The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K (the "Annual Report"). This discussion contains forward-looking statements reflecting our current expectations, estimates, plans and assumptions concerning events and financial trends that involve risks and may affect our future operating results and financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the sections entitled "Forward-Looking Statements," "Risk Factors Summary" and in Part I, Item 1A. "Risk Factors" of this Annual Report. A discussion of the year ended
December 31, 2020compared to the year ended December 31, 2019has been reported previously in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SECon March 15, 2021, in Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." Overview
We are a commercial-stage regenerative medicine company focused on creating the next generation of differentiated products and improving outcomes in patients undergoing surgery, concentrating on patients receiving implantable medical devices. From our proprietary tissue processing platforms, we have developed a portfolio of advanced regenerative medical products that are designed to be very similar to natural biological material. Our proprietary products, which we refer to as our Core Products, are designed to address the implantable electronic device/cardiovascular, orthopedic/spinal repair and soft tissue reconstruction markets, which represented a combined
$3 billionmarket opportunity in the United Statesin 2020. To expand our commercial reach, we have commercial relationships with major medical device companies, such as Boston Scientific and Biotronik, to promote and sell some of our Core Products. We 101
believe that our focus on our unique regenerative medicine platforms and core products will ultimately maximize our likelihood of continued clinical and commercial success and create a long-term competitive advantage for us.
We estimate that more than two million patients were either implanted with medical devices, such as pacemakers, defibrillators, neuro-stimulators, spinal fusion and trauma fracture hardware or tissue expanders for breast reconstruction, in
the United Statesin 2019. This number is driven by advances in medical device technologies and an aging population with a growing incidence of comorbidities, including diabetes, obesity and cardiovascular and peripheral vascular diseases. These comorbidities can exacerbate various immune responses and other complications that can be triggered by a device implant. Our Core Products are targeted to address unmet clinical needs with the goal of promoting healthy tissue formation and avoiding complications associated with medical device implants, such as scar-tissue formation, capsular contraction, erosion, migration, non-union of implants and implant rejection. We believe that we have developed the only biological envelope, which is covered by a number of patents, that forms a natural, systemically vascularized pocket for holding implanted electronic devices. We have a proprietary processing technology for manufacturing bone regenerative products for use in orthopedic/spinal repair that preserves a cell's ability to regenerate bone and decelerates cell apoptosis or programmed cell death. We have a patented cell removal technology that produces undamaged extracellular matrices for use in soft tissue reconstruction. In pre-clinical and clinical studies, our products have supported and, in some cases, accelerated tissue healing, and thereby improved patient outcomes. Our Non-Core Products are those fulfilled through tissue processing contracts at our Richmond, Californiafacility. These contracts serve to utilize as much as possible of the starting human biological material from which we produce our orthopedic/spinal repair and soft tissue reconstruction products, leverage our existing overhead and improve our cash flow. The resulting processed materials, including particulate bone, precision milled bone, cellular bone matrix, acellular dermis and other soft tissue products, are sold to medical/surgical companies as finished products and as a subcomponent of their products. Additionally, we process amniotic membrane as finished product for selected customers. We process all of our products at our two manufacturing facilities in Roswell, Georgiaand Richmond, California, and stock inventory of raw materials, components and finished goods at those locations. We rely on a single or limited number of suppliers for certain raw materials and components. Except for the porcine tissue supplier of our raw materials for our CanGaroo and cardiovascular products, which is Cook Biotech, we generally have no long-term supply agreements with our suppliers, as we obtain supplies on a purchase order basis. Specifically, we acquire donated human tissue directly through tissue procurement firms engaged by us. We primarily ship our Core Products from our facilities directly to hospital customers. 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, our initial public offering consummated on October 13, 2020(the "IPO") and a private placement of our common stock in December 2021. We have devoted the majority of our resources to acquisitions and integration, manufacturing and administrative costs, research and development, clinical activity and investing in our commercial infrastructure through our direct sales force and our commercial partners in order to expand our presence and to promote awareness and adoption of our products. As of December 31, 2021, we had 176 employees, of which 31 were direct sales representatives. We have incurred significant operating losses since our inception. We incurred a net loss of $24.8 millionand $21.8 millionfor the years ended December 31, 2021and 2020, respectively. Our accumulated deficit as of December 31, 2021was $105.1 million. We expect to continue to incur significant expenses and operating losses for the foreseeable future as we seek to grow our sales organization and expand our product development and clinical and research activities. In addition, we expect to continue to incur additional costs and expenses associated with operating as a public company.
