Quarterly Report for Quarter Ending September 30, 2025 (Form 10-Q)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management's Discussion and Analysis provides material historical and prospective disclosures intended to enable investors and other users to assess our financial condition and results of operations. The following discussion should be read in conjunction with our condensed consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and accompanying notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2024. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Some of the numbers included herein have been rounded for the convenience of presentation. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed above in "Cautionary Statement Regarding Forward-Looking Statements" and elsewhere in this Form 10-Q.

Business Overview

We develop, manufacture and market regenerative medicine products and medical devices for domestic and international markets. Our products serve the specialized needs of orthopedic and neurological surgeons, including orthobiologics for the promotion of bone healing, implants and instrumentation for the treatment of spinal disease. We promote our products in the United States through independent distributors and stocking agents, supported by direct employees.

We have an extensive sales channel of independent commissioned agents and stocking distributors in the United States representing some or all of our products. We also maintain a national accounts program to enable our agents to gain access to integrated delivery network hospitals ("IDNs") and through group purchasing organizations ("GPOs"). We have biologics contracts with major GPOs, as well as extensive access to IDNs across the United States for both biologics and spine hardware systems. While our focus is the United States market, we promote and sell our products internationally through direct sales representatives and stocking distribution partners in Europe, Canada, Mexico, South America, Australia, and certain Pacific region countries. We have recently made and intend to continue to make measured investments in the expansion of our commercial team to support our new products and maximize the reach of our broad portfolio of orthobiologics solutions.

We have focused and intend to continue to focus primarily on four key growth initiatives: (1) introduce new products, including our recently launched CollagenX™, a bovine collagen particulate product for surgical wound closure; OsteoFactor Pro^TM, allogenic growth factor solution and Trivium™, a next-generation demineralized bone matrix, in addition to our introductions last year: Cortera^®Posterior Fixation System, viable bone matrix, OsteoVive^®Plus, and amniotic membrane allografts, SimpliGraft™and SimpliMax™;(2) expand our distribution network; (3) penetrate adjacent markets; and (4) leverage our growth platform with technology and strategic acquisitions. While the intent of these four key growth initiatives is to increase our future revenues, no assurance can be provided that we will be successful in implementing these growth initiatives or increasing our future revenues.

Since one of our key growth initiatives is to leverage our growth platform with technology and strategic acquisitions and explore other strategic transactions with respect to our products and our company, including licenses, business collaborations and other business combinations or transactions with other companies, we, as a matter of course, often engage in discussions with third parties regarding such matters.

During the first quarter of 2025, we entered into a manufacture and license agreement with a distributor pursuant to which we agreed to manufacture and supply to the distributor our SimpliGraft® product under the distributor's name and brand in exchange for a one-time $1.5 million cash payment and minimum SimpliGraft® product purchase obligations of the distributor. During the fourth quarter of 2024, we entered into a license agreement with a distributor granting an exclusive right and license to manufacture and commercialize in the United States our SimpliMax™ product in exchange for a one-time $1.5 million cash payment and minimum quarterly royalty payments based on the volume of product sold by the distributor. The Centers for Medicare and Medicaid Services ("CMS") issued a Local Coverage Determination implementing significant changes to reimbursement for cellular and tissue-based products, which would impact our SimpliMax™ and SimpliGraft® products and constitute a CMS Policy Change under these license agreements, which changes were initially intended to become effective in February 2025 but were delayed to April 2025 and then again delayed to January 1, 2026. On July 14 and 15, 2025, CMS released the CY 2026 Physician Fee Schedule ("PFS") proposal and the CY 2026 Hospital Outpatient Prospective Payment System ("OPPS") proposal. Under these proposed rules, which are scheduled for implementation on January 1, 2026, CMS is calling for a consistent payment approach for skin substitutes across the private office and hospital outpatient departments settings with a fixed price of $125.38 per square centimeter. The comment period for the PFS and OPPS proposals concluded in mid-September 2025, and it is anticipated that CMS will publish its final rules for reimbursement in these care settings in November 2025. Together with the Local Coverage Determinations and the recently announced Wasteful and Inappropriate Service Reduction model, there are several significant potential changes to reimbursement of skin substitutes that could begin impacting the industry and the Company when the final rules become effective on January 1, 2026. Because of these regulatory changes, it is possible that these license agreements may be terminated, adversely affecting our future license revenue.

With respect to recently enacted or to be effective tariffs announced by the current U.S. Presidential administration, we do not anticipate the effect on our business will be material based on tariffs currently in place.

Pending Sale of Coflex/CoFix Assets and International Hardware Business

As previously disclosed, on July 7, 2025, we entered into an Asset Purchase Agreement (the "Coflex/CoFix Agreement") with Companion Spine, LLC, a company to whom we have sold certain of our Coflex and CoFix products from time to time in the ordinary course of business ("Companion"), or its affiliate designee (together with Companion, the "Buyer"). Pursuant to and subject to the terms and conditions of the Coflex/CoFix Agreement, we agreed to sell and assign to the Buyer certain assets relating to our Coflex and CoFix products in the United States (the "Coflex/CoFix Business" and such assets, the "Coflex/CoFix Assets" ) and the Buyer agreed to assume certain liabilities in connection therewith (such transaction, the "Coflex/CoFix Transaction") for a total purchase price of $17.5 million, subject to a closing inventory valuation adjustment set forth in the Coflex/CoFix Agreement (the "Coflex/CoFix Purchase Price"). Concurrently with the execution and delivery of the Coflex/CoFix Agreement, $2.5 million of the Coflex/CoFix Purchase Price was paid to us as a cash deposit that is non-refundable, except in the event the Coflex/CoFix Agreement is terminated by the Buyer due to certain breaches by us under the Coflex/CoFix Agreement. Completion of the Coflex/CoFix Transaction is subject to the Buyer obtaining financing. Under the Coflex/CoFix Agreement, the Buyer had the ability to pay us up to two additional $2.5 million cash deposits in the event the Buyer required additional time to obtain financing. On each of September 4, 2025 and November 3, 2025, pursuant to the terms of the Coflex/CoFix Agreement, the Buyer paid us an additional $2.5 million cash deposit to provide additional time for the Buyer to obtain financing. If the Buyer obtains financing and the closing of the Coflex/CoFix Transaction occurs, the remaining balance of the Coflex/CoFix Purchase Price will be required to be paid by the Seller to us at the closing and will consist of a cash payment of $1.8 million and a $8.2 million unsecured promissory note to be issued by the Buyer to us. If issued, the promissory note will mature on December 31, 2025.

Also, on July 7, 2025, we simultaneously entered into an Equity Purchase Agreement (the "Paradigm Agreement" and together with the Coflex/CoFix Agreement, the "Agreements"), with Companion, pursuant to which and subject to the terms and conditions thereof, we agreed to sell to Companion all of our shares of equity securities of Paradigm, which constitute 100% of the issued and outstanding shares of equity securities of Paradigm Spine GmbH, a wholly owned subsidiary engaged in the operation of our hardware business outside of the United States ("Paradigm" and such transaction the "Paradigm Transaction" and together with the Coflex/CoFix Transaction, the "Transactions") for a total purchase price of $1.7 million, subject to certain cash, indebtedness and net working capital adjustments set forth in the Paradigm Agreement (the "Paradigm Purchase Price"). As with the Coflex/CoFix Transaction, completion of the Paradigm Transaction is subject to Companion obtaining financing.

The completion of the Transactions is expected to occur in the fourth quarter of 2025, although no assurance can be provided that the Seller will obtain financing to fund the Transactions, that the closings will not be delayed or that the closings will occur. The closing of each of the Transactions is contingent on the other closing at the same time. The Agreements contain certain termination rights for the respective parties, including the right to terminate the Coflex/CoFix Agreement and Paradigm Agreement if the Coflex/CoFix Transaction or Paradigm Transaction, respectively, is not consummated by December 31, 2025. If completed, the Transactions will significantly reduce our future revenues.

The Coflex/CoFix Agreement and the Paradigm Agreement contain customary representations, warranties and covenants of the parties, and the completion of each of the Transactions is subject to a number of customary conditions set forth in the Agreements, which, among others, include the performance by each party of its obligations under the respective Agreement and the accuracy of the representations in each respective Agreement. Subject to certain limitations, the respective parties to the Agreements have agreed to indemnify the other party for certain matters, including breaches of representations, warranties and covenants, subject in certain cases to a $250,000 deductible and $2.0 million cap.

