You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes appearing elsewhere in this Annual Report. This discussion and analysis contain forward-looking statements based upon current beliefs, plans, expectations, intentions and projections that involve risks, uncertainties and assumptions, such as statements regarding our plans, objectives, expectations, intentions and projections. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under "Risk Factors" and elsewhere in this Annual Report.
Overview
We are an advanced materials company that develops and commercializes advanced
ceramics for biomedical, technical, and antipathogenic applications. The core
strength of
Biomedical Applications: Since our inception, we have been focused on medical
grade silicon nitride.
We believe that silicon nitride has a superb combination of properties that make it suited for long-term human implantation. Other biomaterials are based on bone grafts, metal alloys, and polymers- all of which have well-known practical limitations and disadvantages. In contrast, silicon nitride has a legacy of success in the most demanding and extreme industrial environments. As a human implant material, silicon nitride offers bone ingrowth, resistance to bacterial and viral infection, ease of diagnostic imaging, resistance to corrosion, and superior strength and fracture resistance, among other advantages, all of which claims are validated in our large and growing inventory of peer-reviewed, published literature reports. We believe that our versatile silicon nitride manufacturing expertise positions us favorably to introduce new and innovative devices in the medical and non-medical fields.
In
Technical Applications: It is our belief that our silicon nitride has the best combination of mechanical, thermal, and electrical properties of any technical ceramic material. It is a high-performance technical ceramic with high strength, toughness, and hardness, and is extremely resistant to thermal shock and impact. It is also an electrically insulating ceramic material. Typically, it is used in applications where high load-bearing capacity, thermal stability, and wear resistance are required. We have obtained AS9100D certification and ITAR registration to facilitate entry into the aerospace portion of this market.
We recently entered the ceramic armor market through the purchase of assets from
TA&T's primary area of expertise is material processing and fabrication know-how for a broad spectrum of monolithic ceramic, ceramic composite, and coating materials. Primary technologies include Additive Manufacturing (3D Printing) of ceramics and metals, low-cost fabrication of fiber reinforced ceramic matrix composites (CMCs) and refractory chemical vapor deposited (CVD) coatings, transparent ceramics for ballistic armor and optical applications, and magnetron sputtered (PVD) coatings for lubrication, wear resistance and environmental barrier coatings for CMCs. TA&T also provides a host of services that include 3D printing, PVD-CVD coatings, material processing-CMCs, CIP, PS, HP, HIP, and material characterization for powders and finished parts-TGA/DSC, PSD. SA, Dilatometry, UV-VIS and FTIR transmission, haze and clarity.
Antipathogenic Applications: Today, there is a global need to improve protection
against pathogens in everyday life.
We presently manufacture advanced ceramic powders and components in our
manufacturing facilities based in
Components of our Results of Operations
We manage our business within one reportable segment, which is consistent with how our management reviews our business, makes investment and resource allocation decisions and assesses operating performance.
Revenue
The majority of our product revenue is derived from the manufacture and sale of
spinal fusion products used in the treatment of spine disorders to CTL, with
whom we entered into a 10-year exclusive sales agreement in
We believe our product revenue will increase as we secure opportunities to manufacture third party products with silicon nitride, launch and generate revenue from our ceramic armor products, and as we continue to introduce new products into the market.
We derive grant and contract revenue from awards provided by governmental agencies.
Cost of Revenue
The expenses that are included in cost of revenue include all in-house manufacturing costs for the products we manufacture.
42 Gross Profit
Our gross profit measures our product revenue relative to our cost of revenue. We expect our gross profit percentage to decrease as we expand the penetration of our silicon nitride technology platform through OEM and private label partnerships, which offer additional avenues for the adoption of silicon nitride. Prior to the sale of our retail spine implant business, our revenues and gross profits were based on our retail sales. With the focus on OEM and private label partnerships, the margins are lower, thus causing the decrease in our gross profit percentage.
Research and Development Expenses
Our research and development costs are expensed as incurred. Research and development costs consist of engineering, product development, clinical trials, test-part manufacturing, testing, developing and validating the manufacturing process, manufacturing, facility and regulatory-related costs. Research and development expenses also include employee compensation, employee and non-employee stock-based compensation, supplies and materials, consultant services, and travel and facilities expenses related to research and development activities.
