What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-12 compared with 2022-11-14 · 147 added, 214 removed, 164 unchanged (69% of the section changed)

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“Risk Factors” of our Annual Report.

We are a commercial-stage regenerative medicine company focused on creating the next generation of differentiated products and improving outcomes in patients undergoing surgery, concentrating on patients receiving implantable medical devices.

From our proprietary tissue processing platforms, we have developed a portfolio of advanced regenerative medical products that are designed to be very similar to natural biological material.

Our proprietary products, which we refer to as our Core Products, are designed to address the implantable electronic device/cardiovascular, orthopedic/spinal repair and soft tissue reconstruction markets, which represented a combined $3 billion market opportunity in the United States in 2020.

To expand our commercial reach, we have commercial relationships with major medical device companies, such as Boston Scientific and Biotronik, to promote and sell some of our Core Products.

We believe our focus on our unique regenerative medicine platforms and our Core Products will ultimately maximize our probability of continued clinical and commercial success and will create a long-term competitive advantage for us.

We estimate that, over the past two years, approximately two million patients per year in the United States are implanted with either medical devices, such as pacemakers, defibrillators, neuro-stimulators, spinal fusion and trauma fracture hardware or tissue expanders for breast reconstruction.

This number is driven by advances in medical device technologies and an aging population with a growing incidence of comorbidities, including diabetes, obesity and cardiovascular and peripheral vascular diseases.

These comorbidities can exacerbate various immune responses and other complications that can be triggered by a device implant.

Our Core Products are targeted to address unmet clinical needs with the goal of promoting healthy tissue formation and avoiding complications associated with medical device implants, such as scar-tissue formation, capsular contraction, erosion, migration, non-union of implants and implant rejection.

We believe that we have developed the only biomaterial envelope, which is covered by a number of patents that forms a natural, systemically vascularized pocket for holding implanted electronic devices.

We have a proprietary processing technology for manufacturing bone regenerative products for use in orthopedic/spinal repair that preserves a cell’s ability to regenerate bone and decelerates cell apoptosis or programmed cell death.

We have a patented cell removal technology that produces undamaged extracellular matrices for use in soft tissue reconstruction.

Our Non-Core Products are those fulfilled through tissue processing contracts at our Richmond, California facility.

These contracts serve to utilize as much as possible of the starting human biological material from which we produce our orthopedic/spinal repair and soft tissue reconstruction products, leverage our existing overhead and improve our cash flow.

The resulting processed materials, including particulate bone, precision milled bone, cellular bone matrix, acellular dermis and other soft tissue products, are sold to medical/surgical companies as finished products and as a subcomponent of their products.

Additionally, we process amniotic membrane as finished product for selected customers.

We process all of our products at our two manufacturing facilities in Roswell, Georgia and Richmond, California, and stock inventory of raw materials, components and finished goods at those locations.

We rely on a single or limited number of suppliers for certain raw materials and components.

We are a commercial-stage regenerative medicine company focused on creating the next generation of differentiated products and improving outcomes in patients undergoing surgery.

We seek to leverage our unique understanding of biologics to improve the interaction between medical devices and patients, with the goal of reducing complications and improving healing.

From our proprietary tissue processing platforms, we have developed a portfolio of advanced regenerative medical products that are designed to mimic the healing response of natural biological material.

Our proprietary products are designed to address the device protection, women’s health, orthobiologics and cardiovascular markets, which represented a combined $3 billion market opportunity in the United States in 2019.

To expand our commercial reach, we have commercial relationships with major medical device companies, such as Boston Scientific, Biotronik, Sientra and beginning in April 2023, LeMaitre Vascular, to promote and sell some of our products.

We believe our focus on our unique regenerative medicine platforms will ultimately maximize our probability of continued clinical and commercial success and will create a long-term competitive advantage for us.

We estimate that, over the past two years, approximately two million patients per year in the United States were implanted with either medical devices, such as pacemakers, defibrillators, neuro-stimulators, spinal fusion and trauma fracture hardware or tissue expanders for breast reconstruction.

This number has been driven by advances in medical device technologies, reimbursement models focused on patient outcomes, and an aging population with a growing incidence of comorbidities, including diabetes, obesity and cardiovascular and peripheral vascular diseases.

These comorbidities can exacerbate various immune responses and contribute to other complications upon device implant.

Our products are targeted to address unmet clinical needs with the goal of promoting healthy tissue formation and avoiding complications associated with medical device implants, such as infection, scar-tissue formation, capsular contraction, erosion, migration, non-union of implants and implant rejection.

We have leading products in each of our four priority markets:

device protection, cardiovascular, orthobiologics and women’s health.

In device protection, we sell the only biological envelope, protected by a global patent portfolio, that forms a natural, systemically vascularized pocket for holding implanted electronic devices.

In cardiovascular, we sell our SIS ECM for use as an intracardiac and vascular patch.

In orthobiologics, we have a proprietary processing technology for manufacturing a comprehensive portfolio of bone regenerative products designed to promote the body’s ability to regenerate healthy bone, osteogenesis, while decreasing cell apoptosis, or programmed cell death.

In women’s health, we have a patented cell removal technology that produces undamaged extracellular dermal matrices with superior handling, designed to promote faster healing and reduce inflammation.

In pre-clinical and clinical studies, our products have supported and, in some cases, accelerated tissue healing, and thereby improved patient outcomes.

We process all of our products at our two manufacturing facilities in Roswell, Georgia and Richmond, California, and stock inventory of raw materials, supplies and finished goods at those locations.

We rely on a single or limited number of suppliers for certain raw materials and supplies.

Except for the porcine tissue supplier of our raw materials for our CanGaroo and cardiovascular products, which is Cook Biotech, we generally have no long-term supply agreements with our suppliers, as we obtain supplies on a purchase order basis.

Specifically, we acquire donated human tissue directly

through tissue procurement firms engaged by us.

We primarily ship our Core Products from our facilities directly to hospital customers.

Specifically, we acquire donated human tissue directly through tissue procurement firms engaged by us.

Our products are shipped either directly to hospital customers or through distribution partners.

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 initial public offering (“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 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.

As of March 31, 2023, we had 144 employees.

We have incurred significant operating losses since our inception.

We incurred a net loss of $8.0 million for the three months ended March 31, 2023.

Our accumulated deficit as of March 31, 2023 was $146.0 million.

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

Because of the numerous risks and uncertainties associated with our commercialization and development efforts, including risks relating to our ability to obtain FDA clearance for the next generation of our flagship CanGaroo product, CanGaroo RM, and our ability to successfully commercialize this product, we are unable to predict when we will become profitable, and we may never become profitable.

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

Our ability to achieve profitability will depend on our ability to generate sales from existing or new products sufficient to exceed our ongoing operating expenses and capital requirements.

Because of the numerous risks and uncertainties affecting product sales and our ongoing commercialization and product development efforts, we are unable to predict with any certainty whether we will be able to increase sales of our products or the timing or amount of ongoing expenditures we will be required to incur.

Accordingly, even if we are able to increase sales of our products, we may not become profitable.

In order to mitigate the current and potential future liquidity issues caused by the matters noted above, we may seek to raise capital through the issuance of common stock, 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, 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

We continue to closely monitor the impact of the COVID-19 pandemic and its variants on our business.

In March 2020, the World Health Organization declared COVID-19 a global pandemic and recommended various containment and mitigation measures worldwide.

Since that time, the number of procedures performed using our products has intermittently decreased, as governmental authorities in the United States have recommended, and in certain cases required, that elective, specialty and other non-emergency procedures and appointments be suspended or canceled in order to avoid patient exposure to medical environments and the risk of potential infection with COVID-19, and to focus limited resources and personnel capacity on the treatment of COVID-19 patients.

As a result, beginning in March 2020, a significant number of procedures using our products have intermittently been postponed or cancelled, which has negatively impacted sales of our products.

These measures and challenges will likely continue for the duration of the pandemic, which is uncertain, and may reduce our net sales in the future and negatively impact our business, financial condition and results of operations while the pandemic continues.

