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 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. 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 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.
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 with our suppliers, as we obtain supplies on a purchase order basis. Specifically, we acquire donated human tissue directly
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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 and a private placement of our common stock. 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 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. 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.
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 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 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
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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
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
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 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 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. 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, advertising and public relations and customer service expenses. We expect sales and marketing expenses to grow
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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. 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 antibiotics. We also conduct clinical trials to validate the performance characteristics of our products and to capture patient data necessary to support our commercial efforts.
Results of Operations
Comparison of the Three Months Ended March 31, 2022 and 2021
Three Months Ended March 31,
2022
2021
Change 2021 / 2022
% of Net
% of Net
(in thousands, except percentages)
Amount
Sales
Amount
Sales
$
%
Net sales
$
11,495
100.0
%
$
12,884
100.0
%
$
(1,389)
(10.8)
%
Cost of goods sold
7,214
62.8
%
6,555
50.9
%
659
10.1
%
Gross profit
4,281
37.2
%
6,329
49.1
%
(2,048)
(32.4)
%
Sales and marketing
4,818
41.9
%
4,703
36.5
%
115
2.4
%
General and administrative
4,113
35.8
%
3,605
28.0
%
508
14.1
%
Research and development
2,272
19.8
%
1,720
13.3
%
552
32.1
%
Total operating expenses
11,203
97.5
%
10,028
77.8
%
1,175
11.7
%
Loss from operations
(6,922)
(60.2)
%
(3,699)
(28.7)
%
(3,223)
87.1
%
Interest expense
1,215
10.6
%
1,355
10.5
%
(140)
(10.3)
%
Loss before provision of income taxes
(8,137)
(70.8)
%
(5,054)
(39.2)
%
(3,083)
61.0
%
Income tax expense
12
0.1
%
13
0.1
%
(1)
(8)
%
Net loss
$
(8,149)
(70.9)
%
$
(5,067)
(39.3)
%
$
(3,082)
60.8
%
Net Sales
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.
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Net sales information for our Core Products and Non-Core Products is summarized as follows:
Three Months Ended March 31,
2022
2021
% of Net
% of Net
Change 2021 / 2022
(in thousands, except percentages)
Amount
Sales
Amount
Sales
$
%
Products:
Core Products
$
8,140
70.8
%
$
10,664
82.8
%
$
(2,524)
(23.7)
%
Non-Core Products
3,355
29.2
%
2,220
17.2
%
1,135
51.1
%
Total Net Sales
$
11,495
100.0
%
$
12,884
100.0
%
$
(1,389)
(10.8)
%
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. 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 $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. 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 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 $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 $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.
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Research and Development
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 $1.2 million in the three months ended March 31, 2022 compared to $1.4 million in the three months ended March 31, 2021. 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 three months ended September 30, 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.
Non-GAAP Financial Measures
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. 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 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
March 31,
2022
2021
Net sales
$
11,495
$
12,884
Cost of goods sold
7,214
6,555
Gross profit
4,281
6,329
Intangible asset amortization expense
849
849
Gross profit, excluding intangible asset amortization
$
5,130
$
7,178
Gross margin
37.2
%
49.1
%
Gross margin, excluding intangible asset amortization
44.6
%
55.7
%
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
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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.
Liquidity and Capital Resources
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. 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, proceeds from our IPO and a private placement of our common stock. 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 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. 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. 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.
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 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.
Cash Flows for the Three Months Ended March 31, 2022 and 2021
Three Months Ended March 31,
2022
2021
(in thousands)
Net cash used in:
Operating activities
$
(7,350)
$
(5,174)
Investing activities
(34)
(131)
Financing activities
(869)
(3,726)
Net decrease in cash
$
(8,253)
$
(9,031)
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Net Cash Used in Operating Activities
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 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 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
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”). 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 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
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 at the lower of first-in-first-out cost or market cost, and after factoring in all rebates, discounts and other incentives or
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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 .
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 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 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
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. 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 March 31, 2022, Aziyo was in compliance with the financial covenant and all other covenants.
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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.
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 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 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. 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 and clinical studies;
● 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 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.”
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
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
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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.