Our ability to achieve profitability will depend on our ability to generate sales of existing or new products sufficient to exceed our operating expenses and capital requirements. Due to the many risks and uncertainties affecting product sales and our ongoing marketing and product development efforts, we are unable to
to predict with any certainty whether we will be able to increase sales of our products or the timing or amount of ongoing expenditures we will be required to incur. Accordingly, even if we are able to increase sales of our products, we may not become profitable. As a result, we anticipate that we will need additional funding to support our continuing operations and pursue our growth strategy. Until such time as we are able to generate sufficient sales from our products, we expect to finance our operations through equity offerings, debt financings or other capital sources, which may include collaborations or license agreements with other companies or other strategic transactions such as an asset sale. We may not be able to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms or at all. If we fail to raise capital or enter into such agreements in the short-term, we will be unable to fund our operations and capital expenditure requirements at that time which may result in there being substantial doubt about our ability to continue as a going concern. We believe that the net proceeds from our IPO, together with our existing cash, availability under our Revolving Credit Facility and cash generated from expected future commercial sales as well as the
December 2021PIPE financing (see below) will be sufficient to fund our operating expenses, debt service requirements and capital expenditure needs through at least twelve months from the issuance date of the consolidated financial statements included elsewhere in this Annual Report. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than
we expect. Impact of COVID-19 We are closely monitoring the impact of the COVID-19 pandemic on our business. In
March 2020, the World Health Organizationdeclared COVID-19 a global pandemic and recommended various containment and mitigation measures worldwide. Since that time, the number of procedures performed using our products has decreased significantly, as governmental authorities in the United Stateshave recommended, and in certain cases required, that elective, specialty and other non-emergency procedures and appointments be suspended or canceled in order to avoid patient exposure to medical environments and the risk of potential infection with COVID-19, and to focus limited resources and personnel capacity on the treatment of COVID-19 patients. As a result, beginning in March 2020, a significant number of procedures using our products have been postponed or cancelled, which has negatively impacted sales of our products. These measures and challenges will likely continue for the duration of the pandemic, which is uncertain, and will likely continue to reduce our net sales and negatively impact our business, financial condition and results of operations while the pandemic continues. In addition, numerous state and local jurisdictions, including those where our facilities are located, have imposed, and others in the future may impose or re-impose, "shelter-in-place" orders, quarantines, executive orders and similar government orders and restrictions for their residents to control the spread of COVID-19. Such orders or restrictions have resulted in reduced operations at our manufacturing facilities, travel restrictions and cancellation of events, and have restricted the ability of our sales representatives and those of our commercial partners and independent sales agents to attend procedures in which our products are used, among other effects, thereby significantly and negatively impacting our operations. The extent to which the COVID-19 pandemic impacts our future financial condition and results of operations will depend on future events and developments, which are highly uncertain and cannot be predicted, including the severity and spread of the disease and the effectiveness of actions to contain the disease or treat its impact, among others. As new information regarding COVID-19 continues to emerge, it is difficult to predict the degree to which this disease will ultimately have on our business.
June 2, 2021, we issued a voluntary recall pertaining to a single donor lot of our FiberCel Fiber Viable Bone Matrix, a bone repair product formerly distributed by Medtronic, after learning of post-surgical infections reported in several patients treated with the product, including some patients that tested positive for tuberculosis.
Since the recall was issued, we have worked with the
(“CDC”) to identify and secure all unused products, verify the
the condition of patients treated with the recalled product, understand if there is a relationship between post-surgical infections and the recalled lot of product, and determine the medical cause of these infections.
We have identified the 154 units comprising the single product lot in question. Based on information from the
CDC, 136 units within this product lot were implanted into 113 patients and the remaining 18 units were returned to either us or the CDC. Of these 113 patients, CDChas identified at least 75 patients whohave exhibited clinical or diagnostic findings consistent with tuberculosis infection. As part of our continuing cooperation with the FDA and CDCand our efforts to conduct a prompt and fulsome investigation into this matter, we have reviewed the processes for screening donors and producing FiberCel and have not identified any deviations from our established protocols, which are designed to comply with industry standards established by the American Association of Tissue Banks("AATB") as well as applicable FDA requirements and guidelines. To help ensure the safety of future production lots, we have implemented a number of potential safeguards against Mycobacterium tuberculosis that we believe exceed applicable industry standards and currently available FDA-approved testing. We have implemented additional donor screening procedures to include screening for any donor utilizing hemodialysis for an extended period of time and to request additional background and information on any time spent by the donor outside the United States. In addition, we have developed and begun utilizing a methodology for testing processed viable cell bone matrix tissue products for Mycobacterium tuberculosis as a further enhancement of our donor screening. As far as we are aware, there are no commercially available testing methods authorized by the FDA for detecting the presence of Mycobacterium tuberculosis in these products. For an update on the legal proceedings related to the FiberCel Recall, see Part I, Item 3, "Legal Proceedings" and Note 16 to the consolidated financial statements included elsewhere in this Annual Report. Defending any current or future claims, proceedings or lawsuits, regardless of merit, could be costly, divert management attention and result in adverse publicity, which could result in the withdrawal of, or reduced acceptance of, our products in the market. If we cannot successfully defend against product liability claims, we could incur substantial liability and costs. Additionally, following the public announcement of our voluntary recall, there has been various media coverage surrounding the recall and patients impacted. Such negative publicity related to the perceived quality and safety of our products could affect our brand image, decrease confidence in our products or have an adverse effect on our ability to retain existing and attract new customers, suppliers and distribution partners, any one of which could result in decreased revenue, having an adverse effect on our business, financial condition and operating results.
Components of our operating results
We recognize revenue on the sale of our Core Products and our Non-Core Products. With respect to our Core Products, CanGaroo and our cardiovascular products are sold to hospitals and other healthcare facilities primarily through our direct sales force, commercial partners or independent sales agents. Our orthopedic/spinal repair products are sold through commercial partners. Our soft tissue reconstruction product SimpliDerm is sold directly to hospitals and other healthcare facilities through independent sales agents. 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. We expect our expenses to continue to increase for the foreseeable future as we grow our sales and marketing organization, expand our product development and clinical activities and increase our administrative infrastructure. As a result, we will need to generate significant net sales in order to achieve profitability. Below is a breakdown of our main expense categories and the related expenses incurred in each category: 104 Table of Contents Costs of Goods Sold
Our cost of goods sold relates to raw materials purchased and the costs of processing and converting those raw materials, consisting primarily of salaries and benefits, supplies, quality control testing and manufacturing overhead incurred in our processing facilities at
Sales and marketing expenses
Sales and marketing expenses are primarily related to our direct sales force, consisting of salaries, commission compensation, fringe benefits, meals and other expenses. Auto and travel costs have also historically contributed to sales and marketing expenses, albeit to a lesser extent due to the COVID-19 pandemic. Outside of our direct sales force, we incur significant expenses relating to commissions to our CanGaroo commercial partners and independent sales agents. Additionally, this expense category includes distribution costs as well as market research, trade show attendance, advertising and public relations and customer service expenses. We expect sales and marketing expenses to grow commensurate with sales increases, and to an even larger degree in the near-term due to a continued focus on growing our direct sales force and increasing marketing activities to coincide with new product launches.
