7,796
67.9
%
6,233
52.9
%
1,563
25.1
%
Gross profit
3,689
32.1
%
5,541
47.1
%
(1,852)
(33.4)
%
Sales and marketing
4,783
41.6
%
4,301
36.5
%
482
11.2
%
General and administrative
3,593
31.3
%
2,667
22.7
%
926
34.7
%
Research and development
2,289
19.9
%
1,264
10.7
%
1,025
81.1
%
Total operating expenses
10,665
92.9
%
8,232
69.9
%
2,433
29.6
%
Loss from operations
(6,976)
(60.7)
%
(2,691)
(22.9)
%
(4,285)
159.2
%
Interest expense
1,328
11.6
%
1,465
12.4
%
(137)
(9.4)
%
Other (income) expense, net
—
—
%
2,567
21.8
%
(2,567)
NM
Loss before provision of income taxes
(8,304)
(72.3)
%
(6,723)
(57.1)
%
(1,581)
23.5
%
Income tax expense
12
0.1
%
8
0.1
%
4
50
%
Net loss
$
(8,316)
(72.4)
%
$
(6,731)
(57.2)
%
$
(1,585)
23.5
%
Accretion of Convertible Preferred Stock
—
—
%
3,510
29.8
%
(3,510)
NM
Net loss attributable to common stockholders
$
(8,316)
(72.4)
%
$
(10,241)
(87.0)
%
$
1,925
(18.8)
%
NM = not meaningful
Net Sales
Net sales decreased $0.3 million, or 2.5%, to $11.5 million in the three months ended September 30, 2021 compared to $11.8 million in the three months ended September 30, 2020. The decline in net sales was due to reductions in the net sales of our Core Products of $1.8 million, partially offset by growth in the net sales of our Non-Core Products of $1.5 million.
Net sales information for our Core Products and Non-Core Products is summarized as follows:
Three Months Ended September 30,
2021
2020
% of Net
% of Net
Change 2020 / 2021
(in thousands, except percentages)
Amount
Sales
Amount
Sales
$
%
Products:
Core Products
$
8,588
74.8
%
$
10,345
87.9
%
$
(1,757)
(17.0)
%
Non-Core Products
2,897
25.2
%
1,429
12.1
%
1,468
102.7
%
Total Net Sales
$
11,485
100.0
%
$
11,774
100.0
%
$
(289)
(2.5)
%
Net sales generated by our Core Products declined $1.8 million, or 17.0%, to $8.6 million in the three months ended September 30, 2021 compared to $10.3 million in the three months ended September 30, 2020. The Core Products net sales reduction can be attributed to the cessation of purchases by Medtronic of FiberCel following our recall of a single lot of FiberCel in June 2021. Excluding the FiberCel sales to Medtronic of $0.4 million and $2.1 million in the three months ended September 30, 2021 and 2020, respectively, net sales of our Core Products were essentially equal at $8.2 and $8.3 million, respectively.
Net sales generated by our Non-Core Products increased $1.5 million, or 102.7%, to $2.9 million in the three months ended September 30, 2021 compared to $1.4 million in the three months ended September 30, 2020. The Non-Core Products net sales increase was primarily due to revenues associated with new contracts signed in the latter half of 2020 and by one contract manufacturing customer building inventory for a new product launch .
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Cost of Goods Sold
Cost of goods sold was $7.8 million and $6.2 million in the three months ended September 30, 2021 and 2020, respectively, and included, in each case, $0.8 million of intangible asset amortization expenses. Gross margin in the three months ended September 30, 2021 was 32.1%, a decrease from 47.1% in the corresponding prior year period. Gross margin, excluding intangible asset amortization, in the three months ended September 30, 2021 was 39.5%, a decline from 54.3% in the corresponding prior year period. Gross margin, excluding intangible asset amortization, is a non-GAAP financial measure. See "Non-GAAP Financial Measures” for a discussion regarding our use of gross margin, excluding intangible asset amortization, including its limitations and a reconciliation to the most directly comparable GAAP financial measure. The decrease in gross margin was primarily due to lower yields in our orthopedic and spinal repair product lines related to heightened donor screening criteria ahead of the implementation of enhanced product testing, as well as write-downs of inventory in certain categories. Together these factors negatively impacted gross margins by approximately $1.4 million or 12%. We do not expect these costs to continue at similar levels going forward.