We expect to incur additional research and development costs as we continue to develop new medical devices, industrial and ceramic armor products, product candidates for antipathogenic applications, and other products which may increase our total research and development expenses.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries, benefits and other related costs, including stock-based compensation for certain members of our executive team and other personnel employed in finance, compliance, administrative, information technology, customer service, executive and human resource departments. General and administrative expenses also include other expenses not part of the other cost categories mentioned above, including facility expenses and professional fees for accounting and legal services.
Results of Operations
Year Ended
The following table sets forth, for the periods indicated, our results of operations for the years endedDecember 31, 2022 and 2021 (dollars, in thousands): Year Ended December 31, 2022 2021 $ Change % Change Product revenue$ 601 $ 606 $ (5 ) -1 % Grant and contract revenue 960 - 960 100 % Total revenue 1,561 606 955 158 % Costs of revenue 265 449 (184 ) -41 % Gross profit 1,296 157 1,139 725 % Operating expenses: Research and development 6,450 5,886 564 10 % General and administrative 3,990 3,603 387 11 % Sales and marketing 1,336 1,288 48 4 % Grant and contract expense 855 - 855 100 % Total operating expenses 12,631 10,777 1,854 17 % Loss from operations (11,335 ) (10,620 ) (715 ) 7 % Other income (expense), net (704 ) 1,311 (2,015 ) -154 % Net loss before income taxes (12,039 ) (9,309 ) (2,730 ) 29 % Provision for income taxes - - - - % Net loss$ (12,039 ) $ (9,309 ) $ (2,730 ) 29 % 43 Product Revenue
Total product revenue was
Costs of Revenue and Gross Profit
Cost of revenue decreased
Research and Development Expenses
Research and development expenses increased
General and Administrative Expenses
General and administrative expenses increased
Sales and Marketing Expenses
Sales and marketing expenses remained primarily unchanged when comparing 2022 to 2021.
Grant and Contract Expenses
For the year ended
44 Other Income (Expense), Net
Other expenses increased
Liquidity and Capital Resources
The consolidated financial statements have been prepared assuming the Company will continue to operate as a going concern, which contemplates the realization of assets and settlement of liabilities in the normal course of business, and does not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from uncertainty related to its ability to continue as a going concern within one year from the date of issuance of these consolidated financial statements.
For the years ended
The Company is actively generating additional scientific and clinical data to have it published in leading industry publications. We believe the publication of such data would help sales efforts as the Company approaches new prospects. The Company is also making additional changes to the sales strategy, including a focus on revenue growth by expanding the use of silicon nitride in other areas outside of spinal fusion applications. For instance, results from an independent study demonstrated the potential anti-viral properties of our silicon nitride. We believe that we may be able to apply our silicon nitride powder to personal protection products, such as face masks, gowns and gloves, resulting in inactivation of viruses that come into contact with the items.
The Company has common stock that is publicly traded and has been able to
successfully raise capital when needed since the date of the Company's initial
public offering in
On
On
On
45
During the year ended
On
Management has concluded that its existing capital resources will be sufficient
to fund operations for at least the next 12 months, or through
Risks Related to COVID-19 Pandemic
The COVID-19 pandemic is affecting
Correction of an Immaterial Error
During the first quarter of 2022 the Company identified an error related to the
removal of a loan obligation and the recording of other income for forgiveness
of debt totaling approximately
Cash Flows
The following table summarizes, for the periods indicated, cash flows from operating, investing and financing activities (in thousands):
Year Ended December 31, 2022 2021 Net cash used in operating activities$ (10,263 ) $ (10,127 )
Net cash provided by (used in) investing activities (1,101 ) (1,656 ) Net cash provided by financing activities
3,336 705 Net cash provided (used)$ (8,028 ) $ (11,078 )
Net cash used in operating activities was
Net cash used in investing activities was
Net Cash Provided by Financing Activities
Net cash provided by financing activities was
46 Indebtedness 2020 PPP Loan
On
2021 PPP Loan
On
Since receiving the 2021 PPP Loan and learning that the principal amount of the
loan and accrued interest had been forgiven, The Company determined that the
Company should not have removed the loan obligation and recorded approximately
Business Loan
On
Related Party Debt
TA&T is obligated to repay certain personal loans made by the founders of TA&T
to TA&T prior to
Wells Fargo Line of Credit
Prior to
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as defined in Item 303(a)(4) of Regulation S-K.
