What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-10 compared with 2021-11-10 · 105 added, 233 removed, 185 unchanged (65% of the section changed)

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.

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 Part II, Item 7,“Management’s Discussion and Analysis of Financial Condition and Results of Operations” 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.

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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 believe that we have developed the only biomaterial 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.

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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

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.

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 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.

As of March 31, 2022, we had 157 employees, of which 26 were direct sales representatives.

For the three months ended March 31, 2022, we incurred net losses of $8.1 million, and as of March 31, 2022, we had an accumulated deficit of $113.2 million.

In addition, during the three months ended March 31, 2022, we used $7.4 million and $0.9 million of cash in operating and financing activities, respectively.

We expect to continue to incur significant expenses and operating losses for the foreseeable future as we seek to grow our sales organization to coincide with product launches and expand our product development and clinical and research activities.

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.

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.

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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.

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, either refinance or restructure our Term Loan Facility and Revolving Credit Facility, restructure our Revenue Interest Obligation, or pursue asset sale transactions.

However, such transactions may not be successful and we may not be able to raise additional equity, refinance or restructure our debt instruments, or sell assets 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 Revolving Credit Facility 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.

We continue to closely monitor the impact of the COVID-19 pandemic and its variants 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

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.

Since that time, the number of procedures performed using our products has intermittently decreased, 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 in order to avoid patient exposure to medical environments and the risk of potential infection with COVID-19, and to focus limited resources and 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 intermittently 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 may reduce our net sales in the future 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.

Such orders or restrictions

resulted in reduced operations at our manufacturing facilities and service providers, 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 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.

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.

FiberCel Recall

In June 2021, we issued a voluntary recall pertaining to a single donor lot of our FiberCel Fiber Viable Bone Matrix, a bone repair product formerly distributed by Medtronic, after learning of postsurgical infections reported in several patients treated with the product, including some patients that tested positive for tuberculosis.

For information about legal proceedings in which we are involved and the possible future financial implications, see Note 8 to the condensed consolidated financial statements included elsewhere in this Quarterly Report.

Components of Our Results of Operations

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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 soft tissue reconstruction product SimpliDerm is sold directly to hospitals and other healthcare facilities through independent sales agents.

Our contract manufacturing products are sold directly to corporate customers.

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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.

We expect that our expenses will increase in the foreseeable future as we grow our sales and marketing organization to coincide with new product launches and expand our product development and clinical activities to support our current and pipeline products.

As a result, we will need to generate significant net sales in order to achieve profitability.

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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,

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.

Additionally, this expense category includes distribution costs as well as market research, trade show attendance, advertising and public relations and customer service expenses.

We expect sales and marketing expenses to grow

commensurate with sales increases, and to an even larger degree in the near-term to the extent we grow our direct sales force and increase marketing activities to coincide with new product launches.

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.

Our G&A expenses have increased 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.

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,

Sales and marketing

General and administrative

Research and development

These reclassifications did not impact our consolidated earnings or assets for the three and nine months ended September 30, 2020.

Results of Operations

Comparison of the Three Months Ended September 30, 2021 and 2020

Three Months Ended September 30,

Comparison of the Three Months Ended March 31, 2022 and 2021

Three Months Ended March 31,

Change 2021 / 2022

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Interest expense

Other (income) expense, net

Loss before provision of income taxes

Income tax expense

Accretion of Convertible Preferred Stock

Net loss attributable to common stockholders

NM = not meaningful

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.

Net sales decreased $1.4 million, or 10.8%, to $11.5 million in the three months ended March 31, 2022 compared to $12.9 million in the three months ended March 31, 2021.

The decline in net sales was due to reductions in the net sales of our Core Products of $2.5 million, partially offset by growth in the net sales of our Non-Core Products of $1.1 million.

Net sales information for our Core Products and Non-Core Products is summarized as follows:

Three Months Ended September 30,

Three Months Ended March 31,

Change 2021 / 2022

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Total Net Sales

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.

Net sales generated by our Core Products declined $2.5 million, or 23.7%, to $8.1 million in the three months ended March 31, 2022 compared to $10.6 million in the three months ended March 31, 2021.

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 .

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

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,

Change 2020 / 2021

(in thousands, except percentages)

Cost of goods sold

Sales and marketing

General and administrative

Research and development

Total operating expenses

Loss from operations

Interest expense

Other (income) expense, net

Loss before provision of income taxes

Income tax expense

Accretion of Convertible Preferred Stock

Net loss attributable to common stockholders

NM = not meaningful

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,

Change 2020 / 2021

(in thousands, except percentages)

Core Products

Non-Core Products

Total Net Sales

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.