In addition, on July 7, 2025, we entered into a Limited Consent and Amendment No. 3 to Amended and Restated Credit, Security and Guaranty Agreement (Term Loan) (the "Term Loan Limited Consent") with MidCap Financial Trust and a Limited Consent and Amendment No. 3 to Amended and Restated Credit, Security and Guaranty Agreement (Revolving Loan) (the "Revolving Loan Limited Consent" and together with the Term Loan Limited Consent, the "Limited Consent Agreements") with MidCap Funding IV Trust (collectively, with MidCap Financial Trust, "MidCap"). Under the Limited Consent Agreements, MidCap agreed, subject to the terms and conditions set forth in the Limited Consent Agreements, to, among other things, consent to us entering into the Coflex/CoFix Agreement and Paradigm Agreement and the consummation of the Transactions in accordance with the terms and subject to the conditions set forth therein, including our prepayment in accordance with the Term Loan Credit Agreement of $9.6 million to MidCap from the proceeds of the transactions contemplated by the Coflex/CoFix Agreement and Paradigm Agreement, $7.5 million of which has been prepaid as of the filing of this report from the $7.5 million in non-refundable deposits we have received from the Seller.

Results of Operations

Comparison of Three and Nine Months Ended September 30, 2025 and September 30, 2024

Revenue

Total revenue for the three and nine months ended September 30, 2025 was $33.3 million and $101.6 million, respectively, which represents an increase of 19% and 18%, respectively, compared to $27.9 million and $85.8 million for the three and nine months ended September 30, 2024, respectively. These increases are attributed primarily to $5.5 million and $14.1 million of licensing revenue recognized during the three and nine months ended September 30, 2025, respectively, and an increase in orthobiologics sales during the current year periods. These increases were partially offset by decreased hardware revenue in the current year periods.

Cost of Sales

Cost of sales consists primarily of manufacturing cost, product purchase costs, and depreciation of surgical instruments. Cost of sales also includes reserves for estimated excess inventory, inventory on consignment that may be missing and not returned, and reserves for estimated missing and damaged consigned surgical instruments. Cost of sales decreased by $0.4 million to $11.3 million for the three months ended September 30, 2025 from $11.6 million for the three months ended September 30, 2024. Cost of sales increased by $1.5 million to $35.1 million for the nine months ended September 30, 2025 from $33.6 million for the nine months ended September 30, 2024. The decrease associated with the three-month comparison was due primarily to reduced product costs resulting from the transition to internal production in the current year period compared to the prior year period. The increase associated with the nine-month comparison was primarily due to greater revenue in the current year period compared to the prior year period, as described above.

Gross Profit

Gross profit as a percentage of revenue increased to 66.1% for the three months ended September 30, 2025 compared to 58.4% for the same period in 2024 and increased to 65.5% for the nine months ended September 30, 2025 compared to 60.9% for the same period in 2024. Of the increase for the three-month comparison, 860 basis points were due to sales mix and greater scale, partially offset by a decrease of 300 basis points due to increased charges for excess and obsolete inventory. Of the increase for the nine-month comparison, 530 basis points were due to sales mix and greater scale, partially offset by a decrease of 180 basis points due to increased charges for excess and obsolete inventory.

General and Administrative

General and administrative expenses consist primarily of personnel costs for corporate employees, cash-based and stock-based compensation related costs, amortization, and corporate expenses for legal, accounting and professional fees, as well as occupancy costs. General and administrative expenses decreased 6%, or $0.4 million, to $7.1 million for the three months ended September 30, 2025, compared to $7.5 million for the same period in 2024. General and administrative expenses decreased 4%, or $0.9 million, to $22.1 million for the nine months ended September 30, 2025, compared to $23.0 million for the same period in 2024. The decrease for the three-month comparison is primarily attributable to $0.5 million of reduced stock-based compensation expense and $0.5 million of reduced retention and severance expense, partially offset by additional expense of $0.5 million related to various compensation plans. The decrease for the nine-month comparison is primarily attributable to $1.1 million of reduced stock-based compensation expense and $0.5 million of reduced severance expense, partially offset by additional expense of $0.8 million related to various compensation plans and $0.5 million of additional legal fees associated primarily with the pending Transactions with Companion.

Sales and Marketing

Sales and marketing expenses consist primarily of sales commissions, personnel costs for sales and marketing employees, costs for trade shows, sales conventions and meetings, travel expenses, advertising, and other sales and marketing related costs. Sales and marketing decreased 1%, or $0.1 million, to $11.7 million for the three months ended September 30, 2025, compared to $11.9 million for the same period in 2024. Sales and marketing expenses decreased 8%, or $3.0 million, to $34.6 million for the nine months ended September 30, 2025, compared to $37.5 million for the same period in 2024. The decrease for the three-month comparison is primarily due to reduced commission expense of $0.7 million resulting from revenue mix, partially offset by $1.0 million of additional consulting fees during the current year period. The decrease for the nine-month comparison is primarily due to reduced commission expense of $3.0 million resulting from revenue mix and $1.6 million of reduced compensation expense related to headcount, partially offset by $2.3 million of additional consulting fees.

Research and Development

Research and development expenses consist primarily of internal costs for the development of new technologies. Research and development expenses were $0.6 million for the three months ended September 30, 2025, compared to $0.7 million for the same period in 2024. Research and development expenses were $1.6 million for the nine months ended September 30, 2025, compared to $1.9 million for the same period in 2024.

Interest Expense

Interest expense consists of interest incurred from our debt instruments and finance leases. Interest expense was $0.9 million and $3.0 million for the three and nine months ended September 30, 2025, respectively, compared to $1.2 million and $3.0 million for the three and nine months ended September 30, 2024.

Provision for Income Taxes Current and Deferred

The increase in income tax expense for the three and nine months ended September 30, 2025 compared to the three and nine months ended September 30, 2024 was primarily due to an increase in cash state taxes in 2025.

Liquidity and Capital Resources

Working Capital

Since our inception, we have financed our operations through primarily operating cash flows, private placements of equity securities and convertible debt, debt facilities, common stock rights offerings, and other debt transactions. The following table summarizes our working capital as of September 30, 2025 and December 31, 2024 (in thousands):

		September 30, 2025				December 31, 2024
Cash and cash equivalents		$	10,641			$	6,221
Accounts receivable, net			25,517				20,660
Inventories			40,714				38,634
Total current assets			78,330				67,116
Accounts payable			6,856				7,918
Accrued liabilities			11,535				7,771
Line of credit			11,308				12,120
Advances from pending sale of Coflex/CoFix assets and international hardware business			5,000				-
Total current liabilities			33,503				28,581
Net working capital			42,827				38,535

Cash Flows

Net cash provided by operating activities for the first nine months of 2025 was $7.2 million compared to net cash used in operating activities of $12.6 million for the first nine months of 2024. This change relates primarily to net income for the first nine months of 2025 compared to a net loss in the comparable prior year period.

Net cash provided by investing activities for the first nine months of 2025 was $3.2 million compared to net cash used in investing activities of $3.2 million for the first nine months of 2024. This change relates primarily to $5.0 million advances from pending sale of Coflex/CoFix assets and international hardware business in the current year period, partially offset by decreased purchases of property and equipment in the current year period.

Net cash used in financing activities for the first nine months of 2025 was $6.0 million compared to net cash provided by financing activities of $16.9 million for the first nine months of 2024. This change relates primarily to $9.1 million of reduced revolver borrowings, net of repayments, during the current year period compared to the prior year period, $5.0 million additional borrowings during the prior year period, $5.0 million payment on long term debt related to the advances from pending sale of Coflex/CoFix assets and international hardware business in the current year period and an increase of $4.5 million in proceeds from private placements during the prior year period.

Term Loan and Revolving Credit Facilities

The Company, as guarantor, and certain of our subsidiaries, as borrowers (collectively, the "Borrowers"), are parties to a term loan credit agreement (the "Term Credit Agreement") and revolving loan credit agreement (the "Revolving Credit Agreement" and together with the Term Loan Credit Agreement, the "Loan Agreements") with MidCap Financial Trust and MidCap Funding IV Trust, each in its respective capacity as agent, and lenders from time to time party thereto. As of September 30, 2025, $17.0 million was outstanding under the term loan facility under the Term Credit Agreement (the "Term Facility"), reduced from $22.0 million as of June 30, 2025 and December 31, 2204. This reduction was due to prepayments of $5.0 million from non-refundable deposits paid to us by Companion. On November 3, 2025, the outstanding term loan under the Term Facility was further reduced with another prepayment as a result of another $2.5 million non-refundable deposit paid to us by Companion. See Note 2, "Pending Sale of Coflex/CoFix Assets and International Hardware Business" to our condensed consolidated financial statements.

The Revolving Credit Agreement provides for a secured revolving credit facility (the "Revolving Facility," and, together with the secured term credit facility under the Term Credit Agreement, the "Facilities") under which the Borrowers may borrow up to $17.0 million at any one time, the availability of which is determined based on a borrowing base equal to percentages of certain accounts receivable and inventory of the Borrowers in accordance with a formula set forth in the Revolving Credit Agreement. All borrowings under the Revolving Facility are subject to the satisfaction of customary conditions, including the absence of default, the accuracy of representations and warranties in all material respects, and the delivery of an updated borrowing base certificate.

The Facilities have a maturity date of March 1, 2029. Each of the Borrowers, and the Company, as guarantor, are jointly and severally liable for all of the obligations under the Facilities on the terms set forth in the Credit Agreements. The Borrowers' obligations, and the Company's obligations as a guarantor, under the Credit Agreements are secured by first-priority liens on substantially all of their assets, including, without limitation, all inventory, equipment, accounts, intellectual property and other assets of the Company and the Borrowers. As of September 30, 2025, the Company had $11.3 million outstanding and $5.7 million of availability under the Revolving Credit Facility.

The loans and other obligations pursuant to the Credit Agreements bear interest at a per annum rate equal to the sum of the SOFR Interest Rate, as such term is defined in the Credit Agreements, plus the applicable margin of 6.50% in the case of the Term Credit Agreement, and an applicable margin of 4.50% in the case of the Revolving Credit Agreement, subject in each case to a floor of 2.50%. As of September 30, 2025, the effective rate of the Term Credit Agreement, inclusive of authorization of debt issuance costs and accretion of the final payment, was 13.18%, and the effective rate of the Revolving Credit Agreement was 8.89%.

The Credit Agreements contain affirmative and negative covenants customarily applicable to senior secured credit facilities, including covenants that, among other things, limit or restrict the ability of the Borrowers, subject to negotiated exceptions, to incur additional indebtedness and additional liens on their assets, engage in mergers or acquisitions or dispose of assets, pay dividends or make other distributions, voluntarily prepay other indebtedness, enter into transactions with affiliated persons, make investments, undergo a change in control and change the nature of their businesses. In addition, the Credit Agreements require the Borrowers and the Company to maintain net product revenue at or above minimum levels and to maintain a certain minimum liquidity level, in each case as specified in the Credit Agreements. As of September 30, 2025, we were in compliance with all covenants under the Credit Agreements.

Cash Requirements

We believe that our $10.6 million of cash and cash equivalents as of September 30, 2025, together with our anticipated operating cash flows and amounts available under the Facilities, will be sufficient to meet our anticipated cash requirements through at least November 2026. However, we may require or seek additional capital to fund our future operations and business strategy prior to November 2026. Accordingly, there is no assurance that we will not need or seek additional financing prior to such time.

We may elect to raise additional financing even before we need it if market conditions for raising additional capital are favorable. We may seek to raise additional financing through various sources, such as equity and debt financings, debt restructurings or refinancings, or through strategic transactions, dispositions, collaborations and/or license agreements. We can give no assurances that we will be able to secure additional sources of funds to support our operations, or if such funds are available to us, that such additional financing will be sufficient to meet our needs or on terms acceptable to us. This is particularly true if economic and market conditions deteriorate or our business, financial performance or prospects deteriorate.

To the extent that we raise additional capital through the sale of equity or convertible debt securities or the restructuring or refinancing of our debt, the interests of our current stockholders may be diluted, and the terms may include discounted equity purchase prices, warrant coverage, liquidation or other preferences or rights that would adversely affect the rights of our current stockholders. If we issue common stock, we may do so at purchase prices that represent a discount to our trading price and/or we may issue warrants to the purchasers, which could further dilute our current stockholders. If we issue preferred stock, it could adversely affect the rights of our stockholders or reduce the value of our common stock. In particular, specific rights or preferences granted to future holders of preferred stock may include voting rights, preferences as to dividends and liquidation, conversion and redemption rights, sinking fund provisions, and restrictions on our ability to merge with or sell our assets to a third party. Additional debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Prior to raising additional equity or debt financing, we may be required to obtain the consent of MidCap Financial Trust and MidCap Funding IV Trust under our Credit Agreements, which could limit our ability to raise additional financing and the terms thereof.

Critical Accounting Estimates

Management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. GAAP. There have been no changes in our critical accounting estimates for the nine months ended September 30, 2025 as compared to the critical accounting estimates described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2024.