General and administrative expenses
General and administrative ("G&A") expenses consist of compensation, consulting, legal, human resources, information technology, accounting, insurance and general business expenses. Our G&A expenses have increased as a result of operating as a public company, especially as a result of hiring additional personnel and incurring greater director and officer insurance premiums, greater investor and public relations costs, and additional costs associated with accounting, legal, tax-related and other services associated with maintaining compliance with exchange listing and
Research and development costs
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 orthopedic/spinal repair market and activities associated with the development of a 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. 105 Table of Contents Results of Operations
Comparison of the years ended
Year Ended December 31, 2021 2020 Change 2020 / 2021 % of Net % of Net
(in thousands, except percentages) Amount Sales Amount
Sales $ % Net sales
$ 47,390100.0 % $ 42,682100.0 % $ 4,70811.0 % Cost of goods sold 28,368 59.9 % 22,121 51.8 % 6,247 28.2 % Gross profit 19,022 40.1 % 20,561 48.2 % (1,539) (7.5) % Sales and marketing 18,825 39.7 % 17,565 41.2 % 1,260 7.2 % General and administrative 13,963 29.5 % 10,641 24.9 % 3,322 31.2 % Research and development 9,266 19.6 % 5,954 13.9 % 3,312 55.6 % Total operating expenses 42,054 88.7 % 34,160 80.0 % 7,894 23.1 % Loss from operations (23,032) (48.6) % (13,599) (31.9) % (9,433) 69.4 % Interest expense 5,324 11.2 % 5,633 13.2 % (309) (5.5) % Other (income) expense, net (3,579) (7.6) % 2,567 6.0 % (6,146) NM Loss before provision of income taxes (24,777) (52.3) % (21,799) (51.1) % (2,978) 13.7 % Income tax expense 55 0.1 % 26 0.1 % 29 111.5 % Net loss (24,832) (52.4) % (21,825) (51.1) % (3,007) 13.8 % Accretion of Convertible Preferred Stock - - % 3,510 8.2 % (3,510) NM Net loss attributable to common stockholders $ (24,832)(52.4) % $ (25,335)(59.4) % $ 503 (2.0) % NM = not meaningful Net Sales Net sales increased $4.7 million, or 11.0%, to $47.4 millionin the year ended December 31, 2021compared to $42.7 millionin the year ended December 31, 2020. The increase in net sales was due to growth in our Core Products and Non-Core Products of $1.4 millionand $3.3 million, respectively. Net sales information for our Core Products and Non-Core Products is summarized as follows: Year Ended December 31, 2021 2020 % of Net % of Net Change 2020 / 2021 (in thousands, except percentages) Amount Sales Amount Sales $ % Products: Core Products $ 37,60379.3 % $ 36,21684.9 % $ 1,3873.8 % Non-Core Products 9,787 20.7 % 6,466 15.1 % 3,321 51.4 % Total Net Sales $ 47,390100.0 % $ 42,682100.0 % $ 4,70811.0 % Net sales generated by our Core Products grew $1.4 million, or 3.8%, to $37.6 millionin the year ended December 31, 2021compared to $36.2 millionin the year ended December 31, 2020. The Core Products net sales growth can be largely attributed to the volume growth of both our CanGaroo and SimpliDerm partially offset by a decline in our revenues from our bone repair products. A portion of the volume growth in CanGaroo and SimpliDerm was due to the impact of the of the COVID-19 pandemic, which negatively affected our sales principally during the second quarter of 2020, but a majority of the growth was due to increased demand in 2021 compared to 2020. The decline in net sales of our bone repair products can be attributed to the cessation of purchases by Medtronic of FiberCel following our recall of a single lot of FiberCel in June 2021. Sales of
FiberCel at Medtronic were
Net sales generated by our Non-Core Products increased
$3.3 million, or 51.4%, to $9.8 millionin the year ended December 31, 2021from $6.5 millionin the year ended December 31, 2020. The net sales increase was primarily due to revenues associated with new contracts signed in the latter half of 2020 and by one contract manufacturing customer building inventory for a new product launch, along with the decreased revenue impact of COVID-19 in the year ended December 31, 2021compared to such impact in the year ended December 31, 2020.
Cost of Goods Sold
Cost of goods sold increased
$6.2 million, or 28.2%, to $28.4 millionin the year ended December 31, 2021compared to $22.1 millionin the year ended December 31, 2020, and included, in each period, $3.4 millionof intangible asset amortization expenses. Gross margin was 40.1%, in the year ended December 31, 2021compared to 48.2% in the year ended December 31, 2020. Gross margin, excluding intangible asset amortization, was 47.3%, in the year ended December 31, 2021compared to 56.1% in the year ended December 31, 2020. The decrease in gross margin was primarily due to product mix as our Non-Core Product sales generally have lower margins than Core Products. Also contributing to the decreased gross margins in 2021 were lower yields in our orthopedic and spinal repair product lines related to heightened donor screening criteria ahead of the implementation of enhanced product testing, as well as write-downs of inventory in certain categories. Together the product yield and inventory writedowns negatively impacted gross margins in the year ended December 31, 2021by approximately 4%. We do not expect these costs to continue at similar levels going forward. Operating Expenses Sales and Marketing Sales and marketing expenses increased $1.2 million, or 7.2%, to $18.8 millionin the year ended December 31, 2021compared to $17.6 millionin the year ended December 31, 2020. The increase was primarily the result of higher stock-based compensation after our IPO in October 2020and increases in commissions paid to independent sales agents due to sales growth in our Core Products. As a percentage of sales, sales and marketing expenses declined to 39.7% in the year ended December 31, 2021from 41.2% in the year ended December 31, 2020primarily due to the growth in our "business to business" Non-Core Product revenues, as such revenues have limited associated selling costs.