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

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.

Sales of FiberCel to Medtronic were $2.8 million in the three months ended March 31, 2021.

Net sales generated by our Non-Core Products increased $1.1 million, or 51.1%, to $3.4 million in the three months ended March 31, 2022 compared to $2.2 million in the three months ended March 31, 2021.

The increase was primarily driven by a growth in the revenue from several contract manufacturing customers .

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.

Cost of goods sold was $7.2 million and $6.6 million in the three months ended March 31, 2022 and 2021, respectively, and included, in each case, $0.8 million of intangible asset amortization expenses.

Gross margin in the three months ended March 31, 2022 was 37.2%, a decrease from 49.1% in the corresponding prior year period.

Gross margin, excluding intangible asset amortization, in the three months ended March 31, 2022 was 44.6%, a decline from 55.7% in the corresponding prior year period.

Gross margin, excluding intangible asset amortization, is a non-GAAP financial measure.

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.

The decrease in gross margin was primarily due to product mix (higher Non-Core revenues in 2022 with lower gross margins) and lower yields in our orthopedic and spinal repair product lines related to heightened donor screening criteria ahead of the implementation of enhanced product testing.

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.

Sales and marketing expenses increased $0.1 million, or 2.4%, to $4.8 million in the three months ended March 31, 2022 compared to $4.7 million in the three months ended March 31, 2021.

As a percentage of sales, sales and marketing expenses grew to 41.9% in the three months ended March 31, 2022 from 36.5% in the three months ended March 31, 2021.

The increase as a percentage of sales was the result of the growth during the three months ended March 31, 2022 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 $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.

G&A expenses increased $0.5 million, or 14.1%, to $4.1 million in the three months ended March 31, 2022 compared to $3.6 million in the three months ended March 31, 2021.

As a percentage of net sales, G&A expenses increased to 35.8% in the three months ended March 31, 2022 from 28.0% in the three months ended March 31, 2021.

The increase in expense was primarily due to higher stock-based compensation as well as costs associated with FiberCel Litigation that we did not incur in the 2021 period.

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.

R&D expenses increased to $2.3 million in the three months ended March 31, 2022 compared to $1.7 million in the three months ended March 31, 2021.

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 March 31, 2022 largely attributable to the work performed on the final development and testing of our CanGaroo with antibiotics.

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.

Interest expense was approximately $1.2 million in the three months ended March 31, 2022 compared to $1.4 million in the three months ended March 31, 2021.

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.

This Quarterly Report presents our gross margin, excluding intangible asset amortization, for the three months ended March 31, 2022 and 2021.

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.

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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).

The following table presents a reconciliation of our gross margin, excluding intangible asset amortization, for the three months ended March 31, 2022 and 2021 to the most directly comparable GAAP financial measure, which is our GAAP gross margin (in thousands).

Three Months Ended

Nine Months Ended

September 30,

Cost of goods sold

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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.

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.

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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.

As of March 31, 2022, we had cash and restricted cash of approximately $22.2 million and availability under our Revolving Credit Facility of $0.9 million.

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.

As of March 31, 2022, our accumulated deficit was $113.2 million.

On December 8, 2021, we closed on a private investment in public equity (PIPE) financing, thereby receiving net proceeds of approximately $13.8 million, after deducting offering costs.

The PIPE investors purchased an aggregate of 2,122,637 shares of the Company’s Class A common stock and an aggregate of 1,179,244 shares of the Company’s Class B common stock (which are convertible on a one-for-one basis into shares of Class A common stock), in each case, at a price of $4.24 per share.

We expect our losses to continue for the foreseeable future and these losses will continue to have an adverse effect on our financial position.

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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.

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.

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.

Additionally, as discussed below under “--- Credit Facilities,” in August 2021, we commenced the principal repayment of our Term Debt with such repayments totaling approximately $556,000 per month through July 2024.

However, such transactions may not be successful and we may not be able to raise additional equity, refinance our debt instruments, or sell assets on acceptable terms, or at all.

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,

Cash Flows for the Three Months Ended March 31, 2022 and 2021

Three Months Ended March 31,

(in thousands)

Net cash (used in) provided by:

Net cash used in:

Operating activities

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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 operating activities for the three months ended March 31, 2022 was $7.4 million compared to $5.2 million for the three months ended March 31, 2021.

The year-over-year increase was primarily due to a higher net loss (after adjustment for non-cash charges and gains) as well as the timing of certain annual insurance prepayments.

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.

Net cash used in investing activities for the three months ended March 31, 2022 was $0.03 million and approximately $0.1 million for the three months ended March 31, 2021.