In addition, numerous state and local jurisdictions, including those where our facilities are located, imposed, and others in the future may impose or re-impose, “shelter-in-place” orders, quarantines, executive orders and similar government orders and restrictions for their residents to control the spread of COVID-19.

Such orders or restrictions 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 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.

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 “—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.

FiberCel Recall

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.

In June 2021, we issued a voluntary recall pertaining to a single donor lot of our FiberCel, our 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.

Recent Strategic Transactions

In March 2023, we entered into an agreement with Sientra, a medical aesthetics company uniquely focused on plastic surgery, to expand the distribution of our women’s health segment product line, SimpliDerm.

Under the agreement terms, Aziyo will grant Sientra certain non-exclusive rights in the United States to market, sell and distribute SimpliDerm for select use in reconstruction surgery.

In April 2023, we entered into an agreement with LeMaitre Vascular, a provider of vascular devices, implants and services, granting LeMaitre Vascular the exclusive U.S.

distribution rights for the products within its cardiovascular segment:

ProxiCor® PC, ProxiCor® CTR, Tyke® and VasCure®.

The term of the collaboration is three years, and LeMaitre Vascular will have the exclusive option to acquire the product line following the first year or under certain other circumstances.

We are also actively considering material strategic transactions in our device protection and orthobiologics business units.

The types of transactions under consideration include exclusive supply agreements, co-promotion

arrangements, exclusive distribution partnerships, and whole business unit divestitures.

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.

We are currently developing a version of the CanGaroo Envelope, CanGaroo RM, that combines the envelope with antibiotics and is designed to reduce the risk of infection following surgical implantation of an electronic device.

Based on feedback from the FDA, CanGaroo RM will require clearance of a 510(k) submission to be marketed in the United States.

We submitted the required 510(k) in April 2022 and, in March 2023, received a Not Substantially Equivalent (“NSE”) letter from FDA requiring us to address questions relating to drug testing, primarily a request by FDA to modify an in vitro drug release assay employed as a manufacturing control.

We intend to address the questions raised in the NSE letter and continue to work with FDA for potential clearance via the 510(k) pathway.

We anticipate being able to complete our responses to outstanding questions from FDA in the 2023 calendar year.

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.

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

We recognize revenue on the sale of our Core Products and our Non-Core Products.

With respect to our Core Products, CanGaroo and our cardiovascular products are sold to hospitals and other healthcare facilities primarily through our direct sales force, commercial partners or independent sales agents.

Our orthopedic/spinal repair products are sold through commercial partners.

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

We recognize revenue on the sale of our products.

During the three months ended March 31, 2023, our device protection and cardiovascular products were sold to hospitals and other healthcare facilities primarily through our direct sales force, commercial partners or independent sales agents;

however, beginning in April 2023, our cardiovascular products will be sold domestically through our distribution agreement with LeMaitre Vascular and internationally through commercial partners.

Our women’s health product, SimpliDerm, is sold directly to hospitals and other healthcare facilities through independent sales agents or through our distribution agreement with Sientra.

Our orthobiologics products are sold through commercial partners.

Our contract manufacturing products are sold directly to corporate customers.

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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.

We may, however, still experience more significant expense increases as we expand our product development and clinical and research activities.

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

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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.

Outside of our direct sales force, we incur significant expenses relating to commissions to our CanGaroo commercial partners and independent sales agents.

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Research and Development Expenses

Research and development (“R&D”) expenses consist primarily of salaries and fringe benefits, laboratory supplies, clinical trials and outside service costs.

Our product development efforts primarily relate to new offerings in

support of the orthopedic/spinal repair market and activities associated with the development of a CanGaroo Envelope with antibiotics.

We also conduct clinical trials to validate the performance characteristics of our products and to capture patient data necessary to support our commercial efforts.

Research and development (“R&D”) expenses consist primarily of salaries and fringe benefits, laboratory supplies, clinical studies and outside service costs.

Our product development efforts primarily relate to new offerings in support of the orthobiologics market and activities associated with the development of CanGaroo RM, our CanGaroo Envelope with antibiotics.

Our future R&D expenses may increase as a result of additional work required to address the FDA’s questions in the NSE letter we recently received regarding our CanGaroo RM.

We also conduct clinical studies to validate the performance characteristics of our products and to capture patient data necessary to support our commercial efforts.

FiberCel Litigation Costs

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Results of Operations

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

Three Months Ended September 30,

Comparison of the Three Months Ended March 31, 2023 and 2022

Three Months Ended March 31,

Change 2022 / 2023

8 unchanged sentences

Interest expense

Other (income) expense, net

Loss before provision of income taxes

Income tax expense

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 September 30,

Net sales information for our products is summarized as follows:

Three Months Ended March 31,

Change 2022 / 2023

(in thousands, except percentages)

Core Products

Non-Core Products

Device protection

Women's health

Orthobiologics

Cardiovascular

Total Net Sales

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 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 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 $0.1 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 $1.0 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 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 $1.3 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 $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

(in thousands, except percentages)

Total net sales increased $1.6 million, or 13.5%, to $13.1 million in the three months ended March 31, 2023 compared to $11.5 million in the three months ended March 31, 2022, with such increase primarily attributable to volume growth in all four product segments.

Cost of Goods Sold

Sales and marketing

General and administrative

Research and development

FiberCel litigation costs

Total operating expenses

Loss from operations

Interest expense

Other (income) expense, net

Loss before provision of income taxes

Income tax expense

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:

Nine Months Ended September 30,

Cost of goods sold and gross margin percentage information for our products is summarized as follows:

Three Months Ended March 31,

Change 2022 / 2023

(in thousands, except percentages)

Core Products

Non-Core Products

Total Net Sales

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 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.

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).

Device protection

Women's health

Orthobiologics

Cardiovascular

Cost of goods sold, excluding intangible asset amortization

Intangible asset amortization expense

Total Cost of Goods Sold

Total cost of goods sold decreased $0.5 million to $6.7 million in the three months ended March 31, 2023 compared to $7.2 million in the three months ended March 31, 2022.

Gross margin was 48.5% in the three months ended March 31, 2023 compared to 37.2% in the three months ended March 31, 2022.

Gross margin, excluding intangible asset amortization, was 55.0% in the three months ended March 31, 2023 compared to 44.6% in the three months ended March 31, 2022.

With respect to the individual product segments, the gross margin of device protection, women’s health and orthobiologics improved in the three months ended March 31, 2023 compared to the three months ended March 31, 2022 due to operational efficiencies in the current year causing lower costs to manufacture the product.

Also contributing to the improvement for the Orthobiologics segment in the three months ended March 31, 2023 was a larger percentage of segment sales from the higher margin viable bone matrix products versus contracted services.

Gross margin on our cardiovascular products was relatively flat between years.

Operating Expenses

Sales and Marketing

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.

Sales and marketing expenses increased $0.6 million, or 11.2%, to $5.4 million in the three months ended March 31, 2023 compared to $4.8 million in the three months ended March 31, 2022.

As a percentage of sales, sales and marketing expenses decreased to 41.0% in the three months ended March 31, 2023 from 41.9% in the three months ended March 31, 2022.

The increase in expense was largely attributable to approximately $0.5 million of severance costs on the previously announced reduction in force which occurred in the first quarter of 2023 and primarily impacted certain members of sales and marketing management.

General and Administrative

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.

G&A expenses decreased $0.3 million, or 8.6%, to $3.7 million in the three months ended March 31, 2023 compared to $4.0 million in the three months ended March 31, 2022.

As a percentage of net sales, G&A expenses decreased to 28.2% in the three months ended March 31, 2023 from 35.0% in the three months ended March 31, 2022.

The decrease in expense was primarily due to lower stock-based compensation and corporate insurance costs.

Research and Development

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.

R&D expenses decreased to $1.8 million in the three months ended March 31, 2023 compared to $2.3 million in the three months ended March 31, 2022.

We continue to focus our R&D efforts primarily on the development of our CanGaroo RM Antibacterial Envelope.

Such related costs were slightly less in the first quarter of 2023 versus the prior

year’s comparable period due to the reduction of efforts needed and expenses incurred as the development progresses toward anticipated completion.

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.

FiberCel litigation costs increased to $1.9 million in the three months ended March 31, 2023 compared to $0.1 million in the three months ended March 31, 2022.

The increase in expense was primarily due to the establishment of the Contingent Liability for FiberCel litigation in the third quarter of 2022 and the continued evaluation of such liability as the FiberCel cases progress.

The FiberCel litigation costs in the three months ended March 31, 2022 were comprised only of legal fees incurred.

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

Interest Expense

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.

Interest expense was approximately $1.5 million in the three months ended March 31, 2023 compared to $1.2 million in the three months ended March 31, 2022.

The increase was due to the higher principal outstanding and interest rates incurred by us on our existing debt, the SWK Loan Facility, as compared to the debt outstanding in the three months ending March 31, 2022, which consisted primarily of the MidCap Loan Facility and MidCap Credit Facility.

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 $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.

Non-GAAP Financial Measures

This Quarterly Report presents our gross margin, excluding intangible asset amortization, for the three and nine months ended September 30, 2022 and 2021.

This Quarterly Report presents our gross margin, excluding intangible asset amortization, for the three months ended March 31, 2023 and 2022.

We calculate gross margin, excluding intangible asset amortization, as gross profit, excluding amortization expense relating to intangible assets we acquired in the CorMatrix Acquisition, divided by net sales.

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

The following table presents a reconciliation of our gross margin, excluding intangible asset amortization, for the three and nine months ended September 30, 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 months ended March 31, 2023 and 2022 to the most directly comparable GAAP financial measure, which is our GAAP gross margin (in thousands).

Three Months Ended

Nine Months Ended

September 30,

Cost of goods sold

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Liquidity and Capital Resources

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

As of March 31, 2023, we had cash of approximately $11.8 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 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.

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

As of March 31, 2023, our accumulated deficit was $146.0 million.

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

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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 “—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 Nine Months Ended September 30, 2022 and 2021

Nine Months Ended September 30,

Cash Flows for the Three Months Ended March 31, 2023 and 2022

Three Months Ended

(in thousands)

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Net Cash Used in Operating Activities

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 operating activities for the three months ended March 31, 2023 was $5.2 million compared to $7.4 million for the three months ended March 31, 2022.

The year-over-year decrease 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 offset by inventory builds.

Net Cash Used in Investing Activities

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.

Net cash used in investing activities for the three months ended March 31, 2023 was $0.2 million compared to $0.03 million for the three months ended March 31, 2022.

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 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.

Net cash provided by financing activities for the three months ended March 31, 2023 was $0.1 million compared to net cash used in financing activities of $0.9 million for the three months ended March 31, 2022.

The year-over-year net decrease was caused primarily by payments made in the 2022 period related to our Revenue Interest Obligation with no such payments having been made in the 2023 period due to ongoing restructuring discussions with Ligand (as defined below).

Credit Facilities

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.

O n August 10, 2022 (the “Closing Date”), we entered into a senior secured term loan facility with SWK Funding LLC (“SWK”), as agent, and other lenders party thereto (as amended and modified subsequent to the Closing Date, the “SWK Loan Facility”) for an aggregate principal amount of $25 million.

An initial draw of $21 million drawn was made on the Closing Date with the additional $4 million drawn on December 14, 2022 upon satisfaction of the amended terms enabling such receipt.

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 to date.

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).

As of March 31, 2023, we had $24.6 million of indebtedness outstanding under our SWK Loan Facility, with such balance being net of $0.9 million of unamortized discount and deferred financing costs, but increased by capitalized PIK Interest (as defined below) of $0.6 million since November 2022.

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.

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) 7.75% 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), 3.75% 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 certain profitability and regulatory conditions (“Extension Conditions”) have not been met, or until November 17, 2025 if such conditions have been satisfied.

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

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(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.

No such mandatory prepayments were required during the three months ended March 31, 2023.

Optional Prepayment

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.

The SWK Loan Facility Agreement also includes an exit fee equal to 6.5% of the aggregate principal amount funded prior to termination, and prepayment penalties that are equal to:

(i) 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 if such prepayment occurs prior to the first anniversary of the Closing Date, or (ii) 2% of the aggregate principal amount funded prior to termination if such prepayment occurs after the first anniversary of the Closing Date but prior to the second anniversary of the Closing Date.

Amortization and Final Maturity

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 amortization of the SWK Loan Facility starts on November 15, 2024, which amortization may be extended to November 17, 2025 if the Extension Conditions (as defined in the SWK Loan Facility Agreement) 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.

As of March 31, 2023, quarterly principal payments are scheduled to begin on November 15, 2024, in an amount equal to 5% of the outstanding principal on such principal payment commencement date 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.

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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 second covenant requires us to maintain a minimum liquidity (as defined in the SWK Loan Facility Agreement) of $5.0 million until December 16, 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.

As of March 31, 2023, we were in compliance with the financial covenant and all other covenants.

On May 12, 2023, we entered into a first amendment to the SWK Loan Facility Agreement with SWK and the other lenders party thereto .

The amendment is described in further detail in Note 11 to the condensed consolidated financial statements included elsewhere in this Quarterly Report, and in Part II, Item 5 of this Quarterly Report.

Supplier Promissory Note

During 2017, we restructured certain of our liabilities with a tissue supplier and entered into an unsecured promissory note bearing interest at 5%.

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

In connection with the August 2022 debt refinancing, we used $1.4 million of the proceeds from the SWK Loan Facility to repay the remaining balance on the promissory note, and as of March 31, 2023, we had no balance remaining on the promissory note.

Funding Requirements

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.

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.

As of March 31, 2023, we had $24.6 million of indebtedness outstanding, consisting of $25.5 million outstanding under our SWK Loan Facility (net of $0.9 million of unamortized discount and deferred financing costs).

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

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

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

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

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.

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● the expenses we incur in manufacturing and selling our products;

● the extent to which we acquire or invest in products, technologies and businesses, although we currently have no commitments or agreements relating to any of these types of transactions;

● the extent to which we acquire or invest in products, technologies and businesses in the future, although we may currently have no commitments or agreements relating to any of these types of transactions;

● the costs of operating as a public company;

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To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest may be materially diluted, and the terms of such securities could include liquidation or other preferences that adversely affect your rights as a common stockholder.

Debt financing and preferred equity financing, if available, may involve agreements that include restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures, creating liens, redeeming shares of our common stock and/or declaring dividends.

Debt financing, if available, may involve agreements that include restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures, creating liens, redeeming shares of our common stock and/or declaring dividends.

If we raise funds through collaborations, licensing agreements or other strategic alliances, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates, or grant licenses on terms that may not be favorable to us.

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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 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.

Based on our current operating plans, we believe there is uncertainty as to whether our future cash flows along with our existing cash, 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 nine months ended September 30, 2022, there were no material changes to those previously disclosed, except as noted below.

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, 2023, 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.

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

Refer to Note 3, “Recently Issued Accounting Standards,” to our condensed consolidated financial statements included elsewhere in this Quarterly Report for information regarding recently issued accounting pronouncements.

Section 107 of the JOBS Act permits us, as an “emerging growth company,” to take advantage of an extended transition period for adopting new or revised accounting standards until those standards would otherwise apply to private companies.

We have elected to avail ourselves of this exemption and, as a result, for so long as we remain an emerging growth company, unless we subsequently choose to affirmatively and irrevocably opt out of the extended transition period, our financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies.

Section 107 of the JOBS Act provides that we can elect to opt out of the extended transition period at any time, which election is irrevocable.

We will remain an emerging growth company until the earliest of:

(i) the last day of the first fiscal year in which our annual gross revenues are $1.235 billion or more;

(ii) the last day of 2025;

(iii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common equity held by non-affiliates is $700 million or more as of the last business day of our most recently completed second fiscal quarter;

or (iv) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the previous three years.

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