General and administrative
G&A expenses increased
$3.4 million, or 31.2%, to $14.0 millionin the year ended December 31, 2021compared to $10.6 millionin the year ended December 31, 2020. The increase was primarily due to costs of being a public company, most notably increases in directors and officers insurance, legal fees and stock-based compensation. As a percentage of net sales, G&A expenses rose to 29.5% in the year ended December 31, 2021from 24.9% in the year ended December 31, 2020. Research and Development
R&D expenses increased
$3.3 million, or 55.6%, to $9.3 millionin the year ended December 31, 2021compared to $6.0 millionin the year ended December 31, 2020. We continue to focus our R&D efforts on the development of our pipeline products with the growth in R&D expenses in the year ended December 31, 2021largely attributable to the work performed on the development of our CanGaroo Envelope with antibiotics. In 2021, we completed both the product design and manufacturing validation for this next version of our CanGaroo Envelope.
Interest expense was approximately
$5.3 millionand $5.6 millionin the year ended December 31, 2021and 2020, respectively. The decrease was due to lower draws on our Revolving Credit Agreement during the year ended December 31, 2021and lower outstanding principal on our Term Loan Credit Agreement due to the commencement of principal payments in the third quarter of 2021. See "Credit Facilities" below for further discussion of these debt agreements and 107
Note 9 to the consolidated financial statements included elsewhere in this annual report for a description of our interest income obligation and related interest expense.
Other (income) Expenses, net
Other (income) expense, net was approximately
$3.6 millionof income in the year ended December 31, 2021. Such other income relates to the forgiveness of our promissory note with Silicon Valley Bankunder the Paycheck Protection Program of the CARES Act in the amount of approximately $3.0 millionand our receipt of $550,000in satisfaction of a 2018 settlement with KeraLink. For further discussion on these items, see Notes 8 and 17 to the consolidated financial statements included elsewhere in this Annual Report. Other (income) expense, net was an expense of approximately $2.6 millionin the year ended December 31, 2020and was primarily attributable to the loss on early extinguishment of debt of $2.3 million. See Note 12 to the consolidated financial statements included elsewhere in this Annual Report for further discussion.
Accretion of Series A Preferred Shares
Accretion of Series A Preferred Stock was
$3.5 millionin the year ended December 31, 2020. The Accretion of Series A Preferred Stock relates to $3.5 millionof deemed dividends related to the sale of the Convertible Preferred Stock in September 2020below its fair value. See Note 12 to the consolidated financial statements included elsewhere in this Annual Report for additional information.
Non-GAAP Financial Measures
This Annual Report presents our gross margin, excluding intangible asset amortization, for the years ended
December 31, 2021and 2020. 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. Gross margin, excluding intangible asset amortization, is a supplemental measure of our performance, is not defined by or presented in accordance with U.S.generally accepted accounting principles ("GAAP"), has limitations as an analytical tool and should not be considered in isolation or as an alternative to our GAAP gross margin, gross profit or any other financial performance measure presented in accordance with GAAP. We present gross margin, excluding intangible asset amortization, because we believe that it provides meaningful supplemental information regarding our operating performance by removing the impact of amortization expense, which is not indicative of our overall operating performance. 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. Although we use gross margin, excluding intangible asset amortization, as described above, this metric has limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. 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. 108 Table of Contents The following table presents a reconciliation of our gross margin, excluding intangible asset amortization, for the years ended December 31, 2021and 2020 to the most directly comparable GAAP financial measure, which is our GAAP gross margin (in thousands). Year Ended December 31, 2021 2020 Net sales $ 47,390 $ 42,682Cost of goods sold 28,368 22,121 Gross profit 19,022 20,561 Intangible asset amortization expense 3,396
Gross profit, excluding amortization of intangible assets
48.2% Gross margin, excluding amortization of intangible assets 47.3% 56.1%
Seasonality Historically, we have experienced seasonality in our first and fourth quarters, and we expect this trend to continue. We have experienced and may in the future experience higher sales in the fourth quarter as a result of hospitals in
the United Statesincreasing their purchases of our products to coincide with the end of their budget cycles. Satisfaction of patient deductibles throughout the course of the year also results in increased sales later in the year, once patients have paid their annual insurance deductibles in full, which reduces their out-of-pocket costs. Conversely, our first quarter generally has lower sales than the preceding fourth quarter as patient deductibles are re-established with the new year, which increases their out-of-pocket costs.
Cash and capital resources
December 31, 2021, we had cash and restricted cash of approximately $30.4 millionand availability under our Revolving Credit Facility of $2.1 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 and a private placement of our common stock. Our historical cash outflows have primarily been associated with acquisition and integration, manufacturing costs, general and marketing, research and development, clinical activity, purchase of property and equipment used in the production activities of our Richmond, Californiafacility 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 December 31, 2021, our accumulated deficit was $105.1 million. On October 13, 2020, in connection with our IPO, we issued and sold 2,941,176 shares of common stock, consisting of 2,205,882 shares of Class A common stock and 735,294 shares of Class B common stock, at a price to the public of $17.00per share, resulting in net proceeds to us of approximately $43.0 million, after deducting the underwriting discount of approximately $3.5 millionand offering expenses of approximately $3.5 million. Additionally, on December 8, 2021, we closed on a private investment in public equity (PIPE) financing, thereby receiving net proceeds of approximately $13.8 million, after deducting offering costs. The PIPE investors purchased an aggregate of 2,122,637 shares of the Company's Class A common stock and an aggregate of 1,179,244 shares of the Company's Class B common stock (which are convertible on a one-for-one basis into shares of Class A common stock), in each case, at a price of $4.24per share. 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, 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. Additionally, as discussed below under "--- Credit Facilities," in August 2021, we commenced the principal repayment of our Term Debt with such repayments totaling approximately $556,000per month through
July 2024. 109 Table of Contents In order to mitigate the current and potential future liquidity issues caused by the matters noted above, we may seek to raise capital through the issuance of common stock, either refinance or restructure our Term Debt and Revolver or pursue asset sale transactions. However, such transactions may not be successful and we may not be able to raise additional equity or refinance our Term Debt and Revolver on acceptable terms, or at all. We believe that the net proceeds from our IPO, together with our existing cash, availability under our Revolving Credit Facility and cash generated from expected future commercial sales as well as the December 2021PIPE financing will be sufficient to fund our operating expenses, debt service requirements and capital expenditure needs through at least twelve months from the issuance date of the consolidated financial statements included elsewhere in this Annual Report. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect.
Cash flow for the years ended
Year Ended December 31, 2021 2020 (in thousands) Net cash (used in) provided by: Operating activities
$ (15,446) $ (13,626)Investing activities (369) (640) Financing activities 6,711 51,208 Net decrease in cash $ (9,104) $ 36,942
Net cash used in operating activities for the year ended
December 31 2021was $15.4 millioncompared to $13.6 millionfor the year ended December 31, 2020. The year-over-year change was primarily due to a higher net loss (after adjustment for non-cash charges and gains) offset by improved working capital performance, particularly as it relates to our management of inventory levels and collection of receivables.
Net cash used in investing activities for the year ended
December 31, 2021was $0.4 millionand approximately $0.6 millionfor the year ended December 31, 2020. In both periods, the use of cash related to the purchase of property and equipment, the majority of which are used in the production activities of our Richmond, Californiafacility.
Net cash provided by financing activities
Net cash provided by financing activities for the year ended
December 31, 2021totaled $6.7 millioncompared to $51.2 millionof cash provided by financing activities for the year ended December 31, 2020. The year-over-year net decrease of $44.5 millionwas primarily due to capital raises in the 2020 period of $51.9 million(including $43.0 millionin net proceeds from the IPO) versus capital raises in the 2021 period of $14.0 million(including $13.8 millionin net proceeds from our PIPE financing). Also contributing to this decrease were net repayments of $1.8 millionon our Revolving Credit Facility in 2021 (versus net borrowings of $2.3 millionin 2020) and principal payments of $2.8 millionon our Term Loan Credit Agreement during the 2021 period.
July 15, 2019, Aziyo and Aziyo Med, LLC, which we refer to collectively as the Borrowers, entered into an amended and restated term loan credit agreement (the "Term Loan Credit Agreement"), with Midcap Financial Trust, as agent and lender, and the other lenders party thereto, which provided for the conversion of our existing term loans into borrowing under the Term Loan Credit Agreement (consisting of a $8.5 milliontranche (Term Loan Tranche 1), a $5.0 milliontranche (Term Loan Tranche 2) and a $3.0 milliontranche (Term Loan Tranche 3)), and established a new $3.5 milliontranche (Term Loan Tranche 4) and a new $5.0 milliontranche (Term Loan Tranche 5). Commitments in respect 110
of Term Loan Tranche 5 terminated without being borrowed on
June 30, 2020. We refer to Term Loan Tranche 1, Term Loan Tranche 2, Term Loan Tranche 3 and Term Loan Tranche 4 collectively as the Term Loan Facility.
December 31, 2021, we had $17.1 millionof indebtedness outstanding under our Term Loan Facility (net of $0.1 millionof unamortized deferred financing costs) and $4.8 millionoutstanding under our Revolving Credit Facility (with $2.1 millionof additional borrowings available thereunder).
Interest Rates and Fees
Borrowings under the Term Loan Facility accrue interest at a rate per year equal to the LIBOR Rate (as defined elsewhere in this Annual Report on Form 10-K) plus a margin of 7.25%. Borrowings under the Revolving Credit Facility bear interest at the per annum rate equal to the LIBOR Rate plus a margin of 4.95%. The LIBOR Rate is defined as the greater of 2.25% and the applicable London Interbank Offered Rate for
U.S.dollar deposits divided by 1.00 minus the maximum effective reserve percentage for Eurocurrency funding. Under the terms of the Revolving Credit Facility, we can borrow up to an amount (the "Borrowing Base"), equal to (1) 85.0% of the aggregate net amount at such time of the Eligible Accounts (as defined in the Revolving Credit Agreement), plus (2) 50% of the value of the Eligible Inventory (as defined in the Revolving Credit Agreement), valued at the lower of first-in-first-out cost or market cost, and after factoring in all rebates, discounts and other incentives or rewards associated with the purchase of the applicable Eligible Inventory (provided that the Borrowing Base will be automatically adjusted down, if necessary, such that the aggregate availability from Eligible Inventory shall never exceed the lesser of (x) an amount equal to 40.0% of the Borrowing Base and (y) $2,000,000).
In addition to paying interest on principal amounts outstanding under the Revolving Credit Facility, we are obligated to pay unused line fees to lenders under the Revolving Credit Facility in respect of unused commitments under thereof equal to 0.50% multiplied by the lesser of (1) the unused commitments and (2)
The Term Loan Credit Agreement requires the Borrowers to prepay amounts outstanding under the Term Loan Facility, subject to certain exceptions, with: (1) 100% of any net casualty proceeds in excess of
$250,000with respect to assets upon which the agent maintains a lien and (2) 100% of the net cash proceeds of non-ordinary course asset sales or sales pertaining to collateral upon which the Borrowing Base is calculated. In addition, the Borrowers are required to prepay all outstanding obligations under the Term Loan Facility upon the termination of all commitments under the Revolving Credit Facility and the repayment of the outstanding borrowings thereunder. No such mandatory prepayments were required during the years ended December 31, 2021and 2020. The Revolving Credit Agreement requires the Borrowers to prepay amounts outstanding under the Revolving Credit Facility (or provide cash collateral up to the amount of any outstanding letter of credit obligations) to the extent outstanding borrowings under the Revolving Credit Facility exceed the lesser of (1) $8,000,000and (2) the Borrowing Base.