Related-Party Transactions
We have not entered into any transactions since
Indemnification Agreements: We have entered into indemnification agreements with each of our executive officers and directors that require us to indemnify such persons against any and all expenses, including judgments, fines or penalties, attorney's fees, witness fees or other professional fees and related disbursements and other out-of-pocket costs incurred, in connection with any action, suit, arbitration, alternative dispute resolution mechanism, investigation, inquiry or administrative hearing, whether threatened, pending or completed, to which any such person may be made a party by reason of the fact that such person is or was a director, officer, employee or agent of our company, provided that such director or officer acted in good faith and in a manner that the director or officer reasonably believed to be in, or not opposed to, our best interests. The indemnification agreements also set forth procedures that will apply in the event of a claim for indemnification thereunder. We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors and officers.
Seasonality and Backlog
Our business is generally not seasonal in nature. The majority of our product revenue is derived from the manufacture and sale of spinal fusion products, used in the treatment of spine disorders, to CTL Medical. We also retained CTL Medical to act as our exclusive broker to offer for sale, and sell, our manufacturing services to third party developers of spinal implants and spinal devices that incorporate silicon nitride technology, which has a remaining term of 5-years. CTL Medical's sales generally consist of products that are in stock with them or maintained at hospitals or with their sales distributors. Accordingly, we do not have a backlog of sales orders.
Critical Accounting Policies and Estimates
A summary of our significant accounting policies and estimates is discussed in
Management's Discussion and Analysis of Financial Condition and Results of
Operations and in Note 1 to our consolidated financial statements included in
our Annual Report on Form 10-K for the year ended
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New Accounting Pronouncement, Not Yet Adopted
The Company has reviewed all other recently issued, but not yet adopted, accounting standards, in order to determine their effects, if any, on its results of operations, financial position or cash flows. Based on that review, the Company believes that no other pronouncements will have a significant effect on its financial statements upon adoption.
Revenue Recognition
The Company derives its product revenue primarily from the sale of spinal fusion products, used in the treatment of spine disorders to CTL Medical, with whom the Company has a 10-year exclusive sales agreement in place,7 years of which remain. The Company is currently pursuing other sales opportunities for silicon nitride outside the spinal fusion application. The sale of the Company's products has a single performance obligation and revenue is recognized at the time the product is shipped to the customer. In general, the Company's customers do not have any rights of return or exchange.
Revenue is recognized when control of the goods or services promised under the contract is transferred to the customer either at a point in time (e.g., upon delivery) or over time (e.g., as performed under the contract). The Company accounts for a contract when it has approval and commitment from both parties, the rights and payment terms of the parties are identified, the contract has commercial substance and collectability of consideration is probable. Contracts are reviewed to determine whether there is one or multiple performance obligations. A performance obligation is a promise to transfer a distinct good or service to a customer and represents the unit of accounting for revenue recognition. For contracts with multiple performance obligations, the expected consideration, or the transaction price, is allocated to each performance obligation identified in the contract based on the relative standalone selling price of each performance obligation. Revenue is then recognized for the transaction price allocated to the performance obligation when control of the promised goods or services underlying the performance obligation is transferred. Contract consideration is not adjusted for the effects of a significant financing component when, at contract inception, the period between when control transfers and when the customer will pay for that good or service is one year or less. Contact modifications that provide for additional distinct goods or services at the standalone selling price are treated as separate contracts. The transaction price for our contracts reflects our estimate of returns, rebates and discounts, which historically have not been significant. Amounts billed to customers for shipping and handling are included in the transaction price and generally are not treated as separate performance obligations as these costs fulfill a promise to transfer the product to the customer. The Company does not employee salespeople to actively seek additional customers; there are no incremental costs for obtaining customers that need to be capitalized.
Account and Other Receivables and Allowance for Doubtful Accounts
Account and other receivables are carried at invoiced amount less an allowance for doubtful accounts. On a regular basis, the Company evaluates account and other receivables and estimates an allowance for doubtful accounts, as needed, based on various factors such as customers' current credit conditions, length of time past due, and the general economy as a whole. Receivables are written off against the allowance when they are deemed uncollectible.
48 Inventories
Inventories are stated at the lower of cost or net realizable value, with cost for manufactured inventory determined under the standard costs, which approximate actual costs, determined on the first-in first-out ("FIFO") method. Manufactured inventory consists of raw material, direct labor and manufacturing overhead cost components. The Company reviews the carrying value of inventory on a periodic basis for excess or obsolete items, and records any write-down as a cost of revenue, as necessary.
Long Lived Intangible Assets
The Company evaluates the carrying value of definite-lived intangibles when
events or changes in circumstances indicate that the carrying value may not be
recoverable. Factors the Company considers important which could trigger an
impairment review include, but are not limited to, significant under-performance
relative to historical or projected future operating results, significant
changes in the manner of its use of acquired assets or its overall business
strategy, and significant industry or economic trends. The Company amortizes
definite-lived intangible assets on a straight-line basis over their useful
lives. The Company recorded no impairment loss for definite-lived intangible
assets during the year ended
Property and Equipment
Property and equipment, including leasehold improvements, are stated at cost, less accumulated depreciation and amortization. Property and equipment are depreciated using the straight-line method over the estimated useful lives of the assets, which range from three to five years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease term, generally five years.
The Company reviews the carrying value of the Company's property and equipment that are held and used in the Company's operations for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of these assets is determined based upon expected undiscounted future net cash flows from the operations to which the assets relate, utilizing management's best estimate, assumptions, and projections at the time. If the carrying value is determined to be unrecoverable from future operating cash flows, the asset is deemed impaired and an impairment charge would be recognized to the extent the carrying value exceeded the estimated fair value of the asset. The Company estimates the fair value of assets based on the estimated future discounted cash flows of the asset.
As of
Income Taxes
The Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to the differences between the financial statement carrying value of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the fiscal year in which those temporary differences are expected to be recovered or settled. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
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The Company operates in various tax jurisdictions and is subject to audit by various tax authorities. The Company provides for tax contingencies whenever it is deemed probable that a tax asset has been impaired, or a tax liability has been incurred for events such as tax claims or changes in tax laws. Tax contingencies are based upon their technical merits relative tax law and the specific facts and circumstances as of each reporting period. Changes in facts and circumstances could result in material changes to the amounts recorded for such tax contingencies.
The Company recognizes uncertain income tax positions taken on income tax returns at the largest amount that is more-likely than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.
The Company's policy for recording interest and penalties associated with
uncertain tax positions is to record such items as a component of our income tax
provision. For the years ended
Stock-Based Compensation
The Company measures stock-based compensation expense related to employee stock-based awards based on the estimated fair value of the awards as determined on the date of grant and is recognized as expense over the remaining requisite service period. The Company utilizes the Black-Scholes-Merton option pricing model to estimate the fair value of employee stock options. The Black-Scholes-Merton model requires the input of highly subjective and complex assumptions, including the estimated fair value of the Company's common stock on the date of grant, the expected term of the stock option, and the expected volatility of the Company's common stock over the period equal to the expected term of the grant. The Company estimates forfeitures at the date of grant and revises the estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company accounts for stock options to purchase shares of stock that are issued to non-employees based on the estimated fair value of such instruments using the Black-Scholes-Merton option pricing model.
Derivative Liabilities
Derivative liabilities include the fair value of instruments such as common
stock warrants, preferred stock warrants and convertible features of notes, that
are initially recorded at fair value and are required to be re-measured to fair
value at each reporting period. The change in fair value of the instruments is
recognized as a component of other income (expense) in the Company's
consolidated statements of operations until the instruments settle, expire or
are no longer classified as derivative liabilities. The Company estimates the
fair value of these instruments using the Black-Scholes-Merton or
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