Operating Expenses
Sales and Marketing
Sales and marketing expenses increased $0.5 million, or 11.2%, to $4.8 million in the three months ended September 30, 2021 compared to $4.3 million in the three months ended September 30, 2020. As a percentage of sales, sales and marketing expenses grew to 41.6% in the three months ended September 30, 2021 from 36.5% in the three months ended September 30, 2020. Along with slightly higher marketing costs, the increase as a percentage of sales was the result of the growth during the third quarter of 2021 of revenues from sales by us directly to the end user as such revenues have higher selling costs than our “business to business” revenues.
General and Administrative
G&A expenses increased $0.9 million, or 34.7%, to $3.6 million in the three months ended September 30, 2021 compared to $2.7 million in the three months ended September 30, 2020. As a percentage of net sales, G&A expenses increased to 31.3% in the three months ended September 30, 2021 from 22.7% in the three months ended September 30, 2020. The increase in expense was primarily due to costs of being a public company, most notably increases in directors and officers insurance, legal fees and stock-based compensation.
Research and Development
R&D expenses increased to $2.3 million in the three months ended September 30, 2021 compared to $1.3 million in the three months ended September 30, 2020. We continue to focus our R&D efforts on the development of our pipeline products with the growth in R&D expenses in the three months ended September 30, 2021 largely attributable to the work performed on the development of our CanGaroo anti-infective product.
Interest Expense
Interest expense was approximately $1.3 million in the three months ended September 30, 2021 compared to $1.5 million in the three months ended September 30, 2020. The decrease was due to lower draws on our Revolving Credit Agreement and lower outstanding principal on our Term Loan Credit Agreement (as defined below) due to the commencement of principal payments in the third quarter of 2021. See “Credit Facilities” below for further discussion of these debt agreements and Note 7 to the condensed consolidated financial statements included elsewhere in this Quarterly Report for a description of our Revenue Interest Obligation and the interest expense related thereto.
Other (Income) Expense, net
Other (income) expense, net was $2.6 million in the three months ended September 30, 2020 and was primarily attributable to the loss on early extinguishment of debt of $2.3 million. This loss related to the conversion of Convertible Bridge Notes into Convertible Preferred Stock with such stock exceeding the face value of the Convertible Bridge Notes
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by $2.3 million. See Note 8 to the condensed consolidated financial statements included elsewhere in this Quarterly Report for further discussion.
Comparison of the Nine Months Ended September 30, 2021 and 2020
Nine Months Ended September 30,
2021
2020
Change 2020 / 2021
% of Net
% of Net
(in thousands, except percentages)
Amount
Sales
Amount
Sales
$
%
Net sales
$
36,529
100.0
%
$
30,216
100.0
%
$
6,313
20.9
%
Cost of goods sold
20,897
57.2
%
15,676
51.9
%
5,221
33.3
%
Gross profit
15,632
42.8
%
14,540
48.1
%
1,092
7.5
%
Sales and marketing
14,285
39.1
%
12,845
42.5
%
1,440
11.2
%
General and administrative
10,727
29.4
%
7,350
24.3
%
3,377
45.9
%
Research and development
5,890
16.1
%
3,981
13.2
%
1,909
48.0
%
Total operating expenses
30,902
84.6
%
24,176
80.0
%
6,726
27.8
%
Loss from operations
(15,270)
(41.8)
%
(9,636)
(31.9)
%
(5,634)
58.5
%
Interest expense
4,034
11.0
%
4,248
14.1
%
(214)
(5.0)
%
Other (income) expense, net
(3,579)
(9.8)
%
2,567
8.5
%
(6,146)
NM
Loss before provision of income taxes
(15,725)
(43.0)
%
(16,451)
(54.4)
%
726
(4.4)
%
Income tax expense
43
0.1
%
18
0.1
%
25
138.9
%
Net loss
(15,768)
(43.2)
%
(16,469)
(54.5)
%
701
(4.3)
%
Accretion of Convertible Preferred Stock
—
—
%
3,510
11.6
%
(3,510)
NM
Net loss attributable to common stockholders
$
(15,768)
(43.2)
%
$
(19,979)
(66.1)
%
$
4,211
(21.1)
%
NM = not meaningful
Net Sales
Net sales grew $6.3 million, or 20.9%, to $36.5 million in the nine months ended September 30, 2021 compared to $30.2 million in the nine months ended September 30, 2020. The increase in net sales was due to growth in both the net sales of our Core Products and of our Non-Core Products, which grew $3.3 million and $3.0 million, respectively.