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.

Net Cash Used in Financing Activities

Net cash used in financing activities for the three months ended March 31, 2022 totaled $0.9 million compared to $3.7 million for the three months ended March 31, 2021.

The year-over-year net decrease was caused by net borrowings of $1.4 million on our Revolving Credit Facility during the three months ended March 31, 2022 compared to net repayments of $3.1 million during the three months ended March 31, 2021.

This change in the Revolving Credit Facility activity was offset by principal payments of $1.7 million on our Term Loan Credit Agreement as such payments commenced in August 2021.

Credit Facilities

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.

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”).

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).

As of March 31, 2022, we had $15.4 million of indebtedness outstanding under our Term Loan Facility (net of $0.1 million of unamortized discount and deferred financing costs), and $6.2 million outstanding under our Revolving Credit Facility (with $0.9 million of additional borrowings available thereunder).

Interest Rates and Fees

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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

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).

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% 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 .

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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.

No such mandatory prepayments were required during the three months ended March 31, 2022 and 2021.

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 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 which, based on the amendment to the Term Loan Credit Agreement executed in January 2022, shall be equal to the amount prepaid multiplied by 3.0% until January 21, 2023 and 2.0% thereafter.

The “Exit Fee” is defined as an amount equal to 6.5% 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.

Should the Revolving Credit Facility be terminated prior to its final maturity (see below), based on the amendment to the Revolving Credit Agreement executed in January 2022, the Borrowers must pay a fee equal to an amount determined by multiplying the amount of the Revolving Credit Facility so terminated by 3.0% until January 21, 2023 and 2.0% thereafter.

Amortization and Final Maturity

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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.

In January 2022, the Term Loan Credit Agreement and Revolving Credit Agreement were amended and all future Minimum Net Product Revenue covenant amounts were reset.

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.

As of March 31, 2022, Aziyo was in compliance with the financial covenant and all other covenants.

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.

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.

Supplier Promissory Note

During 2017, we restructured certain of our liabilities with a tissue supplier and entered into an unsecured promissory note.

As of March 31, 2022, the balance of this promissory note totaled $1.4 million plus accrued interest.

The note bears interest at 5% and is currently due in full;

however, the notes are subordinated in payment to the Term Loan Facility and Revolving Credit Facility and in both 2021 and 2020, the Company’s senior lender restricted payment of the amounts due.

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.

We expect to continue to incur significant expenses and operating losses for the foreseeable future as we grow our sales organization to coincide with product launches 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.

As of March 31, 2022, we had $23.0 million of indebtedness outstanding, consisting of $15.4 million outstanding under our Term Loan Facility (net of $0.1 million of unamortized deferred financing costs), $6.2 million outstanding under our Revolving Credit Facility (with $0.9 million of additional borrowings available thereunder), and a $1.4 million promissory note payable to one of our suppliers.

In addition, as further described in Note 7 to the condensed consolidated financial statements included elsewhere in this Quarterly Report, we are party to a royalty agreement with Ligand Pharmaceuticals Incorporated (“Ligand”) pursuant to which we assumed a restructured, long-term obligation to Ligand (the “Revenue Interest Obligation”), that requires us to pay Ligand 5.0% of future sales of the products we acquired from CorMatrix (as well as products substantially similar to those products), subject to annual minimum payments of $2.75 million.

Furthermore, a $5.0 million payment will be due to Ligand if cumulative sales of these products exceed $100 million and a second $5.0 million will be due if cumulative sales exceed $300 million during the ten-year term of the agreement which expires on May 31, 2027.

We are currently forecasting that the initial $5.0 million milestone payment will become payable in mid-2023.

If our available cash balances and cash flow from operations, if any, are insufficient to satisfy our liquidity requirements, we may seek to raise additional capital through equity offerings, debt financings, or asset sale transactions.

However, such transactions may not be successful and we may not be able to raise additional equity, refinance our Term Debt and Revolver, or sell assets on acceptable terms, or at all.

We may also consider raising additional capital in the future to expand our business, pursue strategic investments or take advantage of financing opportunities.

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● 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 scope, rate of progress and cost of our current and future pre-clinical and clinical studies;

● the cost of our research and development activities and the cost and timing of commercializing new products or technologies;

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● unanticipated general, legal and administrative expenses;

● 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.

● the effects on any of the above of the current COVID-19 pandemic 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.

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“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.

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.

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.

The preparation of our unaudited condensed consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures.

We have discussed the policies and estimates that we believe are critical and require the use of complex judgment in their application in our Annual Report, and, during the three months ended March 31, 2022, there were no material changes to those previously disclosed.

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

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis