What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-14 compared with 2022-08-15 · 169 added, 159 removed, 209 unchanged (61% of the section changed)

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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, 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.

As of September 30, 2022, we had 166 employees, of which 26 were direct sales representatives.

For the nine months ended September 30, 2022, we incurred a net loss of $27.5 million, and as of September 30, 2022, we had an accumulated deficit of $132.5 million.

In addition, during the nine months ended September 30, 2022, we used $16.2 million and $5.7 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 expand our product development and clinical and research activities and to the extent we grow our sales organization to coincide with product launches.

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.

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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.

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, restructure our Revenue Interest Obligation, or pursue asset sale or licensing 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, 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.

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, potential availability under our SWK Loan Facility (described below under “– Liquidity and Capital Resources – Credit Facilities”), issuances of additional equity 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 a going concern within one year after the issuance of the financial statements.

Impact of COVID-19

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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.

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

In June 2021, we issued a voluntary recall pertaining to a single donor lot of our FiberCel, 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 the FiberCel Litigation in which we are involved, the impact of such proceedings on our financial statements included in this Quarterly Report, and the possible future financial implications, see Note 8 to the condensed consolidated financial statements included elsewhere in this Quarterly Report.

The impact of FiberCel Litigation on our results of operations for the periods covered by this Quarterly Report are discussed below under “ – Results of Operations.”

Strategic Transactions

We operate four distinct business units – Device Protection, Cardiovascular, Women’s Health, and Orthobiologics.

We have received interest and are actively considering material strategic transactions in each of these business units.

The types of transactions under consideration include exclusive supply agreements, co-promotion arrangements, exclusive distribution partnerships, and whole business unit divestitures.

The most advanced of these potential transactions are based on written statements of interest with detailed terms that include cash offers for acquisition of the unit, and partnership opportunities with significant upfront payments and purchase commitments.

Each business unit has at least one contemplated transaction with the potential, we believe, to be consummated, add non-dilutive capital, and enhance shareholder value.

However, we intend to be selective and only execute agreements that we believe are in the best long-term interest of shareholders.

As a result, it is possible that we do not execute any of the aforementioned.

Moreover, if we do execute one or more of these transactions, there can be no assurance that the terms of any such transaction would be favorably received by the market.

CanGaroo RM Status

A 510(k) submission for pre-market clearance of the CanGaroo RM Antibacterial Envelope, the only biomaterial envelope designed to mitigate complications in implantable electronic device procedures, is currently under review by the U.S.

We recently held a positive meeting with the FDA that clarified certain information requirements related to our 510(k) submission.

We will be able to complete our responses to outstanding questions from FDA in time for an anticipated CanGaroo RM marketing clearance in the first quarter of 2023.

Impact of Inflation

Inflationary factors, such as increases in our cost of goods sold or other operating expenses, may adversely affect our operating results.

While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we do not believe inflation had a material effect on our financial condition or results of operations during the nine months ended September 30, 2022 and 2021.

We cannot assure you, however, that we will be able to

increase the selling prices of our products or reduce our operating expenses in an amount sufficient to offset the effects future inflationary pressures may have on our gross margin.

Accordingly, we cannot assure you that our financial condition and results of operations will not be materially impacted by inflation in the future.

Components of Our Results of Operations

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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.

We expect that our recurring operating costs will largely stabilize, or increase at modest rates, in the near future through the identification of efficiencies as we grow.

We may, however, still experience more significant expense increases as we expand our product development and clinical and research activities and to the extent we grow our sales organization to coincide with product launches.

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

Cost 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.

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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 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

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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.

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.

FiberCel Litigation Costs

FiberCel litigation costs consist primarily of legal fees and the estimated costs to resolve the outstanding FiberCel litigation cases offset by the estimated amounts recoverable under insurance, indemnity and contribution agreements for such costs.

Results of Operations

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

Three Months Ended June 30,

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

Three Months Ended September 30,

Change 2021 / 2022

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Research and development

FiberCel litigation costs

Total operating expenses

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Income tax expense

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 increased $0.9 million, or 7.9%, to $12.4 million in the three months ended September 30, 2022 compared to $11.5 million in the three months ended September 30, 2021.

The improvement in net sales was due to growth in net sales of our Core Products of $0.4 million and Non-Core Products of $0.5 million.

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

Three Months Ended June 30,

Three Months Ended September 30,

Change 2021 / 2022

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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 .

