What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-14 compared with 2023-05-12 · 155 added, 63 removed, 248 unchanged (47% of the section changed)

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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.

To expand our commercial reach, we have commercial relationships with major medical device companies, such as Boston Scientific, Biotronik, Sientra and 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.

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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 March 31, 2023, we had 144 employees.

As of June 30, 2023, we had 151 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 incurred a net loss of $18.6 million for the six months ended June 30, 2023.

Our accumulated deficit as of June 30, 2023 was $156.6 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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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.

Viable Bone Matrix Recall and FiberCel Recall

Viable Bone Matrix Recall

In July 2023, we announced a voluntary recall of a single lot of a certain viable bone matrix product and the market withdrawal of all of our viable bone matrix (“VBM”) products produced after a specified date.

Notice of the voluntary recall was issued to centers after we learned of post-surgical Mycobacterium tuberculosis (MTB) infections in two patients treated with a VBM product from a single donor lot.

Prior to release, samples from this specific lot had tested negative for MTB by an independent laboratory using a nucleic acid test that is designed to specifically detect the MTB organism.

Since issuing the recall, we have been working with the U.S.

Food and Drug Administration (“FDA”) and the U.S.

Centers for Disease Control and Prevention (“CDC”) to identify and secure all unused product, ascertain the medical status of patients treated with the recalled product, understand whether there is any relationship between the post-surgical infections and the recalled product lot and determine the medical cause of these infections.

We have identified the 115 units comprising the single product lot in question.

Based on information from the CDC, 49 units within this product lot were implanted into 36 patients and the remaining units were either never distributed by us or were returned to either us or the CDC.

Of these 36 patients, CDC has identified at least five patients who have exhibited clinical or diagnostic findings consistent with tuberculosis infection.

We are continuing to work closely with the FDA and CDC in investigating the circumstances surrounding the event.

FiberCel Recall

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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.

CanGaroo RM Status

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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 three months ended March 31, 2023 and 2022.

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.

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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.

During the three months ended June 30, 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 have been 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 orthobiologics products

are sold through commercial partners.

Our contract manufacturing products are sold directly to corporate customers.

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Results of Operations

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

Three Months Ended March 31,

Comparison of the Three Months Ended June 30, 2023 and 2022

Three Months Ended June 30,

Change 2022 / 2023

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Interest expense

Other (income) expense, net

Loss before provision of income taxes

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Net sales information for our products is summarized as follows:

Three Months Ended March 31,

Three Months Ended June 30,

Change 2022 / 2023

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Total Net Sales

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.

Total net sales decreased $2.3 million, or 18.5%, to $10.3 million in the three months ended June 30, 2023 compared to $12.6 million in the three months ended June 30, 2022, with such decrease primarily attributable to the viable bone matrix recall and market withdrawal in July 2023 described above.

Such recall and market withdrawal, which impacted only our Orthobiologics business, necessitated the establishment of a product returns reserve and reversal of revenue totaling $3.0 million.

Revenues from Women’s Health increased compared to the prior year’s second quarter due to volume growth and revenues from Cardiovascular decreased slightly due to the commencement of our distribution agreement with LeMaitre Vascular which provides for sales at a transfer price versus sales prior to such agreement being made at end-user pricing.

On June 19, 2023, Surgalign Holdings, Inc.

(“Surgalign”) and certain of its direct and indirect subsidiaries commenced voluntary proceedings under chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas.

Total revenues generated by us from Surgalign during the three months ended June 30, 2023 and 2022 were $1.1 million and $1.3, respectively.

Surgalign is in the process of selling its assets through the chapter 11 process.

Our contract with Surgalign is not being assumed by the buyer of the relevant assets.

Consequently, future revenues from our Surgalign distribution relationship are highly uncertain.

Cost of Goods Sold

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

Three Months Ended March 31,

Three Months Ended June 30,

Change 2022 / 2023

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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.

Total cost of goods sold increased $1.6 million to $9.3 million in the three months ended June 30, 2023 compared to $7.7 million in the three months ended June 30, 2022.

Gross margin was 9.5% in the three months ended June 30, 2023 compared to 38.8% in the three months ended June 30, 2022.

Gross margin, excluding intangible asset amortization, was 17.8% in the three months ended June 30, 2023 compared to 45.5% in the three months ended June 30, 2022.

The decline in gross margin was due to the gross margin impact of the viable bone matrix recall and market withdrawal in July 2023 which, including both the revenue reversal noted above and inventory writedown described in Note 8 to the condensed consolidated financial statements, totaled $5.0 million causing a decrease in gross margin percentage of 35.4%.

With respect to the individual product segments, the gross margin of Device Protection improved in the three months ended June 30, 2023 compared to the three months ended June 30, 2022 due to operational efficiencies in the current year causing lower costs to manufacture the product.

The gross margin of Women’s Health declined due to non-recurring production issues and the gross margin of the Cardiovascular business declined due to the commencement of the LeMaitre Vascular distribution agreement described above.

Operating Expenses

Sales and Marketing

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.

Sales and marketing expenses increased $1.8 million, or 33.1%, to $3.6 million in the three months ended June 30, 2023 compared to $5.4 million in the three months ended June 30, 2022.

As a percentage of sales, sales and marketing expenses decreased to 35.1% in the three months ended June 30, 2023 from 42.8% in the three months ended June 30, 2022.

The decrease in expense was largely attributable to 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 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.

G&A expenses decreased $0.7 million, or 15.0%, to $4.0 million in the three months ended June 30, 2023 compared to $4.7 million in the three months ended June 30, 2022.

As a percentage of net sales, G&A expenses increased to 38.9% in the three months ended June 30, 2023 from 37.3% in the three months ended June 30, 2022.

The decrease in expense was primarily due to declines in the cost of insurance and lower equity compensation expense.

Research and Development

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.

R&D expenses decreased to $1.2 million in the three months ended June 30, 2023 compared to $2.6 million in the three months ended June 30, 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.

Such related costs were less in the second 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 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.

FiberCel litigation costs increased to $1.3 million in the three months ended June 30, 2023 compared to $0.3 million in the three months ended June 30, 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 legal defense costs incurred as the FiberCel cases progress.

FiberCel litigation costs in the three months ended June 30, 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 $1.5 million in the three months ended June 30, 2023 compared to $1.2 million in the three months ended June 30, 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 June 30, 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.

Comparison of the Six Months Ended June 30, 2023 and 2022

Six Months Ended June 30,

Change 2022 / 2023

(in thousands, except percentages)

Cost of goods sold

Sales and marketing

General and administrative

Research and development

FiberCel litigation costs

Total operating expenses

Loss from operations

Interest expense

Loss before provision of income taxes

Income tax expense

Net sales information for our products is summarized as follows:

Six Months Ended June 30,

Change 2022 / 2023

(in thousands, except percentages)

Device protection

Women's health

Orthobiologics

Cardiovascular

Total Net Sales

Total net sales decreased $0.8 million, or 3.3%, to $23.3 million in the six months ended June 30, 2023 compared to $24.1 million in the six months ended June 30, 2022, with such decrease primarily attributable to the viable bone matrix recall and market withdrawal in July 2023 described above.

Such recall and market withdrawal, which impacted only our Orthobiologics business, necessitated the establishment of a product returns reserve and reversal of revenue totaling $3.0 million.

Revenues from Device Protection and Women’s Health increased compared to the corresponding period of the prior year due to volume growth and revenues from Cardiovascular decreased slightly due to the commencement of our distribution agreement with LeMaitre Vascular which provides for sales at a transfer price versus sales prior to such agreement being made at end-user pricing.

On June 19, 2023, Surgalign Holdings, Inc.

Total revenues generated by us from Surgalign during the six months ended June 30, 2023 and 2022 were $2.3 million and $2.5, respectively.

Surgalign is in the process of selling its assets through the chapter 11 process.

Our contract with Surgalign is not being assumed by the buyer of the relevant assets.

Consequently, future revenues from our Surgalign distribution relationship are highly uncertain.

Cost of Goods Sold

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

Six Months Ended June 30,

Change 2022 / 2023

(in thousands, except percentages)

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 increased $1.1 million to $16.0 million in the six months ended June 30, 2023 compared to $15.0 million in the six months ended June 30, 2022.

Gross margin was 31.3% in the six months ended June 30, 2023 compared to 38.0% in the six months ended June 30, 2022.

Gross margin, excluding intangible asset amortization, was 38.6% in the six months ended June 30, 2023 compared to 45.1% in the six months ended June 30, 2022.

The decline in gross margin was due to the gross margin impact of the viable bone matrix recall and market withdrawal in July 2023

which, including both the revenue reversal noted above and inventory writedown described in Note 8 to the condensed consolidated financial statements, totaled $5.0 million causing a decrease in gross margin percentage of 15.4%.

With respect to the individual product segments, the gross margin of Device Protection improved in the six months ended June 30, 2023 compared to the six months ended June 30, 2022 due to operational efficiencies in the current year causing lower costs to manufacture the product.

Operating Expenses

Sales and Marketing

Sales and marketing expenses decreased $1.2 million, or 12.2%, to $9.0 million in the six months ended June 30, 2023 compared to $10.2 million in the six months ended June 30, 2022.

As a percentage of sales, sales and marketing expenses decreased to 38.4% in the six months ended June 30, 2023 from 42.4% in the six months ended June 30, 2022.

General and Administrative

G&A expenses decreased $1.0 million, or 12.0%, to $7.7 million in the six months ended June 30, 2023 compared to $8.7 million in the six months ended June 30, 2022.

As a percentage of net sales, G&A expenses decreased to 32.9% in the six months ended June 30, 2023 from 36.2% in the six months ended June 30, 2022.

The decrease in expense was primarily due to declines in the cost of insurance and lower equity compensation expense.

Research and Development

R&D expenses decreased to $3.0 million in the six months ended June 30, 2023 compared to $4.9 million in the six months ended June 30, 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 six months 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 $3.2 million in the six months ended June 30, 2023 compared to $0.4 million in the six months ended June 30, 2022.

FiberCel litigation costs in the six months ended June 30, 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 $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.

Interest expense was approximately $3.1 million in the six months ended June 30, 2023 compared to $2.4 million in the six months ended June 30, 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 six months ending June 30, 2022, which consisted primarily of the MidCap Loan Facility and MidCap Credit Facility.

Non-GAAP Financial Measures

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

This Quarterly Report presents our gross margin, excluding intangible asset amortization, for the three and six months ended June 30, 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 months ended March 31, 2023 and 2022 to the most directly comparable GAAP financial measure, which is our GAAP gross margin (in thousands).

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

Three Months Ended

Six Months Ended

Cost of goods sold

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Liquidity and Capital Resources

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

As of June 30, 2023, we had cash of approximately $9.3 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 March 31, 2023, our accumulated deficit was $146.0 million.

As of June 30, 2023, our accumulated deficit was $156.6 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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Due to these factors, there is substantial doubt about our ability to continue as going concern within one year after the issuance of the financial statements.

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

Three Months Ended

Cash Flows for the Six Months Ended June 30, 2023 and 2022

Six Months Ended

(in thousands)

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Net Cash Used in Operating Activities

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 operating activities for the six months ended June 30, 2023 was $7.6 million compared to $10.7 million for the six months ended June 30, 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 and reduction to receivables offset by inventory builds.

Net Cash Used in Investing Activities

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.

Net cash used in investing activities for the six months ended June 30, 2023 and 2022 was $0.3 million.

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 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.

Net cash provided by financing activities for the six months ended June 30, 2023 was $0.1 million compared to net cash used in financing activities of $3.0 million for the six months ended June 30, 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).

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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.

In connection with the August 2022 debt refinancing, 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 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.

As of June 30, 2023, we had $24.9 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 $0.9 million since November 2022.

Interest Rates

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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 months ended March 31, 2023.

No such mandatory prepayments were required during the three months ended June 30, 2023.

Optional Prepayment

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

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.

As of June 30, 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 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 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 March 31, 2023, we were in compliance with the financial covenant and all other covenants.

As of June 30, 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.

The amendment is described in further detail in Note 6 to the condensed consolidated financial statements included elsewhere in 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.

As of June 30, 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 June 30, 2023, we had no balance remaining on the promissory note.

Funding Requirements

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

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).

As of June 30, 2023, we had $24.9 million of indebtedness outstanding, consisting of $25.8 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 other transactions.

The initial $5.0 million milestone payment became due in the second quarter of 2023.

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

27 unchanged sentences

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

We have discussed the policies and estimates that we believe are critical and require the use of complex judgment in their application in our Annual Report, and, during the three months ended March 31, 2023, 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 three and six months ended June 30, 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.

2 unchanged sentences

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.

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.

5 unchanged sentences

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