Net sales information for our Core Products and Non-Core Products is summarized as follows:
Nine Months Ended September 30,
2021
2020
% of Net
% of Net
Change 2020 / 2021
(in thousands, except percentages)
Amount
Sales
Amount
Sales
$
%
Products:
Core Products
$
29,230
80.0
%
$
25,956
85.9
%
$
3,274
12.6
%
Non-Core Products
7,299
20.0
%
4,260
14.1
%
3,039
71.3
%
Total Net Sales
$
36,529
100.0
%
$
30,216
100.0
%
$
6,313
84.0
%
Net sales generated by our Core Products grew $3.3 million, or 12.6%, to $29.2 million in the nine months ended September 30, 2021 compared to $26.0 million in the nine months ended September 30, 2020. The Core Products net sales growth can be largely attributed to the volume growth in all of our Core Product categories due to increased market demand along with the lessened revenue impact of COVID-19 in the nine months ended September 30, 2021 versus such impact in the nine months ended September 30. 2020. As noted above, in June 2021, Medtronic ceased the purchasing of FiberCel following our recall of a single lot of FiberCel in June 2021. Our sales of FiberCel to Medtronic were nearly equal during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020.
Net sales generated by our Non-Core Products increased $3.0 million, or 71.3%, to $7.3 million in the nine months ended September 30, 2021 compared to $4.3 million in the nine months ended September 30, 2020. The Non-Core Products net sales increase was primarily due to revenues associated with new contracts signed in the latter half of 2020
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and by one contract manufacturing customer building inventory for a new product launch, along with the lessened revenue impact of COVID-19 in the nine months ended September 30, 2021 versus such impact in the nine months ended September 30, 2020.
Cost of Goods Sold
Cost of goods sold was $20.9 million and $15.7 million in the nine months ended September 30, 2021 and 2020, respectively, and included, in each case, $2.5 million of intangible asset amortization expenses. Gross margin in the nine months ended September 30, 2021 was 42.8%, a decrease from 48.1% in the corresponding prior year period. Gross margin, excluding intangible asset amortization, in the nine months ended September 30, 2021 was 49.8%, a decline from 56.6% in the corresponding prior year period. Gross margin, excluding intangible asset amortization, is a non-GAAP financial measure. See "Non-GAAP Financial Measures” for a discussion regarding our use of gross margin, excluding intangible asset amortization, including its limitations and a reconciliation to the most directly comparable GAAP financial measure. The decrease in gross margin was primarily due to lower yields in our orthopedic and spinal repair product lines related to heightened donor screening criteria ahead of the implementation of enhanced product testing, as well as write-downs of inventory in certain categories during the third quarter of 2021. Together these factors negatively impacted gross margins by approximately $1.4 million or 4%. We do not expect these costs to continue at similar levels going forward.
Operating Expenses
Sales and Marketing
Sales and marketing expenses increased $1.4 million, or 11.2%, to $14.3 million in the nine months ended September 30, 2021 compared to $12.8 million in the nine months ended September 30, 2020. As a percentage of sales, sales and marketing expenses fell to 39.1% in the nine months ended September 30, 2021 from 42.5% in the nine months ended September 30, 2020. Along with slightly lower marketing costs, the decrease as a percentage of sales is the result of the growth in our “business to business” orthopedic and spinal repair revenues during the nine months ended September 30, 2021, as such revenues have limited associated selling costs.
General and Administrative
G&A expenses increased $3.4 million, or 45.9%, to $10.7 million in the nine months ended September 30, 2021 compared to $7.4 million in the nine months ended September 30, 2020. As a percentage of net sales, G&A expenses increased to 29.4% in the nine months ended September 30, 2021 from 24.3% in the nine months ended September 30, 2020. The dollar increase was primarily due to costs of being a public company, most notably increases in directors and officers insurance, legal fees and stock-based compensation.
Research and Development
R&D expenses increased to $5.9 million in the nine months ended September 30, 2021 compared to $4.0 million in the nine months ended September 30, 2020. We continue to focus our R&D efforts on the development of our pipeline products with the growth in R&D expenses in the nine months ended September 30, 2021 largely attributable to the work performed on the development of our CanGaroo anti-infective product which achieved its next development milestone in the nine months ended September 30, 2021 with the completion of manufacturing validation.
Interest Expense
Interest expense was approximately $4.0 million and $4.2 million in the nine months ended September 30, 2021 and 2020, respectively. The decrease was due to lower draws on our Revolving Credit Agreement during the nine months ended September 30, 2021 and lower outstanding principal on our Term Loan Credit Agreement due to the commencement of principal payments in the third quarter of 2021. See “Credit Facilities” below for further discussion of these debt agreements and Note 7 to the condensed consolidated financial statements included elsewhere in this Quarterly Report for a description of our Revenue Interest Obligation and the interest expense related thereto.