Net sales generated by our Core Products increased $0.4 million, or 4.2%, to $8.9 million in the three months ended September 30, 2022 compared to $8.6 million in the three months ended September 30, 2021.

The Core Products net sales growth can be attributed to sales volume increases in our CanGaroo and SimpliDerm products.

Net sales generated by our Non-Core Products increased $0.5 million, or 18.7%, to $3.4 million in the three months ended September 30, 2022 compared to $2.9 million in the three months ended September 30, 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 $7.7 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.

Cost of goods sold decreased $0.5 million, or 5.8%, to $7.3 million in the three months ended September 30, 2022 compared to $7.8 million in the three months ended September 30, 2021, and included, in each case, $0.8 million of intangible asset amortization expenses.

Gross margin in the three months ended September 30, 2022 was 40.8%, an increase from 32.1% in the corresponding prior year period.

Gross margin, excluding intangible asset amortization, in the three months ended September 30, 2022 was 47.6%, an increase from 39.5% 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).

The increase in gross margin and decrease in cost of goods sold was primarily due to recent production efficiencies and improved inventory management in the three months ended September 30, 2022.

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.

Sales and marketing expenses increased $0.1 million, or 2.8%, to $4.9 million in the three months ended September 30, 2022 compared to $4.8 million in the three months ended September 30, 2021.

As a percentage of sales, sales and marketing expenses declined to 39.7% in the three months ended September 30, 2022 from 41.6% in the three months ended September 30, 2021.

The decrease as a percentage of sales was the result of the growth during the three months ended September 30, 2022 of revenues from sales to contract manufacturing customers as such revenues have lower selling costs than our sales directly to end users.

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.

G&A expenses increased $1.0 million, or 27.6%, to $4.5 million in the three months ended September 30, 2022 compared to $3.5 million in the three months ended September 30, 2021.

As a percentage of net sales, G&A expenses increased to 36.2% in the three months ended September 30, 2022 from 30.6% in the three months ended September 30, 2021.

The increase in expense was primarily due to certain non-recurring charges associated with legal fees on various corporate matters and the Chief Executive Officer transition described in Note 4 to the condensed consolidated financial statements.

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.

R&D expenses decreased to $2.0 million in the three months ended September 30, 2022 compared to $2.3 million in the three months ended September 30, 2021.

We continue to focus our R&D efforts on the development of our pipeline products and the decline in R&D expenses in the three months ended September 30, 2022 was largely attributable to the lessening of work needed to finalize the development and testing of our CanGaroo with antibiotics.

FiberCel Litigation Costs

FiberCel litigation costs increased to $1.5 million in the three months ended September 30, 2022 compared to $0.1 million in the three months ended September 30, 2021.

The increase in expense was primarily due to the settlements reached in a significant number of FiberCel Litigation cases in the three months ended September 30, 2022 as well as the estimation of contingent liabilities for the unsettled cases.

The total of such settlement and estimated settlement values was recorded (net of estimated insurance, indemnity and contribution agreement recoveries) in the three months ended September 30, 2022.

See further discussion in Note 8 to condensed consolidated financial statements included elsewhere in this Quarterly Report.

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.

Interest expense was approximately $1.3 million in both the three months ended September 30, 2022 and 2021.

See “- Liquidity and Capital Resources - Credit Facilities” below for a discussion of our borrowings related to these interest expenses 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,

Other (income) expense, net was approximately $0.8 million of expense in the three months ended September 30, 2022.

Such other expense relates to our debt refinancing in August 2022 and the associated prepayment fees, payment of unaccrued exit fees and write-off of unamortized deferred financing costs which collectively resulted in a loss of $1.2 million.

Such loss was offset by other income of $0.4 million related to the forgiveness of interest accrued on the promissory note to a tissue supplier upon repayment of such note in August 2022.

See Note 6 to the accompanying condensed consolidated statements of operations for the three and nine months ended September 30, 2022 for further discussion of these transactions.

Comparison of the Nine Months Ended September 30, 2022 and 2021

Nine Months Ended September 30,

Change 2021 / 2022

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Research and development

FiberCel litigation costs

Total operating expenses

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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 were $36.5 million in both the nine months ended September 30, 2022 and 2021.

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

Six Months Ended June 30,

Nine Months Ended September 30,

Change 2021 / 2022

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Total Net Sales

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 .

Net sales generated by our Core Products declined $3.1 million, or 10.6%, to $26.1 million in the nine months ended September 30, 2022 compared to $29.2 million in the nine months ended September 30, 2021.

The decrease in Core Products net sales 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 $4.9 million in the nine months ended September 30, 2021.

Net sales generated by our Non-Core Products increased $3.1 million, or 42.2%, to $10.4 million in the nine months ended September 30, 2022 compared to $7.3 million in the nine months ended September 30, 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 $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.

Cost of goods sold increased $1.4 million, or 6.7%, to $22.3 million in the nine months ended September 30, 2022 compared to $20.9 million in the nine months ended September 30, 2021, and included, in each case, $2.5 million of intangible asset amortization expenses.

Gross margin in the nine months ended September 30, 2022 was 39.0%, a decrease from 42.8% in the corresponding prior year period.

Gross margin, excluding intangible asset amortization, in the nine months ended September 30, 2022 was 45.9%, a decline from 49.8% in the corresponding prior year period.

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

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Sales and Marketing

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.

Sales and marketing expenses increased $0.8 million, or 6.0%, to $15.1 million in the nine months ended September 30, 2022 compared to $14.3 million in the nine months ended September 30, 2021.

As a percentage of sales, sales and marketing expenses grew to 41.5% in the nine months ended September 30, 2022 from 39.1% in the nine months ended September 30, 2021.

The increase as a percentage of sales was the result of higher stock-based compensation and travel costs related to our sales force.

General and Administrative

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.

G&A expenses increased $2.7 million, or 25.9%, to $13.2 million in the nine months ended September 30, 2022 compared to $10.5 million in the nine months ended September 30, 2021.

As a percentage of net sales, G&A expenses increased to 36.2% in the nine months ended September 30, 2022 from 28.7% in the nine months ended September 30, 2021.

The increase in expense was primarily due to higher stock-based compensation as well as non-recurring charges totaling $1.7 million associated with legal fees on various corporate matters and the Chief Executive Officer transition described in Note 4 to the condensed consolidated financial statements.

Research and Development

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.

R&D expenses increased to $6.9 million in the nine months ended September 30, 2022 compared to $5.9 million in the nine months ended September 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 nine months ended September 30, 2022 was largely attributable to the work performed on the final development and testing of our CanGaroo with antibiotics.

FiberCel Litigation Costs

FiberCel litigation costs increased to $1.9 million in the nine months ended September 30, 2022 compared to $0.2 million in the nine months ended September 30, 2021.

The increase in expense was primarily due to the settlements reached in a significant number of FiberCel Litigation cases in the nine months ended September 30, 2022 as well as the estimation of contingent liabilities for the unsettled cases.

The total of such settlement and estimated settlement values was recorded (net of estimated insurance, indemnity and contribution agreement recoveries) in the nine months ended September 30, 2022.

See further discussion in Note 8 to condensed consolidated financial statements included elsewhere in this Quarterly Report.

Interest Expense

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.

Interest expense was approximately $3.7 million in the nine months ended September 30, 2022 compared to $4.0 million in the nine months ended September 30, 2021.

The decrease was due to lower draws on our formerly outstanding MidCap Credit Facility (as defined, and further described, in Note 6 to the condensed consolidated financial statements included elsewhere in this Quarterly Report) and lower outstanding principal on our formerly outstanding MidCap Loan Facility (as defined, and further described, in Note 6 to the condensed consolidated financial statements included elsewhere in this Quarterly Report) due to the commencement of principal payments in August 2021.

See “ - Liquidity and Capital Resources - Credit Facilities” below for a further discussion of these debt agreements and Note 6 to the condensed consolidated financial statements included elsewhere in this Quarterly Report.

Other (Income) Expense, net

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

Other (income) expense, net was approximately $0.8 million of expense in the nine months ended September 30, 2022.

Such other expense relates to our debt refinancing in August 2022 and the associated prepayment fees, payment of unaccrued exit fees and the write-off of unamortized deferred financing costs, which collectively resulted in a loss of $1.2 million.

Such loss was offset by other income of $0.4 million related to the forgiveness of interest accrued on the promissory note to a tissue supplier upon repayment of such note in August 2022.

See Note 6 to the accompanying condensed consolidated statements of operations for the three and nine months ended September 30, 2022 for further discussion of these transactions.

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

Such other income relates to the forgiveness of our PPP Loan totaling approximately $3.0 million and 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 and six months ended June 30, 2022 and 2021.

This Quarterly Report presents our gross margin, excluding intangible asset amortization, for the three and nine months ended September 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.

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In addition, other companies, including companies in our industry, may use other measures to evaluate their performance, which could reduce the usefulness of this non-GAAP financial measure as a tool for comparison.

The following table presents a reconciliation of our gross margin, excluding intangible asset amortization, for the three and six months ended June 30, 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 nine months ended September 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

Nine Months Ended

September 30,

Cost of goods sold

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Gross margin, excluding intangible asset amortization

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.

Historically, we have experienced seasonality, with lower sales in our first and second quarters 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.

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Liquidity and Capital Resources

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.

As of September 30, 2022, we had cash of approximately $8.1 million.

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

As of September 30, 2022, our accumulated deficit was $132.5 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.

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Our inability to achieve and then maintain profitability would negatively affect our business, financial condition, results of operations and cash flows.

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.

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.

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 “—Credit Facilities”), issuances of additional equity 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 Six Months Ended June 30, 2022 and 2021

Six Months Ended June 30,

Cash Flows for the Nine Months Ended September 30, 2022 and 2021

Nine Months Ended September 30,

(in thousands)

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Net Cash Used in Operating Activities

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 operating activities for the nine months ended September 30, 2022 was $16.2 million compared to $9.1 million for the nine months ended September 30, 2021.

The year-over-year increase was primarily due to a gain on extinguishment of debt in the three months ended September 30, 2021 versus a loss experienced in the three months ended September 30, 2022.

Additionally, due to timing, accounts payable increases in the current period increased cash and offset a portion of the cash used in operating cash activities when compared to the prior period.

Net Cash Used in Investing Activities

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 investing activities for the nine months ended September 30, 2022 was $0.4 million compared to $0.3 million for the nine months ended September 30, 2021.

In both periods, the use of cash related to the purchase of property and equipment, the majority of which were used in the production activities of our Richmond, California facility.

Net Cash Used in Financing Activities

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.

Net cash used in financing activities for the nine months ended September 30, 2022 was $5.7 million compared to $7.5 million for the nine months ended September 30, 2021.

The year-over-year net decrease was caused primarily by the net cash infusion from the proceeds of the August 2022 debt refinancing, less all debt repayments and refinancing costs incurred during the nine months ended September 30, 2022.

See “Credit Facilities” below for further discussion.

Credit Facilities

On July 15, 2019, Aziyo and Aziyo Med, LLC, which we refer to collectively as the Borrowers, entered into an amended and restated term loan credit agreement (the “Term Loan Credit Agreement”), with Midcap Financial Trust, as agent and lender, and the other lenders party thereto, which provided for the conversion of our existing term loans into borrowing under the Term Loan Credit Agreement (consisting of a $8.5 million tranche (“Term Loan Tranche 1”), a $5.0 million tranche (“Term Loan Tranche 2”) and a $3.0 million tranche (“Term Loan Tranche 3”), and established a new $3.5 million tranche (“Term Loan Tranche 4”).

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 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

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 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.

O n August 10, 2022 (the “Closing Date”), we entered into a senior secured term loan facility with SWK Funding LLC, as agent, and other lenders party thereto (the “SWK Loan Facility”) for an aggregate principal amount of $25 million, with $21 million drawn on the Closing Date (the “Initial Term Loan”) 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 also allows for the establishment of a separate, new asset-based revolving loan facility of up to $8 million, which had not been entered into as of September 30, 2022.

We used $16 million of the proceeds of the SWK Loan Facility to pay all outstanding obligations on the formerly outstanding MidCap Loan Facility and MidCap Credit Facility.

Such payment included (i) $12.8 million to repay all outstanding principal and accrued interest on the MidCap Loan Facility, (ii) $1.7 million to pay the prepayment and exit fees on the MidCap Loan Facility and (iii) $1.5 million to repay the outstanding balance, accrued interest and exit fees on the MidCap Credit Facility.

As of September 30, 2022, we had $20.0 million of indebtedness outstanding under our SWK Loan Facility (net of $1.0 million of unamortized discount and deferred financing costs).

Interest Rates

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%.

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 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.

The SWK Loan Facility Agreement requires certain mandatory prepayments, subject to certain exceptions, with:

(1) 100% of any net casualty proceeds in excess of $250,000 and (2) for non-ordinary course asset sales, an amount equal to the difference between (x) the proportion of divested gross profit (as defined in the SWK Loan Facility Agreement) to the Company’s total gross profit (as defined in the SWK Loan Facility Agreement) multiplied by the outstanding loans under the SWK Loan Facility, and (y) the difference between $1,000,000 and the aggregate sale proceeds of any assets previously sold during the fiscal year.

No such mandatory prepayments were required during the three and nine months ended September 30, 2022.

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.

The SWK Loan Facility Agreement also includes an exit fee equal to:

(i) if such prepayment occurs prior to the first anniversary of the Closing Date, 2% of the aggregate principal amount funded prior to the termination plus remaining unpaid interest payments scheduled to be paid during the first year of the loan or (ii) if such prepayment occurs after the first anniversary of the Closing Date but prior to the second anniversary of the Closing Date, 2% of the aggregate principal amount funded prior to termination.

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.

Outstanding borrowings under the Revolving Credit Facility do not amortize and are due and payable on July 15, 2024.

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.

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.

As of September 30, 2022, quarterly principal payments are scheduled to begin on November 15, 2024, in an amount equal to 5% of the Initial Term Loan with the balance paid at maturity.

All obligations under the SWK Loan 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 our 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:

The SWK Loan Facility Agreement that governs the SWK Loan Facility contains a number of covenants that, among other things and subject to certain exceptions, restrict our ability to:

● incur additional indebtedness;

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● 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;

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● alter the business conducted by them and their subsidiaries.

● 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 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.

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

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.

In addition, the SWK Loan Facility Agreement contains two financial covenants.

The first covenant, which is measured quarterly, requires us to achieve a specified Minimum Aggregate Revenue (as defined in the SWK Loan Facility Agreement) for the preceding 12-month period.

The second covenant requires us to maintain a minimum liquidity (as defined in the SWK Loan Facility Agreement) of $5.0 million until November 21, 2022 (as amended from the previous compliance date of November 10, 2022, which had been previously amended from the compliance date of October 10, 2022) and thereafter, the greater of (a) $5.0 million and (b) the sum of the operating cash burn (as defined in the SWK Loan Facility Agreement) for the two prior consecutive fiscal quarters then ended (the “Liquidity Covenant”).

The SWK Loan Facility Agreement contains events of default, including, most significantly, a failure to timely pay interest or principal, insolvency, or an action by the FDA or such other material adverse event impacting the operations of Aziyo.

As of September 30, 2022, we were in compliance with the financial covenant and all other covenants.

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 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, we expect to continue to incur significant costs and expenses associated with operating as a public company.

As of September 30, 2022, we had $20.0 million of indebtedness outstanding, consisting of $21.0 million outstanding under our SWK Loan Facility (net of $1.0 million of unamortized discount and deferred financing costs).

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.

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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 Revolving Credit Facility, 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 or debt, or sell or license assets on acceptable terms, or at all.

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

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● 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 costs of defending against or the damages payable in connection with the FiberCel Litigation and any future litigation that we may be subject to (to the extent above the applicable insurance coverage);

● the cost and timing of additional regulatory approvals;

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“Risk Factors — Risks Related to Our Business — Our future capital needs are uncertain and we may need to raise funds in the future, and such funds may not be available on acceptable terms or at all.”

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.

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, issuances of additional equity 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.

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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 six months ended June 30, 2022, there were no material changes to those previously disclosed.

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 nine months ended September 30, 2022, there were no material changes to those previously disclosed, except as noted below.

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.

Contingent Liability for FiberCel Litigation

We believe the determination of our Contingent Liability for FiberCel Litigation is a critical accounting policy.

We review every lawsuit and claim and are in contact with outside counsel on an ongoing basis.

An accrual is established for each lawsuit and claim, when appropriate, based on the nature of each such lawsuit or claim.

The provision for FiberCel Litigation claims are based upon many factors, which vary for each case.

These factors include (i) the extent of the injuries incurred, (ii) recent experience on settled claims, (iii) settlement offers made to the other parties to the litigation and (iv) any other factors that may have a material effect on the estimated liability.

While we believe our estimated liability to be reasonable, the actual loss amounts are highly variable and turn on a case-by-case analysis of the relevant facts.

As such, actual settlement amounts may differ from our estimates and such differences may be material.

Recent Accounting Pronouncements

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis