What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-11-14 compared with 2023-08-14 · 187 added, 173 removed, 230 unchanged (61% 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.

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 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.

At Elutia, our mission is to humanize medicine so that patients can thrive without compromise.

As a commercial-stage company, we leverage our unique understanding of biologics to improve the interaction between implanted medical devices and patients by reducing complications associated with these surgeries.

These complications include device migration, erosion, non-union of implants as well as implant rejection.

In addition, our products mitigate the formation of scar and fibrotic capsule formation that commonly occurs with device implants and is linked with additional risk factors including infection and capsular contracture.

We estimate that, over the past two years, more than 700,000 surgical procedures were perfomed per year in which the patient was implanted with medical devices such as pacemakers, defibrillators, neuro-stimulators 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 have leading products in our priority markets – Device Protection and Women’s Health.

In Device Protection, we sell CanGaroo, a “first-to-market” biological envelope, protected by a global patent portfolio, that is indicated for use with implantable electronic devices including cardiac and neurostimulator devices.

CanGaroo creates a secure pocket to hold the device and mitigates complications such as device migration and erosion.

It is a biomatrix made of extracellular matrix (ECM), which has been shown to support healthy wound healing.

Because of this inherent ECM trait, CanGaroo may facilitate re-operative procedures by mitigating scar formation and fibrosis.

In addition, we offer the only envelope designed for subcutaneous implantable cardiac defibrillators, a growing market.

In Women’s Health, we have developed both patented and proprietary technologies to preserve and protect natural extracellular matrix structure and biologic factors needed to support tissue remodeling.

This results in undamaged human acellular dermal matrices with superior handling, designed to promote faster healing and reduce inflammation.

This technology is the basis for our product, SimpliDerm.

Dermal matrices are standard of care for breast reconstruction surgeries, and our largest market.

With respect to pipeline products, we are pioneering the drug-eluting biomatrix (“DEB”), which will solve problems unaddressed by available options.

Our lead product is a version of CanGaroo known as CanGarooRM, a first-in-class biomatrix that combines the CanGaroo envelope with antibiotics.

These antibiotics, rifampin and minocycline, have been shown to reduce the risk of infection following surgical implantation of an electronic device.

We anticipate CanGarooRM will be the only drug-eluting biomatrix approved for use with implantable electronic devices, providing both acute and long-term benefits to the patient.

CanGarooRM will require clearance of a U.S.

Food and Drug Administration 510(k) submission to be marketed in the United States.

We believe CanGarooRM has a market potential that exceeds $300 million in the established pacemaker and cardiac implant space.

Furthermore, we intend to leverage our DEB platform technology by developing and commercializing products for markets with similar unmet needs, including neurostimulation, wound care and breast reconstruction.

The current status of the CanGarooRM clearance is described below.

CanGaroo is sold through both our internal sales force and independent sales agents and marketing partners, which include Boston Scientific and Biotronik.

SimpliDerm is sold through both independent sales agents and our distributor, Sientra.

We also sell legacy products into the Cardiovascular market.

In Cardiovascular, we sell our specialized porcine small intestine submucosa, which is also the tissue used to make CanGaroo, for use as an intracardiac and vascular patch as well as for pericardial reconstruction.

In addition, our TYKE product is designed for use in the neonatal patient population.

These cardiovascular products are sold in the United States through an exclusive agreement with LeMaitre Vascular and internationally through distributors.

We process all of our CanGaroo and cardiovascular products at our manufacturing facility in Roswell, Georgia and stock inventory of raw materials, supplies and finished goods at this location.

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.

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 June 30, 2023, we had 151 employees.

We have a long-term supply agreement with Cook Biotech, the porcine tissue supplier of our raw materials for our CanGaroo and cardiovascular products.

SimpliDerm has historically been processed by us at our Richmond, California facility;

however, with the divestiture of the Orthobiologics Business described below, SimpliDerm will be provided to us on a go forward basis through a long-term supply agreement with the purchaser of the Orthobiologics Business, Berkeley Biologics, LLC, as described below.

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 former 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, 2023, we had 107 full-time employees, and after the divestiture of the Orthobiologics Business described below, we had 53 full-time employees.