The Borrowers may prepay the Term Loan Facility in whole but not in part at any time with at least 10 business days' prior written notice, provided, however, that such prepayment shall be accompanied by a portion of the Exit Fee (as defined below) equal to the amount prepaid divided by the then-outstanding principal amount of borrowings outstanding under the Term Loan Facility, and a prepayment fee which, based on the amendment to the Term Loan Credit Agreement executed in
January 2022, shall be equal to the amount prepaid multiplied by 3.0% until January 21, 2023and 2.0% 111
thereafter. The "Exit Fee" is defined as an amount equal to 6.50% multiplied by the aggregate principal amount of all borrowings advanced to the Borrowers under the Term Loan Facility. The Borrowers may prepay the Revolving Credit Facility in whole or in part at any time, provided, however, that any such partial prepayment shall be in an amount equal to
$100,000or a higher integral multiple of $25,000. Should the Revolving Credit Facility be terminated prior to its final maturity (see below), based on the amendment to the Revolving Credit Agreement executed in January 2022, the Borrowers must pay a fee equal to an amount determined by multiplying the amount of the Revolving Credit Facility so terminated by 3.0% until January 21, 2023and 2.0% thereafter.
Amortization and final maturity
The Borrowers are required to make interest-only payments prior to the principal amortization start date. The Term Loan Facility provided that if certain conditions were satisfied prior to
December 1, 2020(including our completion of a qualified initial public offering and no continuing default or event of default), the principal amortization start date may, upon our request, be extended to August 1, 2021(from the previous principal amortization start date of February 1, 2021). Based on the completion of our IPO, in January 2021, we exercised this interest-only period extension right and, as such, the principal payments in respect of borrowings under the Term Loan Facility commenced on August 1, 2021. Such principal payments shall be in an amount equal to the total principal amount of borrowings under the Term Loan Facility divided by 36, for a 36-month straight-line amortization of equal monthly principal payments. The remaining unpaid balance on the Term Loan Facility, together with all accrued and unpaid interest thereon and any remaining unpaid amount of the Exit Fee, is due and payable on July 15, 2024.
Borrowings outstanding under the Revolving Credit Facility are non-amortizing and are due and payable on
All obligations under the Term Loan Facility and the Revolving Credit Facility are, and any future guarantees of those obligations will be, secured by, among other things, and in each case subject to certain exceptions, a first priority lien on and security interest in, upon, and to all of each Borrower's assets, including all goods, equipment, inventory, contract rights or rights to payment of money, leases, license agreements, franchise agreements, general intangibles, commercial tort claims, documents, instruments (including any promissory notes), chattel paper (whether tangible or electronic), cash, deposit accounts, securities accounts, fixtures, letter of credit rights (whether or not the letter of credit is evidenced by a writing), securities, and all other investment property, supporting obligations, and financial assets, whether now owned or hereafter acquired, wherever located.
Undertakings and other matters
The Term Loan Credit Agreement and the Revolving Credit Agreement each contain a number of covenants that, among other things and subject to certain exceptions, restrict the ability of the Borrowers to:
? incur additional debt;
? contract certain privileges;
? pay dividends or make other distributions on holdings;
? enter into agreements restricting the ability of their subsidiaries to pay dividends;
? repay, redeem or refinance subordinated debt;
? consolidate, merge or sell or otherwise dispose of their assets;
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? make investments, loans, advances, guarantees and acquisitions;
? enter into transactions with affiliates;
? amend or modify their constitutive documents;
? amend or modify certain material agreements;
? modify the activities carried out by them and their subsidiaries; and
? enter into sale-leaseback transactions.
In addition, the Term Loan Credit Agreement and the Revolving Credit Agreement contain a financial covenant, which is tested on a monthly basis, and requires us to achieve a specified Minimum Net Product Revenue (as defined in the applicable credit agreement) for the preceding 12-month period. In
January 2022, the Term Loan Credit Agreement and Revolving Credit Agreement were amended and all future Minimum Net Product Revenue covenant amounts were reset.
The Term Credit Agreement and the Revolving Credit Agreement each contain events of default, including, most importantly, failure to timely pay interest or principal, insolvency or action by the FDA or any other material adverse event affecting Aziyo’s operations.
The Term Loan Credit Agreement and the Revolving Credit Agreement also contain certain customary representations and warranties and affirmative covenants, and certain reporting obligations. In addition, the lenders will be permitted to accelerate all outstanding borrowings and other obligations, terminate outstanding commitments and exercise other specified remedies upon the occurrence of certain events of default (subject to certain grace periods and exceptions), which include, among other things, payment defaults, breaches of representations and warranties, covenant defaults, certain cross-defaults and cross-accelerations to other indebtedness, certain events of bankruptcy and insolvency, certain judgments and changes of control.
supplier promissory note
During 2017, we restructured certain of our liabilities with a tissue supplier and entered into an unsecured promissory note. As of
December 31, 2021, the balance of this promissory note totaled $1.4 millionplus accrued interest. The note bears interest at 5% and is currently due in full; however, the notes are subordinated in payment to the Term Loan Facility and Revolving Credit Facility and in both 2021 and 2020, the Company's senior lender restricted payment of the amounts due. PPP Loan In May 2020, we entered into a promissory note with Silicon Valley Bankunder the Paycheck Protection Program of the CARES Act pursuant to which SVB agreed to make a loan to us in the amount of approximately $3.0 million. The PPP Loan bears interest at a rate of 1.0% per annum with monthly principal and interest payments beginning in March 2021and ending on the maturity date of May 7, 2022; however such repayment commencement was deferred by the U.S. Small Business Administrationwhile they evaluated our forgiveness application. In June 2021, we were notified by the U.S. Small Business Administrationthat the entire balance of our PPP Loan and all related accrued interest was forgiven. Such forgiveness resulted in a gain to us of approximately $3.0 millionwhich has been recorded as other income in the accompanying Consolidated Statements of Operations for the year ended December 31, 2021.
