What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-08-15 compared with 2022-05-10 · 145 added, 67 removed, 223 unchanged (49% 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 Part II, Item 7,“Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report.

“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.

25 unchanged sentences

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 have devoted the majority of our resources to acquisitions and integration, manufacturing and administrative costs, general and administrative, 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 June 30, 2022, we had 162 employees, of which 27 were direct sales representatives.

For the six months ended June 30, 2022, we incurred a net loss of $17.5 million, and as of June 30, 2022, we had an accumulated deficit of $122.6 million.

In addition, during the six months ended June 30, 2022, we used $10.7 million and $3.0 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.

6 unchanged sentences

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.

As such, based on our current operating plans, even after the recent debt refinancing described in Note 12 to the condensed consolidated financial statements included elsewhere in this Quarterly Report, we believe there is uncertainty as to whether our future cash flows along with our existing cash, availability under our SWK Loan Facility (described below under “– Liquidity and Capital Resources – August 2022 Debt Refinancing”) 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.

6 unchanged sentences

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 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.

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.

While access to procedures for our sales representatives and independent sales agents have begun to improve, 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.

19 unchanged sentences

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.

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

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.

Additionally, this expense category includes distribution costs as well as market research, trade show attendance, advertising and public relations related to our products, 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.

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.

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 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

3 unchanged sentences

Results of Operations

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

Three Months Ended March 31,

Comparison of the Three Months Ended June 30, 2022 and 2021

Three Months Ended June 30,

Change 2021 / 2022

7 unchanged sentences

Interest expense

Other (income) expense, net

Loss before provision of income taxes

Income tax expense

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.

Net sales increased $0.4 million, or 3.9%, to $12.6 million in the three months ended June 30, 2022 compared to $12.2 million in the three months ended June 30, 2021.

The improvement in net sales was due to growth in net sales of our Non-Core Products of $1.4 million, partially offset by a decrease in the net sales of our Core Products of $0.9 million.

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

Three Months Ended June 30,

Change 2021 / 2022

(in thousands, except percentages)

Core Products

Non-Core Products

Total Net Sales

Net sales generated by our Core Products declined $0.9 million, or 9.3%, to $9.1 million in the three months ended June 30, 2022 compared to $10.0 million in the three months ended June 30, 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 partially offset by sales volume increases in our CanGaroo and SimpliDerm products.

Sales of FiberCel to Medtronic were $1.7 million in the three months ended June 30, 2021.

Net sales generated by our Non-Core Products increased $1.4 million, or 64.3%, to $3.6 million in the three months ended June 30, 2022 compared to $2.2 million in the three months ended June 30, 2021.

The increase was primarily driven by a growth in the revenue from several contract manufacturing customers, including significant sales volume increases to ACE Surgical Supply .

Cost of Goods Sold

Cost of goods sold was $7.7 million and $6.5 million in the three months ended June 30, 2022 and 2021, respectively, and included, in each case, $0.8 million of intangible asset amortization expenses.

Gross margin in the three months ended June 30, 2022 was 38.8%, a decrease from 46.2% in the corresponding prior year period.

Gross margin, excluding intangible asset amortization, in the three months ended June 30, 2022 was 45.5%, a decline from 53.1% 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 and increase to cost of goods sold was primarily due to product mix (higher Non-Core Products’ revenues in 2022 with lower gross margins).

Operating Expenses

Sales and Marketing

Sales and marketing expenses increased $0.6 million, or 12.6%, to $5.4 million in the three months ended June 30, 2022 compared to $4.8 million in the three months ended June 30, 2021.

As a percentage of sales, sales and marketing expenses grew to 42.8% in the three months ended June 30, 2022 from 39.5% in the three months ended June 30, 2021.

The increase as a percentage of sales was the result of (i) primarily, the growth during the three months ended June 30, 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 and (ii) higher stock-based compensation and travel costs related to our sales force.