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Other (Income) Expense, net
Other (income) expense, net was approximately $3.6 million of income in the nine months ended September 30, 2021. Such other income relates to the forgiveness of our PPP Loan totaling approximately $3.0 million and our receipt of $550,000 in satisfaction of a 2018 settlement with KeraLink. For further discussion on these items, see Notes 6 and 11 to the condensed consolidated financial statements included elsewhere in this Quarterly Report. Other (income) expense, net was $2.6 million in the nine months ended September 30, 2020 and was primarily attributable to the loss on early extinguishment of debt of $2.3 million. This loss related to the conversion of Convertible Bridge Notes into Convertible Preferred Stock during the 2020 period with such stock exceeding the face value of the Convertible Bridge Notes by $2.3 million. See Note 8 to the condensed consolidated financial statements included elsewhere in this Quarterly Report for additional discussion.
Non-GAAP Financial Measures
This Quarterly Report presents our gross margin, excluding intangible asset amortization, for the three and nine months ended September 30, 2021 and 2020. We calculate gross margin, excluding intangible asset amortization, as gross profit, excluding amortization expense relating to intangible assets we acquired in the CorMatrix Acquisition, divided by net sales. Gross margin, excluding intangible asset amortization, is a supplemental measure of our performance, is not defined by or presented in accordance with U.S. generally accepted accounting principles (“GAAP”), has limitations as an analytical tool and should not be considered in isolation or as an alternative to our GAAP gross margin, gross profit or any other financial performance measure presented in accordance with GAAP. We present gross margin, excluding intangible asset amortization, because we believe that it provides meaningful supplemental information regarding our operating performance by removing the impact of amortization expense, which is not indicative of our overall operating performance. We believe this provides our management and investors with useful information to facilitate period-to-period comparisons of our operating results. Our management uses this metric in assessing the health of our business and our operating performance, and we believe investors’ understanding of our operating performance is similarly enhanced by our presentation of this metric. In addition, other companies, including companies in our industry, may use other measures to evaluate their performance, which could reduce the usefulness of this non-GAAP financial measure as a tool for comparison.
The following table presents a reconciliation of our gross margin, excluding intangible asset amortization, for the three and nine months ended September 30, 2021 and 2020 to the most directly comparable GAAP financial measure, which is our GAAP gross margin (in thousands).
Three Months Ended
Nine Months Ended
September 30,
September 30,
2021
2020
2021
2020
Net sales
$
11,485
$
11,774
$
36,529
$
30,216
Cost of goods sold
7,796
6,233
20,897
15,676
Gross profit
3,689
5,541
15,632
14,540
Intangible asset amortization expense
849
849
2,548
2,548
Gross profit, excluding intangible asset amortization
$
4,538
$
6,390
$
18,180
$
17,088
Gross margin
32.1
%
47.1
%
42.8
%
48.1
%
Gross margin, excluding intangible asset amortization
39.5
%
54.3
%
49.8
%
56.6
%
Seasonality
Historically, we have experienced seasonality, with lower sales in our first and second quarter and higher sales in our fourth quarter, and we expect this trend to continue. We have experienced and may in the future experience higher sales in the fourth quarter as a result of hospitals in the United States increasing their purchases of our products to coincide with the end of their budget cycles. Satisfaction of patient deductibles throughout the course of the year also results in increased sales later in the year, once patients have paid their annual insurance deductibles in full, which reduces their out-of-pocket costs. Conversely, our first quarter generally has lower sales than the preceding fourth quarter as patient deductibles are re-established with the new year, which increases their out-of-pocket costs.
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Liquidity and Capital Resources
As of September 30, 2021, we had cash and restricted cash of approximately $28.4 million and availability under our Revolving Credit Facility of $5.1 million. We have historically financed our operations primarily through private placements of our convertible preferred stock, amounts borrowed under our credit facilities and sales of our products and, more recently, with proceeds from our IPO. Our historical cash outflows have primarily been associated with acquisition and integration, manufacturing costs, general and marketing, research and development, clinical activity, purchase of property and equipment used in the production activities of our Richmond, California facility and investing in our commercial infrastructure through our direct sales force and our commercial partners in order to expand our presence and to promote awareness and adoption of our products. As of September 30, 2021, our accumulated deficit was $96.0 million.
On October 13, 2020, in connection with our IPO, we issued and sold 2,941,176 shares of common stock, consisting of 2,205,882 shares of Class A common stock and 735,294 shares of Class B common stock, at a price to the public of $17.00 per share, resulting in net proceeds to us of approximately $43.0 million, after deducting the underwriting discount of approximately $3.5 million and offering expenses of approximately $3.5 million.
We expect our losses to continue for the foreseeable future and these losses will continue to have an adverse effect on our financial position. Because of the numerous risks and uncertainties associated with our commercialization and development efforts, we are unable to predict when we will become profitable, and we may never become profitable. Our inability to achieve and then maintain profitability would negatively affect our business, financial condition, results of operations and cash flows. As discussed below under “— Funding Requirements,” we may need additional funding to support our continuing operations and pursue our growth strategy.
As further described in Note 6, our Term Debt Facility (“Term Debt”) and Revolving Line of Credit (the “Revolver”) include monthly revenue covenants, the non-compliance of which would permit our lenders to accelerate the repayment of these outstanding borrowings. In October 2021, we were informed by Medtronic that they would no longer be distributing cellular bone products such as FiberCel and, as such, the two companies are working towards a mutual termination of the associated FiberCel distribution agreement (“FiberCel Agreement”). Such termination will follow the suspension of all FiberCel purchases by Medtronic after Aziyo’s voluntary recall pertaining to a single donor lot of FiberCel in June 2021. Given the associated revenues derived from the FiberCel Agreement, its suspension and then termination may negatively affect our future revenues. As such, while Aziyo is currently in compliance with all revenue covenants, our ability to comply with these covenants in the future is uncertain. Additionally, in August 2021, we commenced the principal repayment of our Term Debt with such repayments totaling approximately $556,000 per month.
In order to mitigate the current and potential future liquidity issues caused by the matters noted above, we may seek to raise capital through the issuance of common stock and to either refinance or restructure its Term Debt and Revolver. However, we may not be able to raise additional equity or refinance our Term Debt and Revolver on acceptable terms, or at all. As such, based on our current operating plans, we believe there is uncertainty as to whether our future cash flows along with our existing cash, availability under our Revolver and cash generated from expected future sales will be sufficient to meet our anticipated operating needs through twelve months from the financial statement issuance date. Due to these factors, there is substantial doubt about our ability to continue as going concern within one year after the issuance of the financial statements.
Cash Flows for the Nine Months Ended September 30, 2021 and 2020
Nine Months Ended September 30,
2021
2020
(in thousands)
Net cash (used in) provided by:
Operating activities
$
(9,059)
$
(8,258)
Investing activities
(344)
(525)
Financing activities
(7,503)
7,837
Net decrease in cash
$
(16,906)
$
(946)
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Net Cash Used in Operating Activities
Net cash used in operating activities for the nine months ended September 30, 2021 was $9.1 million compared to $8.3 million for the nine months ended September 30, 2020. The year-over-year change was primarily due to a higher net loss (after adjustment for non-cash charges and gains) offset by improved working capital performance, particularly as it relates to our management of inventory levels.
Net Cash Used in Investing Activities
Net cash used in investing activities for the nine months ended September 30, 2021 was $0.3 million and approximately $0.5 million for the nine months ended September 30, 2020. In both periods, the use of cash related to the purchase of property and equipment, the majority of which are used in the production activities of our Richmond, California facility.
Net Cash (Used in) Provided by Financing Activities
Net cash used in financing activities for the nine months ended September 30, 2021 totaled $7.5 million compared to $7.8 million of cash provided by financing activities for the nine months ended September 30, 2020. The year-over-year net increase of $15.3 million was primarily due to the capital raises in the 2020 period totaling approximately $7.1 million necessary to fund our operations prior to the IPO in contrast to only the net repayments of $4.6 million on our Revolving Credit Facility and $1.1 million on our Term Loan Credit Agreement during the 2021 (post-IPO) period.
Credit Facilities
General
On July 15, 2019, Aziyo and Aziyo Med, LLC, which we refer to collectively as the Borrowers, entered into an amended and restated term loan credit agreement (the “Term Loan Credit Agreement”), with Midcap Financial Trust, as agent and lender, and the other lenders party thereto, which provided for the conversion of our existing term loans into borrowing under the Term Loan Credit Agreement (consisting of a $8.5 million tranche (Term Loan Tranche 1), a $5.0 million tranche (Term Loan Tranche 2) and a $3.0 million tranche (Term Loan Tranche 3)), and established a new $3.5 million tranche (Term Loan Tranche 4) and a new $5.0 million tranche (Term Loan Tranche 5). Commitments in respect of Term Loan Tranche 5 terminated without being borrowed on September 30, 2020. We refer to Term Loan Tranche 1, Term Loan Tranche 2, Term Loan Tranche 3 and Term Loan Tranche 4 collectively as the Term Loan Facility.
On July 15, 2019, the Borrowers also entered into an amended and restated revolving credit agreement (the “Revolving Credit Agreement”), with Midcap Funding IV Trust, as agent and lender, and the other lenders party thereto, which provided for an $8.0 million asset-based revolving credit facility (the “Revolving Credit Facility”).
As of September 30, 2021, we had $18.7 million of indebtedness outstanding under our Term Loan Facility (net of $0.2 million of unamortized discount and deferred financing costs), and $2.0 million outstanding under our Revolving Credit Facility (with $4.5 million of additional borrowings available thereunder).
Interest Rates and Fees
Borrowings under the Term Loan Facility accrue interest at a rate per year equal to the LIBOR Rate (as defined below) plus a margin of 7.25%. Borrowings under the Revolving Credit Facility bear interest at the per annum rate equal to the LIBOR Rate plus a margin of 4.95%. The LIBOR Rate is defined as the greater of 2.25% and the applicable London Interbank Offered Rate for U.S. dollar deposits divided by 1.00 minus the maximum effective reserve percentage for Eurocurrency funding.
Under the terms of the Revolving Credit Facility, we can borrow up to an amount (the “Borrowing Base”), equal to (1) 85.0% of the aggregate net amount at such time of the Eligible Accounts (as defined in the Revolving Credit Agreement), plus (2) 50% of the value of the Eligible Inventory (as defined in the Revolving Credit Agreement), valued
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at the lower of first-in-first-out cost or market cost, and after factoring in all rebates, discounts and other incentives or rewards associated with the purchase of the applicable Eligible Inventory (provided that the Borrowing Base will be automatically adjusted down, if necessary, such that the aggregate availability from Eligible Inventory shall never exceed the lesser of (x) an amount equal to 40.0% of the Borrowing Base and (y) $2,000,000). The amount available for borrowing under the Revolving Credit Facility may also be reduced by certain reserve amounts that may be established by the administrative agent from time to time .
In addition to paying interest on the principal amounts outstanding under the Revolving Credit Facility, we are required to pay an unused line fee to the lenders under the Revolving Credit Facility in respect of the unutilized commitments thereunder equal to 0.50% multiplied by the lesser of (1) the unutilized commitments and (2) $8,000,000 minus 40% of the Borrowing Base.
Mandatory Prepayments
The Term Loan Credit Agreement requires the Borrowers to prepay amounts outstanding under the Term Loan Facility, subject to certain exceptions, with: (1) 100% of any net casualty proceeds in excess of $250,000 with respect to assets upon which the agent maintains a lien and (2) 100% of the net cash proceeds of non-ordinary course asset sales or sales pertaining to collateral upon which the Borrowing Base is calculated. In addition, the Borrowers are required to prepay all outstanding obligations under the Term Loan Facility upon the termination of all commitments under the Revolving Credit Facility and the repayment of the outstanding borrowings thereunder. No such mandatory prepayments were required during the nine months ended September 30, 2021 and 2020.
The Revolving Credit Agreement requires the Borrowers to prepay amounts outstanding under the Revolving Credit Facility (or provide cash collateral up to the amount of any outstanding letter of credit obligations) to the extent outstanding borrowings under the Revolving Credit Facility exceed the lesser of (1) $8,000,000 and (2) the Borrowing Base.
Optional Prepayment
The Borrowers may prepay the Term Loan Facility in whole but not in part at any time with at least 10 business days’ prior written notice, provided, however, that such prepayment shall be accompanied by a portion of the Exit Fee (as defined below) equal to the amount prepaid divided by the then-outstanding principal amount of borrowings outstanding under the Term Loan Facility, and a prepayment fee equal to the amount prepaid multiplied by, in the case of Term Loan Tranche 1, Term Loan Tranche 2 or Term Loan Tranche 3, 3.0% until July 15, 2021 and 2.0% thereafter, and, in the case of Term Loan Tranche 4, 4.0% until November 21, 2020, 3.0% until November 21, 2021 and 2.0% thereafter. The “Exit Fee” is defined as an amount equal to 6.50% multiplied by the aggregate principal amount of all borrowings advanced to the Borrowers under the Term Loan Facility.
The Borrowers may prepay the Revolving Credit Facility in whole or in part at any time, provided, however, that any such partial prepayment shall be in an amount equal to $100,000 or a higher integral multiple of $25,000.
Amortization and Final Maturity
The Borrowers are required to make interest-only payments prior to the principal amortization start date. The Term Loan Facility provided that if certain conditions were satisfied prior to December 1, 2020 (including our completion of a qualified initial public offering and no continuing default or event of default), the principal amortization start date may, upon our request, be extended to August 1, 2021 (from the previous principal amortization start date of February 1, 2021). Based on the completion of our IPO, in January 2021, we exercised this interest-only period extension right and, as such, the principal payments in respect of borrowings under the Term Loan Facility commenced on August 1, 2021. Such principal payments shall be in an amount equal to the total principal amount of borrowings under the Term Loan Facility divided by 36, for a 36-month straight-line amortization of equal monthly principal payments. The remaining unpaid balance on the Term Loan Facility, together with all accrued and unpaid interest thereon and any remaining unpaid amount of the Exit Fee, is due and payable on July 15, 2024.
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Outstanding borrowings under the Revolving Credit Facility do not amortize and are due and payable on July 15, 2024.
Security
All obligations under the Term Loan Facility and the Revolving Credit Facility are, and any future guarantees of those obligations will be, secured by, among other things, and in each case subject to certain exceptions, a first priority lien on and security interest in, upon, and to all of each Borrower’s assets, including all goods, equipment, inventory, contract rights or rights to payment of money, leases, license agreements, franchise agreements, general intangibles, commercial tort claims, documents, instruments (including any promissory notes), chattel paper (whether tangible or electronic), cash, deposit accounts, securities accounts, fixtures, letter of credit rights (whether or not the letter of credit is evidenced by a writing), securities, and all other investment property, supporting obligations, and financial assets, whether now owned or hereafter acquired, wherever located.
Covenants and Other Matters
The Term Loan Credit Agreement and the Revolving Credit Agreement each contain a number of covenants that, among other things and subject to certain exceptions, restrict the ability of the Borrowers to:
● incur additional indebtedness;
● incur certain liens;
● pay dividends or make other distributions on equity interests;
● enter into agreements restricting their subsidiaries’ ability to pay dividends;
● redeem, repurchase or refinance subordinated indebtedness;
● consolidate, merge or sell or otherwise dispose of their assets;
● make investments, loans, advances, guarantees and acquisitions;
● enter into transactions with affiliates;
● amend or modify their governing documents;
● amend or modify certain material agreements;
● alter the business conducted by them and their subsidiaries; and
● enter into sale and leaseback transactions.
In addition, the Term Loan Credit Agreement and the Revolving Credit Agreement contain a financial covenant, which is tested on a monthly basis, and requires us to achieve a specified Minimum Net Product Revenue (as defined in the applicable credit agreement) for the preceding 12-month period.
The Term Loan Credit Agreement and the Revolving Credit Agreement each contains events of default, including, most significantly, a failure to timely pay interest or principal, insolvency, or an action by the FDA or such other material adverse event impacting the operations of Aziyo. As of September 30, 2021, Aziyo was in compliance with the financial covenant and all other covenants. When finalized, the mutual agreement to terminate our Supply Agreement for FiberCel with Medtronic, as described above, would have triggered an event of default under the Term Loan Credit Agreement; however, such event of default was waived by our lenders.
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The Term Loan Credit Agreement and the Revolving Credit Agreement also contain certain customary representations and warranties and affirmative covenants, and certain reporting obligations. In addition, the lenders will be permitted to accelerate all outstanding borrowings and other obligations, terminate outstanding commitments and exercise other specified remedies upon the occurrence of certain events of default (subject to certain grace periods and exceptions), which include, among other things, payment defaults, breaches of representations and warranties, covenant defaults, certain cross-defaults and cross-accelerations to other indebtedness, certain events of bankruptcy and insolvency, certain judgments and changes of control.
PPP Loan
In May 2020, we entered into a promissory note with Silicon Valley Bank, or SVB, under the Paycheck Protection Program of the CARES Act pursuant to which SVB agreed to make a loan to us in the amount of approximately $3.0 million. The PPP Loan bears interest at a rate of 1.0% per annum with monthly principal and interest payments beginning in March 2021 and ending on the maturity date of May 7, 2022; however such repayment commencement was deferred by the U.S. Small Business Administration while they evaluated our forgiveness application. In June 2021, we were notified by the U.S. Small Business Administration that the entire balance of our PPP Loan and all related accrued interest was forgiven. Such forgiveness resulted in a gain to us of approximately $3.0 million which has been recorded as other income in the accompanying condensed consolidated statements of operations for the nine months ended September 30, 2021.
2020 Bridge Notes
In April 2020, we entered into a bridge note purchase agreement pursuant to which we issued approximately $2.0 million in aggregate principal amount of convertible promissory notes (the “2020 Bridge Notes”), to HighCape Partners QP, HighCape Partners and Deerfield. The 2020 Bridge Notes had a maturity date of April 1, 2025 and accrued interest at a rate of 5.0% per year. The aggregate principal amount of, and accrued interest on, the 2020 Bridge Notes automatically converted into an aggregate of 2,039,427 shares of our Series A convertible preferred stock upon the closing of our Series A convertible preferred stock financing in September 2020.
Funding Requirements
We expect to continue to incur significant expenses and operating losses for the foreseeable future as we grow our sales organization and expand our product development and clinical and research activities. In addition, we expect to incur additional costs and expenses associated with operating as a public company.
As noted above under “—Liquidity and Capital Resources,” without additional capital, there is substantial doubt about Aziyo’s ability to continue as going concern within one year after the issuance of the financial statements. As such, we may seek to raise additional capital through equity offerings, debt financings, collaborations or licensing arrangements. We may also consider raising additional capital in the future to expand our business, pursue strategic investments or take advantage of financing opportunities. Our present and future funding requirements will depend on many factors, including, among other things:
● continued patient, physician and market acceptance of our products;
● the scope, rate of progress and cost of our current and future pre-clinical studies and clinical trials;
● the cost of our research and development activities and the cost and timing of commercializing new products or technologies;
● the cost and timing of expanding our sales and marketing capabilities;
● the cost of filing and prosecuting patent applications and maintaining, defending and enforcing our patent or other intellectual property rights;
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● the cost of defending, in litigation or otherwise, any claims that we infringe, misappropriate or otherwise violate third-party patents or other intellectual property rights;
● the costs of defending against or the damages payable (to the extent above the applicable insurance coverage), for example, in connection with claims involving the recall of FiberCel;
● the cost and timing of additional regulatory approvals;
● costs associated with any product recall that may occur;
● the effect of competing technological and market developments;
● the expenses we incur in manufacturing and selling our products;
● the extent to which we acquire or invest in products, technologies and businesses, although we currently have no commitments or agreements relating to any of these types of transactions;
● the costs of operating as a public company;
● unanticipated general, legal and administrative expenses; and
● the effects on any of the above of the current COVID-19 pandemic, including variants of the disease, or any other pandemic, epidemic or outbreak of infectious disease.
In addition, our operating plans may change as a result of any number of factors, including those set forth above and other factors currently unknown to us, and we may need additional funds sooner than anticipated. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest may be materially diluted, and the terms of such securities could include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing and preferred equity financing, if available, may involve agreements that include restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures, creating liens, redeeming shares of our common stock and/or declaring dividends. If we raise funds through collaborations, licensing agreements or other strategic alliances, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates, or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings or other arrangements when needed, we may be required to delay the development or commercialization of our products, license to third parties the rights to commercialize products or technologies that we would otherwise seek to commercialize and reduce marketing, customer support or other resources devoted to our products or cease operations. See our Annual Report, Part I, Item 1A. “Risk Factors — Risks Related to Our Business — Our future capital needs are uncertain and we may need to raise funds in the future, and such funds may not be available on acceptable terms or at all.”
Off-Balance Sheet Arrangements
As of September 30, 2021, we did not have any off-balance sheet arrangements, as defined under SEC Regulation S-K Item 303(a)(4)(ii).
Contractual Obligations
Not applicable as permitted based on our classification as a “smaller reporting company” as defined in Rule 12b-2 of the Exchange Act.
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Critical Accounting Policies and Estimates
Refer to Note 2, “Summary of Significant Accounting Policies,” to our condensed consolidated financial statements included elsewhere in this Quarterly Report for information regarding our critical accounting estimates and policies.
Recent Accounting Pronouncements
Refer to Note 3, “Recently Issued Accounting Standards,” to our condensed consolidated financial statements included elsewhere in this Quarterly Report for information regarding recently issued accounting pronouncements.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.