Bridge tickets 2020
April 2020, we entered into a bridge note purchase agreement pursuant to which we issued approximately $2.0 millionin aggregate principal amount of convertible promissory notes (the "2020 Bridge Notes"), to HighCape Partners QP, HighCape Partnersand Deerfield. The 2020 Bridge Notes had a maturity date of April 1, 2025and accrued interest at 113
a rate of 5.0% per year. The aggregate principal amount of, and accrued interest on, the 2020 Bridge Notes automatically converted into an aggregate of 2,039,427 shares of our Series A convertible preferred stock upon the closing of our Series A convertible preferred stock financing in
We expect to continue to incur significant operating expenses and losses for the foreseeable future as we develop our commercial organization and expand our product development, clinical and research activities. In addition, we expect to incur additional costs and expenses associated with operating as a public company.
December 31, 2021, we had $23.3 millionof indebtedness outstanding, consisting of $17.1 millionoutstanding under our Term Loan Facility (net of $0.1 millionof unamortized deferred financing costs), $4.8 millionoutstanding under our Revolving Credit Facility (with $2.1 millionof additional borrowings available thereunder), and a $1.4 millionpromissory note payable to one of our suppliers. In addition, as further described in Note 9 to the consolidated financial statements included elsewhere in this Annual 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 millionpayment will be due to Ligand if cumulative sales of these products exceed $100 millionand a second $5.0 millionwill be due if cumulative sales exceed $300 millionduring the ten-year term of the agreement which expires on May 31, 2027. We are currently forecasting that the initial $5.0 millionmilestone payment will become payable in mid-2023. Based on our current and planned business operations, we believe that the net proceeds from our IPO, together with our existing cash, availability under our Revolving Credit Facility and cash generated from expected future commercial sales as well as the December 2021PIPE financing will be sufficient to fund our operating expenses, debt service requirements and capital expenditure needs through at least twelve months from the issuance date of the consolidated financial statement included elsewhere in this Annual Report. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. If our available cash balances and cash flow from operations, if any, are insufficient to satisfy our liquidity requirements, we may seek to raise additional capital through equity offerings, debt financings, or asset sale transactions. We may also consider raising additional capital in the future to expand our business, pursue strategic investments or take advantage of financing opportunities. Our present and future funding requirements will depend on many factors, including, among other things:
? continued acceptance of our products by patients, physicians and the market;
? the scope, rate of progress and cost of our preclinical projects and
? the cost of our research and development activities and the cost and schedule of
commercialize new products or technologies;
? the cost and timing of expanding our sales and marketing capabilities;
? the costs of filing and pursuing patent and maintenance applications,
defend and enforce our patent or other intellectual property rights;
the cost of defending, in litigation or otherwise, any claim that we breach,
? misappropriate or otherwise violate third party patents or other intellectual property rights
defense costs or damages to be paid (to the extent beyond the
? applicable insurance cover), for example, in the context of claims
involving the recall of FiberCel;
? the cost and timing of additional regulatory approvals;
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? the costs associated with any product recalls that may occur;
? the effect of competing technological and business developments;
? the expenses we incur in the manufacture and sale of our products;
the extent to which we acquire or invest in products, technologies and
? businesses, although we currently have no commitments or agreements relating to
any of these types of transactions;
? operating costs as a public company;
? unforeseen general, legal and administrative expenses; and
? the effects on any of the above of the current 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. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest may be materially diluted, and the terms of such securities could include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing and preferred equity financing, if available, may involve agreements that include restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures, creating liens, redeeming shares of our common stock and/or declaring dividends. If we raise funds through collaborations, licensing agreements or other strategic alliances, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates, or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings or other arrangements when needed, we may be required to delay the development or commercialization of our products, license to third parties the rights to commercialize products or technologies that we would otherwise seek to commercialize and reduce marketing, customer support or other resources devoted to our products or cease operations. See Part I, Item 1A. "Risk Factors - Risks Related to our Business - Our future capital needs are uncertain and we may need to raise funds in the future, and such funds may not be available on acceptable terms or at all."
Off-balance sheet arrangements
Critical Accounting Policies and Significant Judgments and Estimates
The preparation of financial statements in conformity with
U.S.GAAP requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the amounts of revenues and expenses reported during the period. On an ongoing basis, management evaluates these estimates and judgments, including those related to revenue, inventory valuation, valuation of intangibles, revenue interest obligation and stock-based compensation. Actual results may differ from those estimates. We have identified the following critical accounting policies:
We enter into contracts to sell and distribute products to healthcare providers or commercial partners, or are produced and sold under contract manufacturing arrangements with corporate customers which are billed under ship and bill contract terms. Revenue is recognized when we have met our performance obligations pursuant to our contracts with our customers in an amount that we expect to be entitled to in exchange for the transfer of control of the products and services to our customers. For all net sales, we have no further performance obligations and revenue is recognized when 115
transfers of control that occur when: (i) the Product is shipped by common carrier; or (ii) the product is delivered to the customer or distributor in accordance with the terms of the agreement.
A portion of our product revenue is generated from consigned inventory maintained at hospitals, and from inventory physically held by our direct sales representatives. For these types of products sales, we retain control until the product has been used or implanted, at which time revenue is recognized. We have elected to account for shipping and handling activities as a fulfillment cost rather than a separate performance obligation. Amounts billed to customers for shipping and handling are included as part of the transaction price and recognized as revenue when control of the underlying products is transferred to the customer. The related shipping and freight charges incurred by us are included in sales and marketing costs. Contracts with customers state the final terms of the sale, including the description, quantity, and price of each implant distributed. The payment terms and conditions in our contracts vary; however, as a common business practice, payment terms are typically due in full within 30 to 60 days of delivery. We, at times, extend volume discounts to customers. We permit returns of our products in accordance with the terms of contractual agreements with customers.
Inventories, consisting of purchased materials, direct labor and manufacturing overhead, are stated at the lower of cost or net realizable value, with cost determined using the average cost method. Inventory write-downs for unprocessed and certain processed donor tissue are recorded based on the estimated amount of inventory that will not pass the quality control process based on historical data. At each balance sheet date, we also evaluate inventories for excess quantities, obsolescence or shelf life expiration. This evaluation includes analysis of our current and future strategic plans, historical sales levels by product, projections of future demand, the risk of technological or competitive obsolescence for products, general market conditions and a review of the shelf life expiration dates for products. To the extent that management determines there is excess or obsolete inventory or quantities with a shelf life that is too near its expiration for us to reasonably expect that we can sell those products prior to their expiration, we adjust the carrying value of the inventory to its estimated net realizable value. Due to the judgmental nature of inventory valuation, we may from time to time be required to adjust our assumptions as processes change and as we gain better information. Although we continue to refine the assumptions, described above, on which we base our estimates, we cannot be sure that our estimates are accurate indicators of future events. Accordingly, future adjustments may result from refining these estimates. Such adjustments may be significant.
Valuation of purchased intangible assets
Purchased intangible assets with finite lives are carried at acquired fair value, less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets. We periodically evaluate the period of amortization for purchased intangible assets to determine whether current circumstances warrant revised estimates of useful lives. We review our purchased intangible assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount to the net undiscounted cash flows expected to be generated by the asset. Impairment exists when the carrying value of our asset exceeds the related estimated undiscounted future cash flows expected to be derived from the asset. If impairment exists, the carrying value of that asset is adjusted to its fair value. A discounted cash flow analysis is used to estimate an asset's fair value, using assumptions that market participants would apply. An impairment loss would be recorded for the excess of net carrying value over the fair value of the asset impaired. The results of impairment tests are subject to management's estimates and assumptions of projected cash flows and operating results. Changes in assumptions or market conditions could result in a change in estimated future cash flows and could result in a lower fair value and therefore an impairment, which could impact reported results. 116 Table of Contents Revenue Interest Obligation In 2017, we completed an asset purchase agreement with CorMatrix and acquired all of the CorMatrix commercial assets and related intellectual property. As part of this acquisition, we entered into a royalty agreement with Ligand pursuant to which we assumed the Revenue Interest Obligation, to Ligand, with an estimated present value on the acquisition date of
$27.7 million. The terms of the Revenue Interest Obligation require us to pay Ligand 5% of future sales of the products we acquired in the CorMatrix acquisition, subject to certain annual minimum payments. Furthermore, a $5.0 millionpayment will be due to Ligand if cumulative sales of the acquired products exceed $100.0 millionand a second $5.0 millionwill be due if cumulative sales exceed $300.0 millionduring the ten-year term of the agreement which expires on May 31, 2027. We have estimated the fair value of the Revenue Interest Obligation, including contingent milestone payments and estimated sales-based payments, based on assumptions related to future sales of the acquired products. At each reporting period, the value of the Revenue Interest Obligation is re-measured based on current estimates of the net present value of future payments, with changes to be recorded in the Consolidated Statements of Operations. There was no change to estimated future payments during the years ended December 31, 2021and 2020, and thus, no re-measurement gain or loss was recognized. The estimation of future sales and the possible attainment of sales milestones is subject to significant judgment. Different judgments would yield different valuations of the Revenue Interest Obligation and these differences could be significant.
Compensation costs associated with stock option awards and other forms of equity compensation are measured at the grant-date fair value of the awards and recognized over the requisite vesting period of the awards on a straight-line basis. Our policy is to grant stock options at an exercise price equal to 100.0% of the market value of a share of common stock at closing on the date of the grant. Our stock options generally have seven to ten year contractual terms and vest over a four-year period from the date of grant. We use the Black-Scholes model to value our stock option grants. The fair value of stock options is determined on the grant date using assumptions for the estimated fair value of the underlying common stock, expected term, expected volatility, dividend yield and the risk-free interest rate. Before the completion of our IPO, our board of directors determined the fair value of common stock considering the state of the business, input from management, third party valuations and other considerations. We use the simplified method for estimating the expected term used to determine the fair value of options. Until our IPO in
October 2020, there had been no public market for our common stock and thus, we lacked company-specific historical and implied volatility information. As a result, we estimate the expected volatility primarily based on the historical volatility of comparable companies in the industry whose share prices are publicly available and expect to continue to do so until such time as we have adequate historical data regarding the volatility of our own traded share price. We use a zero-dividend yield assumption as we have not paid dividends since inception nor do we anticipate paying dividends in the future. The risk-free interest rate approximates recent U.S. Treasurynote auction results with a similar life to that of the option. The period expense is then recognized on a straight-line basis over the requisite service period for the entire award.
Recently issued accounting pronouncements
See Note 3, "Recently Issued Accounting Standards," to our audited consolidated financial statements included elsewhere in this Annual Report for information regarding recently issued accounting pronouncements.
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