General and Administrative

G&A expenses increased $1.5 million, or 43.3%, to $5.1 million in the three months ended June 30, 2022 compared to $3.5 million in the three months ended June 30, 2021.

As a percentage of net sales, G&A expenses increased to 40.0% in the three months ended June 30, 2022 from 29.0% in the three months ended June 30, 2021.

The increase in expense was primarily due to higher stock-based compensation as well as costs associated with the FiberCel Litigation and our CEO transition described in Note 4 to the condensed consolidated financial statements included elsewhere in this Quarterly Report that we did not incur in the 2021 period.

Research and Development

R&D expenses increased to $2.6 million in the three months ended June 30, 2022 compared to $1.9 million in the three months ended June 30, 2021.

We continue to focus our R&D efforts on the development of our pipeline products and the growth in R&D expenses in the three months ended June 30, 2022 was 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 June 30, 2022 compared to $1.4 million in the three months ended June 30, 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 August 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 approximately $3.6 million of income in the three months ended June 30, 2021.

Such other income relates to the forgiveness of our PPP Loan totaling approximately $3.0 million and the Company’s receipt of $550,000 in satisfaction of a 2018 settlement with Keralink.

For further discussion on these items, see Notes 6 and 10 to the condensed consolidated financial statements shown elsewhere in this Quarterly Report.

We did not incur any other (income) expense during the three months ended June 30, 2022.

Comparison of the Six Months Ended June 30, 2022 and 2021

Six Months Ended June 30,

Change 2021 / 2022

(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

Net sales decreased $0.9 million, or 3.6%, to $24.1 million in the six months ended June 30, 2022 compared to $25.0 million in the six months ended June 30, 2021.

The decline in net sales was due to reductions in the net sales of our Core Products of $3.4 million, partially offset by growth in the net sales of our Non-Core Products of $2.5 million.

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

Three Months Ended March 31,

Six Months Ended June 30,

Change 2021 / 2022

3 unchanged sentences

Total Net Sales

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 .

Net sales generated by our Core Products declined $3.4 million, or 16.7%, to $17.2 million in the six months ended June 30, 2022 compared to $20.6 million in the six months ended June 30, 2021.

Sales of FiberCel to Medtronic were $4.5 million in the six months ended June 30, 2021.

Net sales generated by our Non-Core Products increased $2.5 million, or 57.7%, to $6.9 million in the six months ended June 30, 2022 compared to $4.4 million in the six months ended June 30, 2021.

The increase was primarily driven by a growth in the revenue from several contract manufacturing customers, including significant sales volume increases to ACE Surgical Supply .

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.

Cost of goods sold was $15.0 million and $13.1 million in the six months ended June 30, 2022 and 2021, respectively, and included, in each case, $1.7 million of intangible asset amortization expenses.

Gross margin in the six months ended June 30, 2022 was 38.0%, a decrease from 47.7% in the corresponding prior year period.

Gross margin, excluding intangible asset amortization, in the six months ended June 30, 2022 was 45.1%, a decline from 54.5% in the corresponding prior year period.

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

The decrease in gross margin and increase to cost of goods sold was primarily due to product mix (higher Non-Core revenues in 2022 with lower gross margins).

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.

Sales and marketing expenses increased $0.7 million, or 7.6%, to $10.2 million in the six months ended June 30, 2022 compared to $9.5 million in the six months ended June 30, 2021.

As a percentage of sales, sales and marketing expenses grew to 42.4% in the six months ended June 30, 2022 from 37.9% in the six months ended June 30, 2021.

The increase as a percentage of sales was the result of (i) primarily, the growth during the six months ended June 30, 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, and (ii) higher stock-based compensation and travel costs related to our sales force.

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.

G&A expenses increased $2.1 million, or 28.5%, to $9.2 million in the six months ended June 30, 2022 compared to $7.1 million in the six months ended June 30, 2021.

As a percentage of net sales, G&A expenses increased to 38.0% in the six months ended June 30, 2022 from 28.5% in the six months ended June 30, 2021.

The increase in expense was primarily due to higher stock-based compensation as well as costs associated with FiberCel Litigation and our CEO transition described in Note 4 to the condensed consolidated financial statements included elsewhere in this Quarterly Report that we did not incur in the 2021 period.

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.

R&D expenses increased to $4.9 million in the six months ended June 30, 2022 compared to $3.6 million in the six months ended June 30, 2021.

We continue to focus our R&D efforts on the development of our pipeline products and the growth in R&D expenses in the six months ended June 30, 2022 was 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.

Interest expense was approximately $2.4 million in the six months ended June 30, 2022 compared to $2.7 million in the six months ended June 30, 2021.

Other (Income) Expense, net

Other (income) expense, net was approximately $3.6 million of income in the six months ended June 30, 2021.

Such other income relates to the forgiveness of our PPP Loan totaling approximately $3.0 million and the Company’s receipt of $550,000 in satisfaction of a 2018 settlement with Keralink.

For further discussion on these items, see Notes 6 and 10 to the condensed consolidated financial statements shown elsewhere in this Quarterly Report.

We did not incur any other (income) expense during the six months ended June 30, 2022.

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.

This Quarterly Report presents our gross margin, excluding intangible asset amortization, for the three and six months ended June 30, 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.

5 unchanged sentences

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).

The following table presents a reconciliation of our gross margin, excluding intangible asset amortization, for the three and six months ended June 30, 2022 and 2021 to the most directly comparable GAAP financial measure, which is our GAAP gross margin (in thousands).

Three Months Ended

Six Months Ended

Cost of goods sold

3 unchanged sentences

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.

1 unchanged sentence

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.

As of June 30, 2022, we had cash and restricted cash of approximately $16.5 million and availability under our Revolving Credit Facility of $1.0 million.

In August 2022, we refinanced our debt as described below under “— August 2022 Debt Refinancing.

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.

Our historical cash outflows have primarily been associated with acquisitions and integration, manufacturing and administrative 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 June 30, 2022, our accumulated deficit was $122.6 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.

4 unchanged sentences

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.

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 the SWK Loan Facility (described below under “—August 2022 Debt Refinancing”) 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,

Cash Flows for the Six Months Ended June 30, 2022 and 2021

Six Months Ended June 30,

(in thousands)

5 unchanged sentences

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 operating activities for the six months ended June 30, 2022 was $10.7 million compared to $6.0 million for the six months ended June 30, 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 and disbursements on trade payable obligations.

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.

Net cash used in investing activities for the six months ended June 30, 2022 was $0.3 million and approximately $0.2 million for the six months ended June 30, 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.

Net cash used in financing activities for the six months ended June 30, 2022 totaled $3.0 million compared to $5.0 million for the six months ended June 30, 2021.

The year-over-year net decrease was caused by net borrowings of $1.7 million on our Revolving Credit Facility during the six months ended June 30, 2022 compared to net repayments of $3.6 million during the six months ended June 30, 2021.

This change in the Revolving Credit Facility activity was offset by principal payments of $3.3 million on our Term Loan Credit Agreement as such payments commenced in August 2021.

3 unchanged sentences

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).

As of June 30, 2022, we had $13.8 million of indebtedness outstanding under our Term Loan Facility (net of $0.1 million of unamortized discount and deferred financing costs), and $6.5 million outstanding under our Revolving Credit Facility (with $1.0 million of additional borrowings available thereunder).

In August 2022, we refinanced our debt as described below under “— August 2022 Debt Refinancing.”

Interest Rates and Fees

3 unchanged sentences

dollar deposits divided by 1.00 minus the maximum effective reserve percentage for Eurocurrency funding.

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).

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% 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 .

4 unchanged sentences

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.

No such mandatory prepayments were required during the three and six months ended June 30, 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.

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.

26 unchanged sentences

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.

As of June 30, 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.

2 unchanged sentences

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.

As of June 30, 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.

however, the notes are subordinated in payment to the Term Loan Facility and Revolving Credit Facility and in both the six months ended June 30, 2022 and the year ended December 31, 2021, the Company’s senior lender restricted payment of the amounts due.

August 2022 Debt Refinancing

On August 10, 2022, we entered into a term loan facility agreement with SWK Funding LLC (the “SWK Loan Facility”) for principal amount of $25 million, with $21 million funded at closing and $4 million that becomes available, subject to the achievement of specified operational and financial metrics by September 30, 2023 (the “Additional Term Loan”).

The SWK Loan Facility allows for the establishment of a new asset-based revolving loan facility of up to $8 million.

The SWK Loan Facility matures on August 10, 2027 and accrues interest, payable quarterly in arrears.

Principal amortization of the SWK Loan Facility starts on November 15, 2024, which amortization may be extended to November 17, 2025 if conditions to draw the Additional Term Loan have been satisfied.

Principal payments during the amortization period will be limited based on revenue-based caps.

All of the SWK Loan Facility borrowings take the form of Secured Overnight Financing Rate (“SOFR”) loans and will bear interest at a rate per annum equal to the sum of an applicable margin of (i) 8.75% and the “Term SOFR

Rate” (based upon an interest period of 3 months), or (ii) if we have elected the PIK Interest option (as defined below), 4.75% and the “Term SOFR Rate.” We may elect a portion of the interest due, to be paid in-kind at a rate per annum of 4.5% (“PIK Interest”), and such election may be made (x) until November 15, 2024 if the conditions to draw the Additional Term Loan have not been met, or (y) if such conditions to draw the Additional Term Loan have been satisfied, until November 17, 2025.

The “Term SOFR Rate” is subject to a floor of 2.75%.

We are subject to financial covenants under the SWK Loan Facility that require us to (a) maintain minimum Consolidated Unencumbered Liquid Assets (as defined in the Credit Agreement) of (i) at any time on or after the Closing Date and on or before October 10, 2022, $5.0 million, and (ii) at any time thereafter, the greater of (x) $5.0 million, or (y) the sum of the Operating Burn (as defined in the Credit Agreement) for the two (2) prior, consecutive fiscal quarters then ended;

and (b) maintain certain minimum revenue levels, to be tested on a quarterly basis, beginning on the fiscal quarter ending September 30, 2022.

We used $16 million of the proceeds of the SWK Loan Facility to prepay all of the remaining outstanding principal and accrued interest and pay all associated payoff fees on the $20 million Term Loan Facility and $8 million Revolving Credit Facility.

Such payments included $12.8 million to prepay all outstanding principal and accrued interest as well as $1.7 million to pay the required prepayment and exit fees on the Term Loan Facility and $1.2 million to repay the outstanding balance and accrued interest as well as $0.3 million to pay the required exit fees on the Revolving Credit Facility.

We also used $1.4 million of the proceeds to repay the remaining balance on the promissory note with a tissue supplier.

Funding Requirements

1 unchanged sentence

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.

As of June 30, 2022, we had $21.7 million of indebtedness outstanding, consisting of $13.8 million outstanding under our Term Loan Facility (net of $0.1 million of unamortized deferred financing costs), $6.5 million outstanding under our Revolving Credit Facility (with $1.0 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.

2 unchanged sentences

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.

However, such transactions may not be successful and we may not be able to raise additional equity, refinance our Term Debt and Revolving Credit Facility, 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.

22 unchanged sentences

“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.

Based on our current operating plans, we believe, even after the August 2022 debt refinancing described above, there is uncertainty as to whether our future cash flows along with our existing cash, availability under the SWK Loan 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.

1 unchanged sentence

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.

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 six months ended June 30, 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

1 unchanged sentence

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