We have incurred significant operating losses since our inception.

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 incurred a net loss of $28.3 million for the nine months ended September 30, 2023.

Our accumulated deficit as of September 30, 2023 was $166.3 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.

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, CanGarooRM, 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.

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 other transactions.

In order to mitigate the current and potential future liquidity issues caused by the matters noted above, we may seek to raise capital through the issuance of common stock, such as the private placement which we closed in September 2023 described below, pursue asset sales or other transactions, such as the sale of the Orthobiologics Business described below, or restructure our Revenue Interest Obligation.

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.

Viable Bone Matrix Recall and FiberCel Recall

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, 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.

Recent Developments

Sale of Common Stock and Warrants in Private Placement

On September 18, 2023, we entered into a Securities Purchase Agreement (the “Purchase Agreement”) with the purchasers named therein (the “Investors”).

Pursuant to the Purchase Agreement, on September 21, 2023, we sold, in a

private offering exempt from the registration provisions of the Securities Act of 1933, as amended, an aggregate of (i) 6,852,811 units (the “Common Units”) to certain of the Investors, each comprised of (a) one share of Elutia’s Class A common stock, par value $0.001 per share (“Class A Common Stock”) and (b) a warrant (a “Common Warrant”) to purchase one and one half shares of Class A Common Stock, and (ii) 503,058 units (the “Prefunded Units”) to certain of the Investors, each comprised of (a) a prefunded warrant (a “Prefunded Warrant”) to purchase one share of Class A Common Stock, and (b) a Common Warrant.

The Common Units were sold at a purchase price of $1.4275 per unit, and the Prefunded Units were sold at a purchase price of $1.4265 per unit, for aggregate gross proceeds of approximately $10.5 million, before deducting offering expenses.

Each Common Warrant is exercisable at any time until the earlier of (a) 30 trading days after the clearance by the U.S.

Food & Drug Administration of the Company’s CanGaroo®RM antibiotic-eluting biologic envelope or (b) five years from the date of the offering, at an exercise price per share of $1.4275.

Each Prefunded Warrant is exercisable at any time at a nominal exercise price per share of $0.001 (with the remainder of the exercise price per share of Class A Common Stock having been prefunded to the Company).

Sale of Orthobiologics Business

On September 17, 2023, we executed an Asset Purchase Agreement (the “Purchase Agreement”) with Berkeley Biologics, LLC (“Berkeley”), a Delaware limited liability company and wholly owned subsidiary of GNI Group, Ltd.

(Tokyo Stock Exchange:

On November 8, 2023, at the closing (the “Closing”) of the transactions contemplated by the Purchase Agreement (the “Asset Purchase”), Berkeley purchased from us substantially all of our assets that are related to (i) our business of researching, developing, administering, insuring, operating, commercializing, manufacturing, selling and marketing our Orthobiologics products identified in the Purchase Agreement (the “Products”), and (ii) the business of contract manufacturing of particulate bone, precision milled bone, cellular bone matrix, acellular dermis, soft tissue and other products (but excluding the business of contract manufacturing of acellular dermis products for use in the field of breast reconstruction, other than as a supplier to Elutia).

The assets sold represent the entirety of our Orthobiologics segment (the “Orthobiologics Business”).

The Purchase Agreement provides for an aggregate purchase price, subject to certain adjustments pursuant to the terms of the Purchase Agreement, of up to $35 million in cash, with approximately $14.6 million, as adjusted, having been paid shortly after the Closing and up to $20 million after the Closing potentially payable in the form of earn-out payments (each an “Earn-Out Payment”).

For each of the five years following the Closing, Berkeley would be required to pay to us an Earn-Out Payment equal to 10% of the actual revenue earned by Berkeley in the applicable year that is derived from sales of those Products defined as “Earn-Out Products” under the Purchase Agreement, and from any improvements, modifications, derivatives and enhancements related to the Earn-Out Products, with the aggregate amount of Earn-Out Payments capped at $20 million.

The Purchase Agreement contains customary representations, warranties and covenants of the parties.

We, on the one hand, and Berkeley, on the other hand, have agreed to indemnify each other from and against losses the respective parties may incur arising out of breaches of the other party’s representations, warranties and covenants contained in the Purchase Agreement, and Berkeley will indemnify us for losses relating to the Assumed Liabilities (as defined in the Purchase Agreement), and we will indemnify Berkeley for losses relating to the Excluded Assets, Excluded Liabilities, or Excluded Contracts (each as defined in the Purchase Agreement).

We will also indemnify Berkeley for losses related to the operation of the Orthobiologics Business prior to Closing, actions initiated by stockholders or creditors of the Company relating to the Asset Purchase, non-compliance with any applicable bulk sales laws, and any third party action against Berkeley or its related indemnified parties if the facts alleged in the action would give the indemnified party a right to indemnification under the Purchase Agreement, among other indemnification requirements.

Various of the indemnification obligations of the parties under the Purchase Agreement are subject to specified survival limitations and other customary exceptions and limitations.

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

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.”

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.

CanGaroo RM Status

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.

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

(the “VBM Matter”).

Such VBM products are within our Orthobiologics Business.

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

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.

A total of 36 patients were treated with product from the single donor lot.

At present, one lawsuit has been filed, and twelve claims have been asserted as a result of the VBM Matter.

While unknown at this time, possible losses in connection with the VBM Matter could have a material effect on our financial position and results of operations.

We have purchased insurance coverage that, subject to common contract exclusions, will provide coverage for the VBM Matter as well as legal defense costs.

CanGarooRM Status

As described above, we are developing a new version of CanGaroo known as CanGarooRM, a first-in-class biomatrix that combines the CanGaroo envelope with antibiotics.

CanGarooRM 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.

We anticipate being able to complete our responses to outstanding questions from FDA in the 2023 calendar year and gain clearance from the FDA for CanGarooRM in the first half of 2024.

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 three or six months ended June 30, 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 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;

During the three months ended September 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 contract manufacturing products are sold directly to corporate customers.

Gross to net sales adjustments include sales returns and prompt payment and volume discounts.

In recent years, we have incurred significant costs in the operation of our business.

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Cost of Goods Sold

Our cost of goods sold relate to purchased raw materials and the processing and conversion costs of such raw materials consisting primarily of salaries and benefits, supplies, quality control testing and the manufacturing overhead incurred at our processing facilities in Richmond, California and Roswell, Georgia.

Both facilities have additional capacity, which if utilized, would further leverage our fixed overhead.

The Roswell facility has additional capacity, which if utilized, would further leverage our fixed overhead.

Cost of goods sold also includes the amortization of intangibles generated from the CorMatrix Acquisition in 2017.

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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.

Our product development efforts primarily relate to activities associated with the development of CanGarooRM, our CanGaroo Envelope with antibiotics.

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

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Results of Operations

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

Three Months Ended June 30,

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

Three Months Ended September 30,

Change 2022 / 2023

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Income tax expense

Net loss from continuing operations

Discontinued operations

Net sales information for our products is summarized as follows:

Three Months Ended June 30,

Three Months Ended September 30,

Change 2022 / 2023

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Women's health

Orthobiologics

Cardiovascular

Total Net Sales

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.

Total net sales increased $0.3 million, or 4.8%, to $6.1 million in the three months ended September 30, 2023 compared to $5.8 million in the three months ended September 30, 2022.

Revenues from Device Protection and Women’s Health increased compared to the prior year’s third quarter due to volume growth and revenues from Cardiovascular decreased due to the commencement in April 2023 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.

Cost of Goods Sold

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

Three Months Ended June 30,

Three Months Ended September 30,

Change 2022 / 2023

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Women's health

Orthobiologics

Cardiovascular

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Total Cost of Goods Sold

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.

Total cost of goods sold increased $0.4 million to $3.3 million in the three months ended September 30, 2023 compared to $2.9 million in the three months ended September 30, 2022.

Gross margin was 46.4% in the three months ended September 30, 2023 compared to 50.2% in the three months ended September 30, 2022.

Gross margin, excluding intangible asset amortization, was 60.2% in the three months ended September 30, 2023 compared to 64.8% in the three months ended September 30, 2022.

The decline in gross margin was primarily due to the Cardiovascular business which declined due to the commencement of the LeMaitre Vascular distribution agreement described above.

Operating Expenses

Sales and Marketing

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.

Sales and marketing expenses decreased $1.6 million, or 36.0%, to $2.8 million in the three months ended September 30, 2023 compared to $4.4 million in the three months ended September 30, 2022.

As a percentage of sales, sales and marketing expenses decreased to 45.7% in the three months ended September 30, 2023 from 74.9% in the three months ended September 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 $0.7 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.

G&A expenses decreased $1.5 million, or 36.3%, to $2.8 million in the three months ended September 30, 2023 compared to $4.3 million in the three months ended September 30, 2022.

As a percentage of net sales, G&A expenses decreased to 45.0% in the three months ended September 30, 2023 from 74.0% in the three months ended September 30, 2022.

The decrease in expense was primarily due to certain non-recurring legal and severance costs incurred in the third quarter of 2022.

Research and Development

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 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.

R&D expenses decreased to $0.6 million in the three months ended September 30, 2023 compared to $1.7 million in the three months ended September 30, 2022.

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

Such related costs were less in the third 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 $1.3 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.

FiberCel litigation costs increased to $4.1 million in the three months ended September 30, 2023 compared to $1.5 million in the three months ended September 30, 2022.

The increase in expense was primarily due to the continued evaluation of the contingent FiberCel liability and higher legal defense costs as the FiberCel cases progress.

See further discussion in Note 10 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.

Interest expense was approximately $1.6 million in the three months ended September 30, 2023 compared to $1.3 million in the three months ended September 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 September 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 7 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,

Discontinued Operations

Net loss from discontinued operations for the three months ended September 30, 2023 was $1.1 million and net income from discontinued operations for the three months ended September 30, 2022 was $1.2 million.

The decrease was largely due to revenue reduction and overall financial impact to the Orthobiologics Business caused by the viable bone matrix recall and market withdrawal in July 2023.

Also contributing to the decrease were the legal fees incurred in connection with the Orthobiologics disposition.

Comparison of the Nine Months Ended September 30, 2023 and 2022

Nine Months Ended September 30,

Change 2022 / 2023

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Interest expense

Other income, net

Loss before provision of income taxes

Income tax expense

Net loss from continuing operations

Discontinued operations

Net sales information for our products is summarized as follows:

Six Months Ended June 30,

Nine Months Ended September 30,

Change 2022 / 2023

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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.

Total net sales increased $1,6 million, or 9.3%, to $18.9 million in the nine months ended September 30, 2023 compared to $17.2 million in the nine months ended September 30, 2022.

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 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.

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,

Nine Months Ended September 30,

Change 2022 / 2023

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Women's health

Orthobiologics

Cardiovascular

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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.

Total cost of goods sold increased $1.3 million to $9.9 million in the nine months ended September 30, 2023 compared to $8.7 million in the nine months ended September 30, 2022.

Gross margin was 47.3% in the nine months ended September 30, 2023 compared to 49.7% in the nine months ended September 30, 2022.

Gross margin, excluding intangible asset amortization, was 60.8% in the nine months ended September 30, 2023 compared to 64.4% in the nine months ended September 30, 2022.

The slight decline in gross margin was due to the commencement of the LeMaitre Vascular distribution agreement described above.

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.

Sales and marketing expenses decreased $3.2 million, or 23.1%, to $10.5 million in the nine months ended September 30, 2023 compared to $13.7 million in the nine months ended September 30, 2022.

As a percentage of sales, sales and marketing expenses decreased to 55.7% in the nine months ended September 30, 2023 from 79.2% in the nine months ended September 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.

G&A expenses decreased $2.7 million, or 20.7%, to $10.1 million in the nine months ended September 30, 2023 compared to $12.8 million in the nine months ended September 30, 2022.

As a percentage of net sales, G&A expenses decreased to 53.7% in the nine months ended September 30, 2023 from 74.1% in the nine months ended September 30, 2022.

The decrease in expense was primarily due to declines in the cost of insurance and certain non-recurring legal and severance costs incurred in the 2022 period.

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.

R&D expenses decreased to $3.0 million in the nine months ended September 30, 2023 compared to $5.9 million in the nine months ended September 30, 2022.

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

Such related costs were less in the first nine 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.

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 and legal defense costs incurred as the FiberCel cases progress.

FiberCel litigation costs in the six months ended June 30, 2022 were comprised only of legal fees incurred.

FiberCel litigation costs increased to $7.3 million in the nine months ended September 30, 2023 compared to $1.9 million in the nine months ended September 30, 2022.

The increase in expense was primarily due to the continued evaluation of the contingent FiberCel liability and higher legal defense costs incurred as the FiberCel cases progress.

See further discussion in Note 10 to condensed consolidated financial statements included elsewhere in this Quarterly Report.

Interest Expense

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.

Interest expense was approximately $4.6 million in the nine months ended September 30, 2023 compared to $3.7 million in the nine months ended September 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 nine months ending September 30, 2022, which consisted primarily of the MidCap Loan Facility and MidCap Credit Facility.

Discontinued Operations

Net loss from discontinued operations for the nine months ended September 30, 2023 was $2.0 million and net income from discontinued operations for the three months ended September 30, 2022 was $2.8 million.

The decrease was largely due to revenue reduction, inventory write-downs and overall financial impact to the Orthobiologics Business caused by the viable bone matrix recall and market withdrawal in July 2023.

Also contributing to the decrease were the legal fees incurred in connection with the Orthobiologics disposition.

Non-GAAP Financial Measures

This Quarterly Report presents our gross margin, excluding intangible asset amortization, for the three and six months ended June 30, 2023 and 2022.

This Quarterly Report presents our gross margin, excluding intangible asset amortization, for the three and nine months ended September 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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We believe this provides our management and investors with useful information to facilitate period-to-period comparisons of our operating results.

Our management uses this metric in assessing the health of our business and our operating performance, and we believe investors’ understanding of our operating performance is similarly enhanced by our presentation of this metric.

Our management uses this metric in assessing the health of our business and our

operating performance, and we believe investors’ understanding of our operating performance is similarly enhanced by our presentation of this metric.

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

The following table presents a reconciliation of our gross margin, excluding intangible asset amortization, for the three 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).

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

Nine Months Ended

September 30,

Cost of goods sold

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Liquidity and Capital Resources

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.

As of September 30, 2023, we had cash of approximately $14.5 million.

Since inception, we have financed our operations primarily through private placements of our convertible preferred stock, amounts borrowed under our credit facilities, sales of our products and more recently, proceeds from our IPO, a follow-on offering and a private placement of our common stock and warrants.

Our historical cash outflows have primarily been associated with acquisitions and integration, manufacturing and administrative costs, general and marketing, research and development, clinical activity, purchase of property and equipment used in the production activities of our Richmond, California facility and investing in our commercial infrastructure through our direct sales force and our commercial partners in order to expand our presence and to promote awareness and adoption of our products.

As of June 30, 2023, our accumulated deficit was $156.6 million.

As of September 30, 2023, our accumulated deficit was $166.3 million.

On September 21, 2023, we sold, in a private offering exempt from the registration provisions of the Securities Act of 1933, as amended, an aggregate of (i) 6,852,811 units (the “Common Units”) to certain of the Investors, each comprised of (a) one share of the Company’s Class A common stock, par value $0.001 per share (“Class A Common Stock”) and (b) a warrant (a “Common Warrant”) to purchase one and one half shares of Class A Common Stock, and (ii) 503,058 units (the “Prefunded Units”) to certain of the Investors, each comprised of (a) a prefunded warrant (a “Prefunded Warrant”) to purchase one share of Class A Common Stock, and (b) a Common Warrant.

Each Common Warrant is exercisable at any time until the earlier of (a) 30 trading days after the clearance by the U.S.

Food & Drug Administration of the Company’s CanGarooRM antibiotic-eluting biologic envelope or (b) five years from the date of the Offering, at an exercise price per share of $1.4275.

Each Prefunded Warrant is exercisable at any time at a nominal

exercise price per share of $0.001 (with the remainder of the exercise price per share of Class A Common Stock having been prefunded to the Company).

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

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, such as the private placement which we closed in September 2023 described above, pursue asset sale or other transactions, such as the sale of the Orthobiologics Business described below, or restructure our Revenue Interest Obligation.

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.

Due to these factors, there is substantial doubt about our ability to continue as going concern within one year after the issuance of the financial statements.

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

Six Months Ended

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.

Cash Flows for the Nine Months Ended September 30, 2023 and 2022

Nine Months Ended

September 30,

(in thousands)

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Net Cash Used in Operating Activities

Net cash used in operating activities for the six months ended June 30, 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 operating activities for the nine months ended September 30, 2023 was $12.7 million compared to $16.2 million for the nine months ended September 30, 2022.

The year-over-year decrease was primarily due to a lower net loss as well as the receipt of insurance proceeds, and a corresponding decrease in insurance receivables, in connection with our FiberCel litigation.

Net Cash Used in Investing Activities

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

Net cash used in investing activities for the nine months ended September 30, 2023 was $0.3 million compared to $0.4 million for the nine months ended September 30, 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 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).

Net cash provided by financing activities for the nine months ended September 30, 2023 was $10.5 million compared to net cash used in financing activities of $5.7 million for the nine months ended September 30, 2022.

The year-over-year net increase was caused primarily by the private placement in September 2023 which yielded $10.5 million in gross proceeds through the issuance of common stock and warrants.

Further contributing to the increase were 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 (“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.

An initial draw of $21 million 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 has not been entered into to date.

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 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.

As of September 30, 2023, we had $25.3 million of indebtedness outstanding under our SWK Loan Facility, with such balance being net of $0.8 million of unamortized discount and deferred financing costs.

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 June 30, 2023.

No such mandatory prepayments were required during the three months ended September 30, 2023;

however, the closing of the divestiture of the Orthobiologics Business triggered the mandatory prepayment of $4.0 million.

Of such amount, $2.0 million wa s paid shortly after closing of the divestiture of the Orthobiologics Business and the remainder is to be paid by the earlier of (i) February 15, 2024 and (ii) two business days following written request by SWK based on mutual agreement between the parties.

Optional Prepayment

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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 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.

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

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

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

The second covenant requires us to maintain a minimum liquidity (as defined in the SWK Loan Facility Agreement) of $5.0 million until 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 June 30, 2023, we were in compliance with the financial covenant and all other covenants.

The first covenant, which is measured quarterly, requires us to achieve a specified Minimum Aggregate Revenue (as defined in the SWK Loan Facility Agreement) for the preceding 12-month period or, alternatively, to maintain Consolidated Unencumbered Liquid Assets (as defined in the SWK Loan Facility Agreement) greater than either (i) the outstanding principal balance of the loan, or (ii) the aggregate operating cash burn (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 the greater of (a) $5.0 million and (b) the sum of the operating cash burn for the two prior consecutive fiscal quarters then ended (the “Liquidity Covenant”).

As of September 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 .

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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 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.

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 September 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 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).

As of September 30, 2023, we had $25.3 million of indebtedness outstanding, consisting of $26.1 million outstanding under our SWK Loan Facility (net of $0.8 million of unamortized discount and deferred financing costs).

In addition, as further described in Note 8 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.

Furthermore, a $5.0 million payment is 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.

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

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● unanticipated general, legal and administrative expenses;

● the effects on any of the above of the current COVID-19 pandemic or any other pandemic, epidemic or outbreak of infectious disease.

● the effects on any of the above of the COVID-19 pandemic or any other pandemic, epidemic or outbreak of infectious disease.

In addition, our operating plans may change as a result of any number of factors, including those set forth above and other factors currently unknown to us, and we may need additional funds sooner than anticipated.

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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 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.

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 nine months ended September 30, 2023, there were no material changes to those previously disclosed other than those outlined in Note 2, “Summary of Significant Accounting Policies.”

Recent Accounting Pronouncements

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

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.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis