ELUTIA INC. 10-Q

Item 1. Financial Statements. AZIYO BIOLOGICS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands, Except for Share and Per Share Data) (UNAUDITED) September 30, 2020 December 31, 2019 Assets Current assets: Cash $ 1,544 $ 2,482 Restricted cash 100 108 Accounts receivable, net 7,096 7,229 Inventory 9,788 7,190 Prepaid expenses and other current assets 3,685 1,437 Total current assets 22,213 18,446 Property and equipment, net 1,140 988 Intangible assets, net 22,714 25,262 Other assets 76 76 Total assets $ 46,143 $ 44,772 Liabilities, Convertible Preferred Stock and Stockholders’ Deficit Current liabilities: Accounts payable $ 3,245 $ 2,492 Accrued expenses 7,866 3,978 Payables to tissue suppliers 2,431 2,485 Current portion of long-term debt 2,890 1,692 Current portion of revenue interest obligation 2,750 2,750 Revolving line of credit 5,866 4,227 Deferred revenue and other current liabilities 537 650 Total current liabilities 25,585 18,274 Long-term debt 21,201 19,612 Long-term revenue interest obligation 16,667 16,596 Deferred revenue and other long-term liabilities 527 705 Preferred stock warrant liability 474 247 Total liabilities 64,454 55,434 Commitments and contingencies (Note 8) Convertible preferred stock Series A Preferred stock, $0.001 par value, 51,505,000 and 45,500,000 shares authorized, as of September 30, 2020 and December 31, 2019, respectively, 50,414,427 and 44,550,230 shares issued and outstanding, in September 30, 2020 and December 31, 2019, respectively 56,593 44,449 Stockholders’ deficit: Common stock, $0.001 par value, 4,801,180 and 4,514,543 shares authorized, as of September 30, 2020 and December 31, 2019 respectively, 648,679 and 648,277 issued and outstanding in September 30, 2020 and December 31, 2019, respectively 1 1 Additional paid-in capital - 1,826 Accumulated deficit (74,905 ) (56,938 ) Total stockholders’ deficit (74,904 ) (55,111 ) Total liabilities, convertible preferred stock and stockholders' deficit $ 46,143 $ 44,772 The accompanying notes are an integral part of these condensed consolidated financial statements. 6 Aziyo Biologics, Inc. CONDENSED consolidated Statements of Operations (In Thousands, Except Share and Per Share Data) (UNAUDITED) Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Net sales $ 11,774 $ 11,138 $ 30,216 $ 30,847 Cost of goods sold 6,233 5,595 15,676 15,972 Gross Profit 5,541 5,543 14,540 14,875 Sales and marketing 4,174 4,435 12,471 11,592 General and administrative 3,195 2,448 8,894 6,741 Research and development 863 507 2,811 1,742 Loss from operations (2,691 ) (1,847 ) (9,636 ) (5,200 ) Interest expense 1,465 1,249 4,248 3,935 Other expense, net 2,567 - 2,567 - Loss before provision for income taxes (6,723 ) (3,096 ) (16,451 ) (9,135 ) Income tax expense 8 8 18 21 Net loss (6,731 ) (3,104 ) (16,469 ) (9,156 ) Accretion of Convertible Preferred stock 3,510 - 3,510 - Net loss attributable to common stockholders $ (10,241 ) $ (3,104 ) $ (19,979 ) $ (9,156 ) Net loss per share attributable to common stockholders – basic and diluted $ (15.79 ) $ (4.81 ) $ (30.82 ) $ (14.19 ) Weighted average common shares outstanding – basic and diluted 648,436 645,142 648,331 645,142 The accompanying notes are an integral part of these condensed consolidated financial statements. 7 Aziyo Biologics, Inc. CONDENSED Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders’ Deficit (In Thousands, Except Share Amounts) (UNAUDITED) Convertible Preferred Stock Common Stock Number of Shares Amount Number of Shares Amount Additional Paid-in Capital Accumulated Deficit Total Stockholders’ Deficit Balance, December 31, 2018 41,500,000 $ 41,411 645,143 $ 1 $ 1,592 $ (44,999 ) $ (43,406 ) Stock-based compensation - - - - 164 - 164 Net loss - - - - - (9,156 ) (9,156 ) Balance, September 30, 2019 41,500,000 $ 41,411 645,143 $ 1 $ 1,756 $ (54,155 ) $ (52,398 ) Balance, December 31, 2019 44,550,230 44,449 648,277 $ 1 $ 1,826 $ (56,938 ) $ (55,111 ) Issuance of Convertible Preferred Stock, net of issuance costs of $9 5,864,197 8,634 - - - - - Proceeds from stock option exercises - - 402 - 2 - 2 Accretion of Convertible Preferred stock - 3,510 - - (2,012 ) (1,498 ) (3,510 ) Stock-based compensation - - - - 184 - 184 Net loss - - - - - (16,469 ) (16,469 ) Balance, September 30, 2020 50,414,427 $ 56,593 648,679 $ 1 $ - $ (74,905 ) $ (74,904 ) Convertible Preferred Stock Common Stock Number of Shares Amount Number of Shares Amount Additional Paid-in Capital Accumulated Deficit Total Stockholders’ Deficit Balance, June 30, 2019 41,500,000 $ 41,411 645,143 $ 1 $ 1,707 $ (51,051 ) $ (49,343 ) Stock-based compensation - - - - 49 - 49 Net loss - - - - - (3,104 ) (3,104 ) Balance, September 30, 2019 41,500,000 $ 41,411 645,143 $ 1 $ 1,756 $ (54,155 ) $ (52,398 ) Balance, June 30, 2020 45,000,000 44,899 648,277 $ 1 $ 1,952 $ (66,676 ) $ (64,723 ) Issuance of Convertible Preferred Stock, net of issuance costs of $9 5,414,427 8,184 - - - - - Proceeds from stock option exercises - - 402 - 2 - 2 Accretion of Convertible Preferred Stock - 3,510 - - (2,012 ) (1,498 ) (3,510 ) Stock-based compensation - - - - 58 - 58 Net loss - - - - - (6,731 ) (6,731 ) Balance, September 30, 2020 50,414,427 $ 56,593 648,679 $ 1 $ - $ (74,905 ) $ (74,904 ) The accompanying notes are an integral part of these condensed consolidated financial statements. 8 Aziyo Biologics, Inc. CONDENSED consolidated Statements of Cash Flows (In Thousands) (UNAUDITED) Nine Months Ended September 30, 2020 2019 OPERATING ACTIVITIES: Net loss $ (16,469 ) $ (9,156 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 2,921 2,886 Loss on early extinguishment of debt 2,340 - Gain on revaluation of revenue interest obligation and other 227 - Amortization of deferred financing costs 91 111 Interest expense recorded as additional revenue interest obligation 2,011 2,132 Interest expense recorded as Convertible Preferred Stock 39 - Stock-based compensation 184 156 Operating expense satisfied through Convertible Preferred Stock issuance 814 - Changes in operating assets and liabilities: Accounts receivable 134 695 Inventory (2,598 ) (440 ) Prepaid expenses and other (2,248 ) 195 Accounts payable and accrued expenses 4,641 (605 ) Obligations to tissue suppliers (55 ) 204 Deferred revenue and other liabilities (290 ) (830 ) Net cash used in operating activities (8,258 ) (4,652 ) INVESTING ACTIVITIES: Expenditures for property, plant and equipment (525 ) (422 ) Net cash used in investing activities (525 ) (422 ) FINANCING ACTIVITIES: Net borrowings under revolving line of credit 1,639 3,909 Proceeds from long-term debt 2,995 - Proceeds from issuance of Convertible Promissory Notes 2,000 - Proceeds from Convertible Preferred Stock issuance, net 3,441 - Proceeds from stock option exercises 2 - Repayments of long-term debt (300 ) (113 ) Payments on revenue interest obligation (1,940 ) (1,387 ) Deferred financing costs - (43 ) Proceeds from Surgalign transition services agreement, net - 874 Net cash provided by financing activities 7,837 3,240 Net decrease in cash and restricted cash (946 ) (1,834 ) Cash and restricted cash, beginning of period 2,590 2,413 Cash and restricted cash, end of period $ 1,644 $ 579 Supplemental Cash Flow and Non-Cash Financing Activities Disclosures: Cash paid for interest $ 3,769 $ 2,916 Cash paid for taxes $ 32 $ 37 Conversion of Convertible Promissory Note to Convertible Preferred Stock $ 2,000 $ - The accompanying notes are an integral part of these condensed consolidated financial statements. 9 Aziyo Biologics, Inc. NOTES TO consolidated CONDENSED FINANCIAL Statements (UNAUDITED) Note 1. Organization and Description of Business Aziyo Biologics, Inc. (together with its consolidated subsidiaries, “Aziyo” or the “Company”) is a regenerative medicine company, with a focus on patients receiving implantable medical devices. The Company has developed a portfolio of regenerative products using both human and porcine tissue that are designed to be as close to natural biological material as possible. Aziyo’s portfolio of core products span the implantable electronic devices/cardiovascular-related market, the orthopedic/spinal repair market and the soft tissue reconstruction market (“Core Products”). These products are primarily sold to healthcare providers or commercial partners. The Company also sells human tissue products under contract manufacturing and certain other arrangements (“Non-Core Products”) with corporate customers. Reverse Stock Split and Initial Public Offering On September 25, 2020, the Company’s Board of Directors and stockholders approved an amendment to the Company’s amended and restated certificate of incorporation to effect a 1-for-13.9549 reverse stock split of the Company’s common stock, which was effected on September 29, 2020. The par value of the common stock was not adjusted as a result of the reverse stock split. Accordingly, all share and share-related information presented in these condensed consolidated financial statements and the accompanying notes has been retroactively adjusted for all periods presented to give effect to the reverse stock split. On October 13, 2020, in connection with our initial public offering (“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 $17.00 per share, resulting in net proceeds to us of approximately $43.0 million, after deducting the underwriting discount of approximately $3.5 million and offering expenses of approximately $3.5 million. Note 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions of the Securities and Exchange Commission (SEC) on Form 10-Q and Rule 10-01 of Regulation S-X. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted. The results for the nine months ended September 30, 2020 are not necessarily indicative of results to be expected for the year ending December 31, 2020, any other interim periods, or any future year or period. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and the related notes thereto for the year ended December 31, 2019, which are included in the Company’s final prospectus filed with the SEC pursuant to Rule 424(b)(4) on October 8, 2020 under the Securities Act of 1933, as amended (the Securities Act). The financial information as of September 30, 2020 and for the three and nine months ended September 30, 2020 and 2019 is unaudited, but in the opinion of management, all adjustments, consisting of normal and recurring adjustments, considered necessary for a fair statement of the results for these interim periods have been included. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. The condensed balance sheet as of December 31, 2019 was derived from the audited annual financial statements but does not contain all of the disclosures from the annual financial statements. In accordance with Accounting Standards Update (“ASU”) 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40) , the Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the consolidated financial statements are issued. The Company believes that the net proceeds from its IPO, together with its existing cash and availability under its Revolving Line of Credit (the “Revolver”), will be sufficient to fund its operating expenses and capital expenditure requirements through at least one year after the issuance date of the condensed consolidated financial statements for the nine months ended September 30, 2020. 10 The Company expects its 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 the Company’s commercialization and development efforts, the Company is unable to predict when it will become profitable, and it may never become profitable. The Company’s inability to achieve and then maintain profitability would negatively affect its business, financial condition, results of operations and cash flows. As such, the Company may need additional funding to support its continuing operations and pursue its growth strategy. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates and assumptions relating to inventories, receivables, long-lived assets, the valuation of stock-based awards, the valuation of the preferred stock warrant liability and deferred income taxes are made at the end of each financial reporting period by management. Management continually re-evaluates its estimates, judgments and assumptions, and management’s evaluation could change. Actual results could differ from those estimates. Impact of COVID-19 The Company is closely monitoring the impact of the COVID-19 pandemic on its business. In March 2020, the World Health Organization declared COVID-19 a global pandemic and recommended various containment and mitigation measures worldwide. Since that time, the number of procedures performed using the Company’s products has decreased significantly, as governmental authorities in the United States have 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 the Company’s products have been postponed or cancelled, which has negatively impacted sales of its products. These measures and challenges will likely continue for the duration of the pandemic, which is uncertain, and will likely continue to reduce the Company’s net sales and negatively impact its business, financial condition and results of operations while the pandemic continues. Net Loss per Share Attributable to Common Stockholders The Company calculates basic and diluted net loss per share attributable to common stockholders in conformity with the two-class method required for participating securities. The Convertible Preferred Stock is considered a participating security. The two-class method requires income (loss) available to common stockholders for the period to be allocated between common and participating securities based upon their respective rights to share in the earnings as if all income (loss) for the period had been distributed. Under the two-class method, the net loss attributable to common stockholders is not allocated to the Convertible Preferred Stock as the holders of the preferred stock do not have a contractual obligation to share in losses. Basic net loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted-average shares outstanding during the period. For purposes of the diluted net income (loss) per share attributable to common stockholders’ calculation, Convertible Preferred Stock, stock options, and preferred and common stock warrants are considered to be common stock equivalents. All common stock equivalents have been excluded from the calculation of diluted net loss per share attributable to common stockholders, as their effect would be anti-dilutive for all periods presented. Therefore, basic and diluted net loss per share were the same for both periods presented. Fair Value of Financial Instruments Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value: Level 1 —Valuations based on quoted prices for identical assets and liabilities in active markets. Level 2 —Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data. 11 Level 3 —Valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment. The estimated fair value of financial instruments disclosed in the financial statements has been determined by using available market information and appropriate valuation methodologies. The carrying value of all current assets and current liabilities approximates fair value because of their short-term nature. Cash and Restricted Cash The Company maintains its cash balances at banks and financial institutions. The balances are insured up to the legal limit. The Company maintains cash balances that may, at times, exceed this insured limit. Under the provisions of the Revolving Credit Facility (see Note 5), the Company has a lockbox arrangement with the banking institution whereby daily lockbox receipts are contractually utilized to pay down outstanding balances on the Revolver debt. Lockbox receipts that have not yet been applied to the Revolver are classified as restricted cash in the accompanying consolidated balance sheets. The following table provides a reconciliation of cash and restricted cash included in the condensed consolidated balance sheets to the amounts included in the statements of cash flows (in thousands). September 30, September 30, 2020 2019 Cash $ 1,544 $ 273 Restricted cash 100 306 Total cash and restricted cash shown in statements of cash flows $ 1,644 $ 579 Accounts Receivable and Allowances Accounts receivable in the accompanying balance sheets are presented net of allowances for doubtful accounts and sales returns and other credits. The Company grants credit to customers in the normal course of business, but generally does not require collateral or any other security to support its receivables. The Company evaluates the collectability of accounts receivable based on a combination of factors. In circumstances where a specific customer is unable to meet its financial obligations to the Company, a provision to the allowance for doubtful accounts is recorded to reduce the net recognized receivable to the amount that is reasonably expected to be collected. For all other customers, a provision to the allowance for doubtful accounts is recorded based on factors including the length of time the receivables are past due, the current business environment and the Company’s historical experience. Provisions to the allowance for doubtful accounts are recorded to general and administrative expenses. Account balances are charged off against the allowance when it is probable that the receivable will not be recovered. Inventories Inventories, consisting of purchased materials, direct labor and manufacturing overhead, are stated at the lower of cost or net realizable value, with cost determined generally 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, the Company also evaluates inventories for excess quantities, obsolescence or shelf life expiration. This evaluation includes analysis of the Company’s 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 the Company to reasonably expect that it can sell those products prior to their expiration, the Company adjusts the carrying value to estimated net realizable value. Property and Equipment Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line method over the following estimated useful lives of the assets: Processing and research equipment 5 years Office equipment and furniture 3 to 5 years Computer hardware and software 3 to 4 years 12 Leasehold improvements are amortized on the straight-line method over the shorter of the lease term or the estimated useful life of the asset. Repairs and maintenance costs are expensed as incurred. Long-Lived 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. The Company periodically evaluates the period of depreciation or amortization for long-lived assets to determine whether current circumstances warrant revised estimates of useful lives. The Company reviews its property and equipment and intangible assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. Impairment exists when the carrying value of the company’s 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 . 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. There were no impairment losses during either the three or nine months ended September 30, 2020 or 2019. Revenue Recognition On January 1, 2019, the Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) No. 606, “Revenue from Contracts with Customers”, utilizing the modified retrospective method applied to contracts that were not completed. The adoption of the standard did not have a material impact on the timing and amounts of the Company’s revenue as the Company did not have any material remaining performance obligations, or material costs to obtain or fulfill contracts with its customers as of January 1, 2019. The Company’s revenue is generated from contracts with customers in accordance with ASC 606. The core principle of ASC 606 is that the Company recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The ASC 606 revenue recognition model consists of the following five steps: (1) identify the contracts with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The Company enters into contracts to primarily 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 the Company has met its performance obligations pursuant to its contracts with its customers in an amount that the Company expects to be entitled to in exchange for the transfer of control of the products to the Company’s customers. For all product sales, the Company has no further performance obligations and revenue is recognized at the point control transfers which occurs either when: i) the product is shipped via common carrier; or (ii) the product is delivered to the customer or distributor, in accordance with the terms of the agreement. A portion of the Company's product revenue is generated from consigned inventory maintained at hospitals and from inventory physically held by direct sales representatives. For these types of products sales, the Company retains control until the product has been used or implanted, at which time revenue is recognized. The Company 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 the Company 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 the Company’s contracts vary; however, as a common business practice, payment terms are typically due in full within 30 to 60 days of delivery. The Company, at times, extends volume discounts to customers. The Company permits returns of its products in accordance with the terms of contractual agreements with customers. Allowances for returns are provided based upon analysis of the Company’s historical patterns of returns matched against the revenues from which they originated. The Company records estimated returns as a reduction of revenue in the same period revenue is recognized. 13 Deferred Rent The Company recognizes rent expense by the straight-line method over the lease term. Funds received from the lessor used to reimburse the Company for the cost of leasehold improvements are recorded as a deferred credit resulting from a lease incentive and are amortized over the lease term as a reduction of rent expense. Stock-Based Compensation Plans The Company accounts for its stock-based compensation plans in accordance with FASB Accounting Standards Codification (“ASC”) 718, Accounting for Stock Compensation . FASB ASC 718 requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors, including employee stock options and restricted stock. Stock-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense on a straight-line basis over the requisite service period of the entire award. Research and Development Costs Research and development costs, which include mainly salaries, outside services and supplies, are expensed as incurred. Concentration of Credit Risk Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash. At September 30, 2020, the Company maintained $1.9 million in bank deposit accounts that are in excess of the $0.25 million insurance provided by the Federal Deposit Insurance Corporation in one federally insured financial institution. The Company has not experienced any losses in such accounts. Comprehensive Loss Comprehensive income (loss) comprises net income (loss) and other changes in equity that are excluded from net income (loss). For the three and nine months ended September 30, 2020 and 2019, the Company’s net loss equaled its comprehensive loss and accordingly, no additional disclosure is presented. Income Taxes The Company uses the asset and liability method of accounting for income taxes. Deferred income taxes are recorded to reflect the tax consequences on future years for differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to amounts that are more likely than not to be realized. The Company is subject to income taxes in the federal and state jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. In accordance with the authoritative guidance on accounting for uncertainty in income taxes, the Company recognizes tax liabilities for uncertain tax positions when it is more likely than not that a tax position will not be sustained upon examination and settlement with various taxing authorities. Liabilities for uncertain tax positions are measured based upon the largest amount of benefit that is more likely than not (greater than 50%) of being realized upon settlement. The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. Note 3. Recently Issued Accounting Standards In November 2019, the FASB issued ASU 2019-10, “Financial Instruments — Credit Losses (Topic 326), Derivative and Hedging (Topic 815), and Leases (Topic 842), Effective Dates.” The FASB deferred the effective dates of the new credit losses standard for all entities except SEC filers that are not smaller reporting companies (SRCs) to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Board also aligned the effective dates of ASU 2017-04 on goodwill impairment with the new effective dates of the credit losses standard. The FASB deferred the effective dates of its new standards on hedging and leases for entities that are not public business entities (PBEs) (and for leases, for entities that are not non-for-profit (NFP) entities that have issues, or are conduit bond obligors for, certain securities; and are not employee benefit plans (EBPs) that file or furnish financial statements with or to the SEC) to fiscal years beginning after December 15, 2020, and interim periods in the following year. The FASB is also reconsidering its philosophy on establishing effective dates for major standards for private companies, NFPs, EBPs and smaller public companies. The board has developed a two-bucket approach that would give these entities more time to implement major new standards. The Company is evaluating this standard to determine if adoption will have a material impact on the Company’s consolidated financial statements. 14 In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820), Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement.” The standard eliminates, adds, and modifies certain disclosure requirements for fair value measurements. Entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but public companies will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The standard is effective for annual reporting periods beginning after December 15, 2019. Adoption of this new standard in the first quarter of 2020 did not have a material impact on the Company’s consolidated financial statements. In February 2016, the FASB issued ASU 2016-02, Leases. The standard requires that lessees recognize a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meet the definition of a short-term lease). The liability will be equal to the present value of lease payments. The asset will be based on the liability subject to certain adjustments. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Operating leases will result in straight-line expense (similar to current operating leases) while finance leases will result in a front-loaded expense pattern (similar to current capital leases). In November 2019, the FASB issued 2019-10 which extended the adoption of ASU 2016-02 for the Company to be effective periods ending after December 15, 2021. While early adoption is permitted, the company intends to adopt in accordance with the revised timeline provided by the FASB. The Company is evaluating this standard to determine if adoption will have a material impact on the Company’s consolidated financial statements. Note 4. Inventories Inventories were comprised of the following (in thousands): September 30, December 31, 2020 2019 Raw materials $ 1,285 $ 928 Work in process 846 1,164 Finished goods 7,657 5,098 Total $ 9,788 $ 7,190 During the nine months ended September 30, 2019, the Company recorded an inventory writedown of approximately $0.5 million relating to quantities on-hand deemed to be excessive compared to near-term demand or whose remaining shelf-lives will limit salability. Such writedown largely resulted from the impact on future sales of an existing dermis product after the Company’s launch in mid-2019 of a new dermis offering. Note 5. Long-Term Debt On May 31, 2017, in connection with the Company’s acquisition of CorMatrix described in Note 6, Aziyo entered into a $12 million term loan facility (the “Term Loan Facility”) and an $8 million asset-backed revolving line of credit (the “Revolving Credit Facility”), which the Company’s borrowing capacity under the Revolving Credit Facility is limited by certain qualifying assets, with a financial institution (the “May 2017 Financing”). The Term Loan Facility was amended in December 2017, February 2018 and July 2019 (all amendments being considered modifications) such that an additional $1.5 million, $3 million and $3.5 million, respectively were received by the Company bringing the total aggregate principal amount outstanding under the Term Loan Facility to $20 million. Borrowings under the Term Loan Facility, as amended, bear interest at a rate per annum equal to the sum of (x) the greater of (i) 2.25% and (ii) the applicable London Interbank Offered Rate for U.S. dollar deposits divided by 1.00 minus the maximum effective reserve percentage for Eurocurrency funding (“LIBOR”) plus (y) 7.25% (a reduction from 7.75% per annum prior to the July 2019 amendment). The agreement governing the Term Loan Facility provides for interest only payments through January 2021 and interest and equal monthly principal payments from February 2021 through maturity in July 2024 (a deferral from principal repayments from January 2020 through December 2021 prior to July 2019 amendment). Both the Term Loan Facility and the Revolving Credit Facility include mandatory and optional prepayments. The agreement governing the Term Loan Facility also includes an exit fee of 6.5% of the aggregate principal amount and prepayment penalties of 2% to 4% if repaid prior to maturity. The Term Loan Facility also provides for a delay in the payment of principal if certain conditions are met including a qualified initial public offering and no continuing default or event of default. The weighted average interest rate on Term Loan Facility borrowings for the three months ended September 30, 2020 and 2019 and for the nine months ended September 30, 2020 and 2019 was 8.5%, 9.4%, 8.7% and 10.0%, respectively. Borrowings under the Revolving Credit Facility bear interest at a rate per annum equal to the sum of (x) the greater of (i) 2.25% and (ii) LIBOR plus (y) 4.95%. The agreement governing the Revolving Credit Facility includes an unused line fee in an amount equal to 0.5% per annum of the unused borrowing capacity and prepayment penalties of 2% to 4% on the $8 million borrowing capacity if terminated by the Company prior to its expiration in July 2024. The weighted average interest rate on the Revolving Credit Facility borrowings for the three months ended September 30, 2020 and 2019 and for the nine months ended September 30, 2020 and 2019 was 6.2%, 7.1%, 6.1% and 7.3%, respectively. Both debt instruments contain events of default, including, most significantly, a failure to timely pay interest or principal, insolvency, or an action by the Food and Drug Administration or such other material adverse event impacting the operations of Aziyo. The debt instruments also include a financial covenant based on cumulative minimum net product revenue, as defined, restrictions as to payment of dividends, and are secured by all assets of the Company. As of September 30, 2020, Aziyo was in compliance with this financial covenant. 15 In consummating the July 2019 Amendment to the Term Loan Facility, Aziyo paid origination fees of approximately $40,000 and accrued exit fees of $0.4 million. In conjunction with the May 2017 Financing and the amendment thereto, the Company issued to the financial institution warrants to purchase 405,000 shares of Aziyo’s Convertible Preferred Stock at $1.00 per share. The warrants were exercisable through the first to occur of (a) May 31, 2027 (in the case of warrants to purchase 360,000 shares of Convertible Preferred Stock) or December 14, 2027 (in the case of warrants to purchase 45,000 shares of Convertible Preferred Stock), and (b) the earlier of (i) a Sale Transaction (as defined in the Company’s Certificate of Incorporation) or (ii) an initial public offering of the Company’s common stock. All warrants were exercised in connection with the IPO noted in Note 1. The Company accounts for stock warrants in accordance with ASC Topic 815 Derivatives and Hedging — Contracts in Entity’s Own Equity,” as either derivative liabilities or as equity instruments depending on the specific terms of the warrant agreement. All of the Company’s issued and outstanding Convertible Preferred Stock warrants are accounted for as a liability and are valued using the Black Scholes model. Upon issuance, the Company valued such warrants at $286,267. The recognition of these warrants served to reduce the recorded value of the associated Term Loan Facility borrowings. This resulting debt discount will be recognized as interest expense through the maturity of the Term Loan Facility. During 2017, the Company restructured certain of its liabilities with a tissue supplier and entered into an unsecured promissory note totaling $2.1 million. The note bears interest at 5% and includes quarterly interest-only payments in 2017 and quarterly interest and principal payments from March 31, 2018 through August 31, 2020. The notes are subordinated in payment to the Term Loan Facility and Revolving Credit Facility and in 2019, the Company’s senior lender restricted payment of certain amounts due. On April 2, 2020, the Company issued convertible, subordinated promissory notes (the “Initial 2020 Bridge Notes”) with a total principal of approximately $0.6 million. The Initial 2020 Bridge Notes have an interest rate of 5%, are repayable upon demand by the holders any time after April 1, 2025 and shall automatically be converted into the Company’s shares of capital stock upon the closing of an issuance of the Company’s shares of capital stock to one or more investors that results in gross cash proceeds to the Company of at least Three Million Dollars ($3 million). The number of securities to be issued in connection with the conversion of these notes shall equal (i) the sum of the outstanding principal amount of, and all accrued but unpaid interest on, these notes divided by (ii) the cash purchase price per security paid by the investors in the financing. See Note 7 for discussion of the conversion of these notes into Convertible Preferred Stock in September 2020. On April 21, 2020 and April 29, 2020, the Company issued additional convertible, subordinated promissory notes (the “Additional 2020 Bridge Notes” and, together with the Initial 2020 Bridge Notes, the “2020 Bridge Notes”) with a total principal of approximately $1.4 million. The Additional 2020 Bridge Notes have an interest rate of 5%, are repayable upon demand by the holders any time after April 1, 2025 and shall automatically be converted into the Company’s shares of capital stock upon the closing of an issuance of the Company’s shares of capital stock to one or more investors that results in gross cash proceeds to the Company of at least Three Million Dollars ($3 million). The number of securities to be issued in connection with the conversion of these notes shall equal (i) the sum of the outstanding principal amount of, and all accrued but unpaid interest on, these notes divided by (ii) the cash purchase price per security paid by the investors in the financing. See Note 7 for discussion of the conversion of these notes into Convertible Preferred Stock in September 2020. On May 7, 2020, Aziyo entered into a promissory note with Silicon Valley Bank that provided for the receipt by the Company of loan proceeds totaling approximately $3.0 million (the “PPP loan”) pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The PPP Loan matures on May 7, 2022 and bears interest at a rate of 1.0% per annum (unaudited). Monthly amortized principal and interest payments are deferred for ten months after the date of disbursement. The PPP Loan contains events of default and other provisions customary for a loan of this type. If the PPP Loan amount, or any portion thereof, is forgiven pursuant to the Paycheck Protection Program under the CARES Act, the amount so forgiven shall be applied to principal. The Company is not yet able to determine the amount that might be forgiven, and as such, has recorded the PPP loan as a liability until Aziyo is released as the primary obligor for all or a portion of the loan. The PPP loan has been recorded within long-term debt in the accompanying Consolidated Balance Sheets. 16 September 30, December 31, 2020 2019 Term Loan Facility, net of unamortized discount and deferred financing costs $ 19,703 $ 19,612 Note to Tissue Supplier 1,392 1,692 PPP loan 2,996 - Total 24,091 21,304 Current Portion (2,890 ) (1,692 ) Long-Term Debt $ 21,201 $ 19,612 The fair value of all debt instruments, which is based on inputs considered to be Level 2 under the fair value hierarchy, approximates the respective carrying values as of September 30, 2020 and December 31, 2019. The Company has a warrant outstanding to purchase up to 7,656 shares of common stock, at an exercise price of $5.44 per share, which had been issued in connection with a prior financing arrangement. This warrant is fully vested and was exercisable through the earliest to occur of (i) March 1, 2027, (ii) the consummation of a Sale Transaction (as defined in the Company’s Certificate of Incorporation), or (iii) the initial public offering of the Company’s common stock. This warrant was fully exercised in connection with the IPO described in Note 1. Note 6. Revenue Interest Obligation On May 31, 2017, the Company completed an asset purchase agreement with CorMatrix Cardiovascular, Inc. (“CorMatrix”) and acquired all CorMatrix commercial assets and related intellectual property (the “CorMatrix Acquisition”). As part of the CorMatrix Acquisition, the Company assumed a restructured, long-term obligation (the “Revenue Interest Obligation”) to Ligand Pharmaceuticals (“Ligand”) with an estimated present value on the acquisition date of $27.7 million. Subject to annual minimum payments of $2.75 million per year, the terms of the Revenue Interest Obligation require Aziyo to pay Ligand, 5% of future sales of the products Aziyo acquired from CorMatrix, including CanGaroo, ProxiCor, Tyke and Vascure, as well as products substantially similar to those products, such as the version of CanGaroo Aziyo is currently developing that is designed to have anti-infective properties. Furthermore, a $5.0 million payment will be due to Ligand if cumulative sales of these products exceed $100.0 million and a second $5.0 million will be due if cumulative sales exceed $300.0 million during the ten-year term of the agreement which expires on May 31, 2027. The Company has recorded the present value of the estimated total future payments under the Revenue Interest Obligation as a long-term obligation, with the annual minimum payments serving to establish the short-term portion. Interest expense related to the Revenue Interest Obligation for the three months ended September 30, 2020 and 2019 and for the nine months ended September 30, 2020 and 2019 was approximately $0.7 million, $0.7 million, $2.0 million and $2,1 million, respectively. Note 7. Preferred Stock At inception, Aziyo was capitalized through the sale of 19.5 million shares of Series A Convertible Preferred Stock, par value $0.001 per share (the “Convertible Preferred Stock”). Since inception, the Company has issued an additional 30.9 million shares of Convertible Preferred Stock yielding proceeds of approximately $30.4 million were used for general corporate purposes and the CorMatrix Acquisition. During the year ended December 31, 2019 and the nine months ended September 30, 2020, Convertible Preferred Stock offerings totaled approximately $3.0 million and $5.4 million, respectively. The proceeds raised in the 2019 offering included the conversion of a $0.75 million Convertible Promissory Note (issued in November 2019), and the related accrued interest, into the Convertible Preferred Stock. The Convertible Preferred Stock issued during the nine months ended September 30, 2020 occurred largely on September 11, 2020 at which time the Company completed the sale of 3.0 million shares of Convertible Preferred Stock for net proceeds of approximately $3.0 million. At the same time, the 2020 Bridge Notes of $2.0 million (issued in April 2020), and related accrued interest, converted into approximately 2.0 million shares of Convertible Preferred Stock. The fair value of the 3.0 million shares of Convertible Preferred Stock described above exceeded the purchase price of the Convertible Preferred Stock by $3.5 million. Such excess was accounted for as a deemed dividend to the Convertible Preferred Stock and was recorded as “Accretion of Convertible Preferred Stock” in the consolidated statement of operations to arrive at “Net Loss Attributable to Common Shareholders” and will be included in the numerator of basic Earnings Per Share. With respect to the statements of changes in convertible preferred stock and stockholders’ deficit, these deemed dividends have been recorded such that Additional Paid-in Capital was first eliminated and any residual dividends served to reduce Accumulated Deficit. Additionally, the fair value of the 2.0 million shares of Convertible Preferred Stock issued upon conversion of Convertible Bridge Notes exceeded the face value of the Convertible Bridge Notes by $2.3 million. Such excess has been recorded as Loss on Early Extinguishment of Debt within Other Expenses in the accompanying Statements of Operations. 17 As consideration for the advisory services provided to Aziyo in connection with the CorMatrix Acquisition, an agreement was executed between Aziyo and HighCape Partners Management, L.P. whereby upon consummation by Aziyo of a sale transaction, as defined in the Company’s Certificate of Incorporation, or an initial public offering of the Company’s common stock, Aziyo would be required to pay HighCape a fee totaling $0.75 million. In September 2020, our obligation in respect of this fee was extinguished in connection with the issuance of 375,000 shares of Convertible Preferred Stock. Such Convertible Preferred Stock and the associated expense was recorded at its fair value of approximately $0.8 million. Dividends The holders of Convertible Preferred Stock are entitled to receive noncumulative dividends as declared by the Board of Directors. The holders of Convertible Preferred Stock shall be entitled to receive dividends prior and in preference to any payment of any dividend on common stock. No dividends have been declared by the Board of Directors from inception through September 30, 2020. Conversion The Convertible Preferred Stock is convertible at the election of the holders into shares of the Company’s common stock that would result in a conversion ratio of one share of common stock for every 13.9549 shares of Convertible Preferred Stock held. In addition to this voluntary conversion, each share of Convertible Preferred Stock will automatically be converted into shares of common stock upon (i) the written consent of the required holders (as defined) or (ii) the closing of the sale of shares of common stock to the public at a price of at least $5.00 per share (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the common stock), in an underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, resulting in at least $30 million of gross proceeds to the Company. In case of an underwritten public offering, immediately prior to closing, the holders of Convertible Preferred Stock are entitled to receive additional shares (the “Liquidation Shares”) of common stock as determined by dividing the Convertible Preferred Stock Preference Amount, as defined below, by the price per Common Shares in the underwritten public offering. At the closing of the IPO, all outstanding shares of the Convertible Preferred Stock converted into 6,578,220 shares of common stock, including the Liquidation Shares, and the related carrying value was reclassified to common stock and additional paid-in capital. There were no shares of Convertible Preferred Stock outstanding as of the closing of the IPO on October 13, 2020. Redemption and Balance Sheet Classification The Convertible Preferred Stock does not have a mandatory redemption date. However, while it is not mandatorily redeemable, the Convertible Preferred Stock was reclassified into mezzanine equity because it will become redeemable at the option of the stockholders upon the occurrence of certain deemed liquidation events that are considered not solely within the Company’s control. That is, unless a majority of the holders of the then outstanding preferred stock, on an as-if-converted to common stock basis, elect otherwise, deemed liquidation events include a sale of all or substantially all of Aziyo’s assets or a sale of at least fifty percent (50%) of the issued and outstanding voting securities, capital stock, or other comparable equity or ownership interest in Aziyo. Upon issuance of the Convertible Preferred Stock, the Company assessed the embedded conversion and liquidation features of the securities. The Company determined that the preferred stock did not require the Company to separately account for the liquidation features. Note 8. Commitments and Contingencies Operating Leases The Company leases two production facilities and one administrative and research facility under non-cancelable operating lease arrangements that expire through July 2023. All leases contain renewal options and escalation clauses based upon increases in the lessors’ operating expenses and other charges. The Company records rent expense on a straight-line basis over the life of the lease and the difference between the average rent expense and cash payments for rent is recorded as deferred rent and is included in other current and long-term liabilities on the balance sheet. Rent expense for the three months ended September 30, 2020 and 2019 and for the nine months ended September 30, 2020 and 2019 was approximately $0.3 million, $0.3 million, $0.9 million and $0.8 million, respectively, and is included as a component of either cost of goods sold or general and administrative expenses. 18 Cook Biotech License and Supply Agreements Aziyo has entered into a license agreement with Cook Biotech (“Cook”) for an exclusive, worldwide license to the porcine tissue for use in the Company’s Cardiac Patch and CanGaroo products, subject to certain co-exclusive rights retained by Cook. The term of such license is through the date of the last to expire of the licensed Cook patents, which is anticipated to be July 2031. Along with this license agreement, Aziyo entered into a supply agreement whereby Cook would be the exclusive supplier to Aziyo of the licensed porcine tissue. Under certain limited circumstances, Aziyo has the right to manufacture the licensed product and pay Cook a royalty of 3% of sales of the Aziyo-manufactured tissue. The supply agreement expires on the same date as the related license agreement. No royalties were paid to Cook during the three or nine months ended September 30, 2020 or 2019. Aziyo has also entered into an amendment to the Cook license agreement (the “Cook Amendment”) in order to add fields of exclusive use. Specifically, the Cook Amendment provides for a worldwide exclusive license to the porcine tissue for use with neuromodulation devices in addition to cardiovascular devices. The Cook Amendment includes license fee payments of  $0.1 million per year in each of the years 2020 through 2026. Such license payments would accelerate if a change in control, as defined, occurs within Aziyo. The Company, in its sole discretion, can terminate the license agreement at any time. Legal Proceedings From time to time, the Company may become involved in legal proceedings arising in the ordinary course of business. As of September 30, 2020, the Company was not a party to, or aware of, any material legal matters or claims. Note 9. Net Loss Per Share Attributable to Common Stockholders Three Months Ended September, 30 Nine Months Ended September, 30 2020 2019 2020 2019 Numerator: Net loss attributable to common shareholders $ (10,241 ) $ (3,104 ) $ (19,979 ) $ (9,156 ) Denominator: Weighted average number of common shares, basic and diluted 648,436 645,142 648,331 645,142 Net loss per common share attributable to common stockholders, basic and diluted $ (15.79 ) $ (4.81 ) $ (30.82 ) $ (14.19 ) The Company’s potential dilutive securities have been excluded from the computation of diluted net loss per share as the effect would be anti-dilutive. Therefore, the weighted average number of common shares outstanding used to calculate both basic and diluted net loss per share attributable to common stockholders is the same. The Company excluded the following potential common shares, presented based on amounts outstanding at period end, from the computation of diluted net loss per share attributable to common stockholders: Three Months Ended, September 30, Nine Months Ended, September 30, 2020 2019 2020 2019 Convertible Preferred Stock 3,612,668 2,973,866 3,612,668 2,973,866 Options to purchase common stock 287,996 289,152 287,996 289,152 Common stock warrants 7,656 7,656 7,656 7,656 Preferred stock warrants 29,022 29,022 29,022 29,022 Total 3,937,342 3,299,696 3,937,342 3,299,696 Note 10. Related Party Transactions The Company has a management services agreement with an affiliate of HighCape Partners through which strategic, operational and management consulting services are provided to the Company. Fees for such services are $0.25 million per year. During both the nine months ended September 30, 2020 and 2019, the Company recorded expenses totaling $0.19 million for these services, respectively. As of September 30, 2020 and December 31, 2019, approximately $0.2 million and $10,000, respectively, was recorded as an accrued expense related to such management fees. 19 Note 11. Segment Information The Company operates as one segment, regenerative medicines. The segment is based on financial information that is utilized by the Company’s Chief Operating Decision Maker (“CODM”), who is the Company’s Chief Executive Officer, to assess performance and allocate resources. For the three and nine months ended September 30, 2020 and 2019, the Company’s net sales disaggregated by the major sources – Core Products and Non-Core Products (see Note 1) - were as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, Sales by product 2020 2019 2020 2019 Core Products $ 10,345 $ 7,878 $ 25,956 $ 21,562 Non-Core Products 1,429 3,260 4,260 9,285 Total Net Sales $ 11,774 $ 11,138 $ 30,216 $ 30,847 Note 12. Subsequent Events On October 7, 2020, in connection with the Company’s IPO, the Company adopted the Aziyo Biologics, Inc. 2020 Omnibus Incentive Award Plan (the “2020 Plan”), which authorizes the grant of equity awards initially equal to 1,636,000 shares of Class A Common Stock, plus any shares of Class A Common Stock which as of such date were available for issuance under the Aziyo Biologics, Inc. 2015 Stock Option/Stock Issuance Plan, plus an annual increase, as set forth in the 2020 Plan. Additionally, the Company also adopted the Aziyo Biologics, Inc. 2020 Employee Stock Purchase Plan (the “ESPP”), which authorizes the issuance upon the terms and subject to the provisions of the ESPP of a number of shares of Class A Common Stock (the “ESPP Reserve”) initially equal to 143,150 shares of Class A Common Stock, plus an annual increase, as set forth in the ESPP. Upon adoption of the 2020 Plan, the Company granted stock options to purchase 588,907 shares of Class A Common Stock with an exercise price of $17.00 per share (the IPO price per share) which vest, subject to continued service, in equal annual installments over a four year period and have a term of ten years. On October 8, 2020, the Company granted restricted stock units (“RSU”) covering 147,883 shares of Class A Common Stock, which vest in their entirety on the third anniversary date of the RSU grant, or upon a Change in Control (as defined in the 2020 Plan), if earlier, subject to continued service. 20 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report, as well as the audited financial statements and the related notes thereto, and the discussion under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” included in our Prospectus filed with the Securities and Exchange Commission (the “SEC”) on October 8, 2020 (the “Prospectus”). 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 II, Item 1A. “Risk Factors” of this Quarterly Report. 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 billion market opportunity in the United States in 2020. To expand our commercial reach, we have commercial relationships with major medical device companies, such as Boston Scientific and Medtronic, to promote and sell some of our Core Products. We believe our focus on our unique regenerative medicine platforms and our Core Products will ultimately maximize our probability of continued clinical and commercial success and will 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 States in 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, California facility. 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, Georgia and 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 and sales of our products. 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 September 30, 2020, we had 156 employees, of which 25 were direct sales representatives. 21 We have incurred significant operating losses since our inception. We incurred a net loss of $11.9 million for the year ended December 31, 2019, and incurred net losses of  $16.5 million and $9.2 million for the nine months ended September 30, 2020 and 2019, respectively. Our accumulated deficit as of September 30, 2020 was $74.9 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 from existing or new products sufficient to exceed our ongoing operating expenses and capital requirements. Because of the numerous risks and uncertainties affecting product sales and our ongoing commercialization and product development efforts, we are unable 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. 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 as and when needed, we will be unable to execute our growth strategy and may be forced to reduce or terminate some or all of our operations. We believe that the net proceeds from our initial public offering consummated on October 13, 2020 (the “IPO”), together with our existing cash and our availability under our Revolving Credit Facility (as defined below), will be sufficient to fund our operating expenses and capital expenditure requirements through 2022. 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 Organization declared 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 States have 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. Components of Our Results of Operations Net Sales 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 direct sales and 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. 22 Expenses 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: Costs of Goods Sold Our cost of goods sold relate to purchased raw materials and the processing and conversion costs of such raw materials consisting primarily of salaries and benefits, supplies, quality control testing and the manufacturing overhead incurred at our processing facilities in Richmond, California and Roswell, Georgia. Both facilities have additional capacity, which if utilized, would further leverage our fixed overhead. Cost of goods sold also includes the amortization of intangibles generated from the CorMatrix Acquisition in 2017. 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, particularly with respect to our CanGaroo and SimpliDerm product lines. General and Administrative Expenses General and administrative, or G&A, expenses consist of compensation, consulting, legal, human resources, information technology, accounting, insurance and general business expenses. We expect our G&A expenses to increase 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 SEC requirements. Research and Development Expenses Research and development, or R&D, expenses consist primarily of salaries and fringe benefits, laboratory supplies, clinical trials 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 anti-infective properties. We also conduct clinical trials to validate the performance characteristics of our products and to capture patient data necessary to support our commercial efforts. Results of Operations Comparison of the Three Months Ended September 30, 2019 and 2020 Three Months Ended September 30, 2020 2019 Change 2019 / 2020 (in thousands, except percentages) Amount % of Net Sales Amount % of Net Sales $ % Net Sales $ 11,774 100.0 % $ 11,138 100.0 % $ 636 5.7 % Cost of goods sold 6,233 52.9 % 5,595 50.2 % 638 11.4 % Gross Profit 5,541 47.1 % 5,543 49.8 % (2 ) (0.0 )% Sales and marketing 4,174 35.4 % 4,435 39.8 % (261 ) (5.9 )% General and administrative 3,195 27.1 % 2,448 22.0 % 747 30.5 % Research and development 863 7.3 % 507 4.5 % 356 70.2 % Loss from operations (2,691 ) (22.9 )% (1,847 ) (16.6 )% (844 ) 45.7 % Interest expense 1,465 12.4 % 1,249 11.2 % 216 17.3 % Other (income) expense, net 2,567 21.8 % - - 2,567 NM Loss before provision of income taxes (6,723 ) (57.1 )% (3,096 ) (27.8 )% (3,627 ) 117.2 % Income tax expense 8 0.1 % 8 0.1 % - 0.0 % Net loss $ (6,731 ) (57.2 %) $ (3,104 ) (27.9 )% $ (3,627 ) 116.9 % Accretion of Convertible Preferred Stock 3,510 29.8 % - - 3,510 NM Net loss attributable to common stockholders $ (10,241 ) (87.0 )% $ (3,104 ) (27.9 )% $ (7,137 ) 229.9 % 23 NM = not meaningful Net Sales Net sales grew $0.6 million, or 5.7%, to $11.8 million in the three months ended September 30, 2020 compared to $11.1 million in the three months ended September 30, 2019. The increase in net sales was due to the significant growth of our Core Products net sales, which grew $2.5 million, partially offset by a decrease of $1.8 million in net sales of our Non-Core Products. Net sales information for our Core Products and Non-Core Products is summarized as follows: Three Months Ended September 30, 2020 2019 Change 2019 / 2020 (in thousands, except percentages) Amount % of Net Sales Amount % of Net Sales $ % Products: ​ ​ ​ ​ ​ Core Products $ 10,345 87.9 % $ 7,878 70.7 % $ 2,467 31.3 % Non-Core Products 1,429 12.1 % 3,260 29.3 % (1,831 ) (56.2 )% Total Net Sales $ 11,774 100.0 % $ 11,138 100.0 % $ 636 5.7 % Net sales generated by our Core Products grew $2.5 million, or 31.3%, to $10.3 million in the three months ended September 30, 2020 compared to $7.9 million in the three months ended September, 30 2019. The Core Products net sales growth can be largely attributed to the volume growth of our orthopedic/spinal repair products and SimpliDerm, the latter of which was launched in the second half of 2019. The growth in our orthopedic/spinal repair products was due to a broadening of our commercial relationships. Net sales generated by our Non-Core Products decreased $1.8 million, or 56.2%, to $1.4 million in the three months ended September 30, 2020 compared to $3.3 million in the three months ended September 30, 2019. Despite initial shipments to three new customers during the three months ended September 30, 2020, net sales generated by our Non-Core Products decreased largely due to the reduction in the volume of products purchased by one significant contract customer following the expiration of its contract with us in the first half of 2020. Cost of Goods Sold Cost of goods sold was $6.2 million and $5.6 million in the three months ended September 30, 2020 and 2019, respectively, and included, in each case, $0.8 million of intangible asset amortization expenses. Gross margin in the three months ended September 30, 2020 was 47.1%, a decline from 49.8% in the corresponding prior year period. Gross margin, excluding intangible asset amortization, in the three months ended September 30, 2020 was 54.3%, a decline from 57.4% in the corresponding prior year period. Gross margin, excluding intangible asset amortization, is a non-GAAP financial measure. See "Non-GAAP Financial Measures” for a discussion regarding our use of gross margin, excluding intangible asset amortization, including its limitations and a reconciliation to the most directly comparable GAAP financial measure. The decline in gross margin was due to an extended plant maintenance shutdown for two consecutive weeks during the third quarter of 2020. This shutdown caused idle capacity during such period resulting in plant costs being charged directly to cost of goods sold during this shutdown period rather than being a component of inventory. An extended shutdown occurred in the fourth quarter of 2019 and as such, did not impact our gross margin in the corresponding prior year period. Operating Expense Sales and Marketing 24 Sales and marketing expenses decreased $0.3 million, or 5.9%, to $4.2 million in the three months ended September 30, 2020 compared to $4.4 million in the three months ended September 30, 2019. As a percentage of sales, sales and marketing expenses fell to 35.4% in the three months ended September 30, 2020 from 39.8% in the three months ended September 30, 2019. The slight decrease was primarily due to declines in salesperson travel costs due to hospital restrictions caused by the COVID-19 pandemic. General and Administrative G&A expenses increased $0.8 million, or 30.5 %, to $3.2 million in the year three months ended September 30, 2020 compared to $2.4 million in the three months ended September 30, 2019. As a percentage of net sales, G&A expenses increased from 22.0% to 27.1% in the three months ended September 30, 2020 and 2019, respectively. The dollar increase was primarily due to a fee of $0.8 million paid to HighCape Partners Management, L.P. in September 2020. In connection with the CorMatrix Acquisition, we had agreed to pay HighCape Partners Management, L.P. a one-time advisory fee of $750,000 upon the first to occur of any sale transaction (as defined in our certificate of incorporation, as then in effect) and the closing of an initial public offering. In September 2020, our obligation in respect of this fee was extinguished in connection with the issuance of 375,000 shares of Convertible Preferred Stock which was recorded at its fair value. Research and Development R&D expenses increased to $0.9 million being incurred in the three months ended September 30, 2020 compared to $0.5 million in the three months ended September 30, 2019. We continue to focus our R&D efforts on the development of our pipeline products in the orthopedic/spinal repair and CanGaroo product groups with the growth in R&D expenses in the three months ended September 30, 2020 largely attributable to the work performed on the development of our CanGaroo anti-infective product. With respect to the costs of the individual development projects, the majority of our costs are internal salaries and benefits as well as laboratory supplies. These costs represent shared resources amongst all projects. Interest Expense Interest expense increased to approximately $1.5 million in the three months ended September 30, 2020 compared to approximately $1.2 million in the three months ended September 30, 2019. The increase in interest expense in the three months ended September 30, 2020 was due to an increase in the average outstanding balance of our Revolving Credit Facility (as defined below) as well as the interest associated with the Silicon Valley Bank Promissory Note (as defined below) entered into by us in May 2020 under the Paycheck Protection Program of the CARES Act. Other Expense, net Other expense, net was approximately $2.6 million in the three months ended September 30, 2020 and $0 in the three months ended September 30, 2019. The increase in the three months ended September 30, 2020 was primarily attributable to the loss on early extinguishment of debt of $2.3 million. See Note 4 to the consolidated financial statements for further discussion. Accretion of Series A Preferred Stock Accretion of Series A Preferred Stock was $3.5 million in the three months ended September 30, 2020 and $0 in the three months ended September 30, 2019. The Accretion of Series A Preferred Stock relates to $3.5 million of deemed dividends related to the sale of the Convertible Preferred Stock in September 2020 below its fair value. See Note 7 to the condensed consolidated financial statements included elsewhere in this Quarterly Report for additional information. Comparison of the Nine Months Ended September 30, 2020 and 2019 Nine Months Ended September 30, 2020 2019 Change 2019 / 2020 (in thousands, except percentages) Amount % of Net Sales Amount % of Net Sales $ % Net Sales $ 30,216 100.0 % $ 30,847 100.0 % $ (631 ) (2.0 )% Cost of goods sold 15,676 51.9 % 15,972 51.8 % (296 ) (1.9 )% Gross Profit 14,540 48.1 % 14,875 48.2 % (335 ) (2.3 )% Sales and marketing 12,471 41.3 % 11,592 37.6 % 879 7.6 % General and administrative 8,894 29.4 % 6,741 21.9 % 2,153 31.9 % Research and development 2,811 9.3 % 1,742 5.6 % 1,069 61.4 % Loss from operations (9,636 ) (31.9 )% (5,200 ) (16.9 )% (4,436 ) 85.3 % Interest expense 4,248 14.1 % 3,935 12.8 % 313 7.9 % Other (income) expense, net 2,567 8.5 % - 0.0 % 2,567 NM Loss before provision of income taxes (16,451 ) (54.4 )% (9,135 ) (29.6 )% (7,316 ) 80.1 % Income tax expense 18 0.1 % 21 0.1 % (4 ) (18.2 )% Net loss $ (16,469 ) (54.5 )% $ (9,156 ) (29.7 )% $ (7,312 ) 79.9 % Accretion of Convertible Preferred Stock 3,510 11.6 % - - 3,510 NM Net loss attributable to common stockholders $ (19,979 ) (66.1 )% $ (9,156 ) (29.7 )% $ (10,822 ) 118.2 % 25 NM = not meaningful Net Sales Net sales decreased $0.6 million, or 2.0%, to $30.2 million in the nine months ended September 30, 2020 compared to $30.8 million in the nine months ended September 30, 2019. The decrease in net sales was due to a decline of  $5.0 million in net sales of our Non-Core Products, partially offset by $4.4 million of growth in net sales of our Core Products. Net sales information for our Core Products and Non-Core Products is summarized as follows: Nine Months Ended September 30, 2020 2019 Change 2019 / 2020 (in thousands, except percentages) Amount % of Net Sales Amount % of Net Sales $ % Products: ​ ​ ​ ​ ​ Core Products $ 25,956 85.9 % $ 21,562 69.9 % $ 4,394 20.4 % Non-Core Products 4,260 14.1 % 9,285 30.1 % (5,025 ) (54.1 )% Total Net Sales $ 30,216 100 % $ 30,847 100 % $ (631 ) (2.0 )% Net sales generated by our Core Products grew $4.4 million, or 20.4%, to $26.0 million in the nine months ended September 30, 2020 compared to $21.6 million in the nine months ended September 30, 2019. The Core Products net sales growth can be largely attributed to the volume growth of our orthopedic/spinal repair products and SimpliDerm, the latter of which was launched in the second half of 2019. The growth in our orthopedic/spinal repair products was due to a broadening of our commercial relationships. This growth in net sales of our Core Products occurred despite the impact of the COVID-19 pandemic, which negatively affected our sales principally during the second quarter of 2020. Net sales generated by our Non-Core Products decreased $5.0 million, or 54.1%, to $4.3 million in the nine months ended September 30, 2020 from $9.3 million in the nine months ended September 30, 2019. This decrease was due to both the reduction in the volume of products purchased by one significant contract customer following the expiration of its contract with us in the first half of 2020, as well as the impact of the COVID-19 pandemic, which negatively affected our sales principally during the second quarter of 2020. Cost of Goods Sold Cost of goods sold decreased $0.3 million, or 1.9%, to $15.7 million in the nine months ended September 30, 2020 compared to $16.0 million in the nine months ended September 30, 2019, and included, in each case, $2.5 million of intangible asset amortization expenses. Gross margin was 48.1%, in the nine months ended September 30, 2020 compared to 48.2% in the nine months ended September 30, 2019. Gross margin, excluding intangible asset amortization, was 56.6%, in the nine months ended September 30, 2020 compared to 56.5% in the nine months ended September 30, 2019. Cost of goods sold for the nine months ended September 30, 2020 included approximately $0.4 million of costs due to an extended plant maintenance shutdown for two consecutive weeks during the third quarter of 2020. This shutdown caused idle capacity during such period resulting in plant costs being charged directly to cost of goods sold during this shutdown period rather than being a component of inventory. An extended shutdown occurred in the fourth quarter of 2019 and as such, did not impact our gross margin in the corresponding prior year period. Cost of goods sold for the nine months ended September 30, 2019 included inventory write-downs, due to excessive or expiring product, totaling $0.5 million, caused largely by the launch of SimpliDerm which reduced demand for certain other dermis inventory. 26 Operating Expenses Sales and Marketing Sales and marketing expenses increased $0.9 million, or 7.6%, to $12.5 million in the nine months ended September 30, 2020 compared to $11.6 million in the nine months ended September 30, 2019. As a percentage of sales, sales and marketing expenses rose to 41.3% in the nine months ended September 30, 2020 from 37.6% in the nine months ended September 30, 2019. The increase was primarily due to a significant increase in the number of personnel in our direct sales force which enabled us to cover new territories, as well as additions to our marketing and hospital contracting functions. Collectively, these personnel additions increased expenses in the nine months ended September 30, 2020 by $1.4 million which was partially offset by declines in salesperson travel costs due to hospital restrictions caused by the COVID-19 pandemic. General and Administrative G&A expenses increased $2.2 million, or 31.9%, to $8.9 million in the nine months ended September 30, 2020 compared to $6.7 million in the nine months ended September 30, 2019. As a percentage of net sales, G&A expenses rose to 29.4% in the nine months ended September 30, 2020 from 21.9% in the nine months ended September 30, 2019. The dollar increase was primarily due to senior leadership additions beginning during late 2019, including the hiring of our Chief Commercial Officer and Chief Medical Officer, to support and drive the growth of the business, which increased G&A expenses by $1.4 million. Also contributing to the overall increase in the year-over-year period was a fee of $0.8 million paid to HighCape Partners Management, L.P. in September 2020, as discussed above under the heading “ Comparison of the Three Months Ended September 30, 2019 and 2020 — General and Administrative Expenses.” Research and Development R&D expenses increased $1.1 million, or 61.5%, to $2.8 million in the nine months ended September 30, 2020 compared to $1.7 million in the nine months ended September 30, 2019. We continue to focus our R&D efforts on the development of our pipeline products in the orthopedic/spinal repair and CanGaroo product groups, with the growth in R&D expenses in the nine months ended September 30, 2020 largely attributable to the work performed on the development of our CanGaroo anti-infective product. Additionally, during the nine months ended September 30, 2020, increased clinical trial activities also caused higher R&D costs compared to the same prior year period. With respect to the costs of the individual development projects, the majority of our costs are internal salaries and benefits as well as laboratory supplies. These costs represent shared resources amongst all projects. Interest Expense Interest expense increased to approximately $4.2 million in the nine months ended September 30, 2020 compared to approximately $3.9 million in the nine months ended September 30, 2019. The increase in interest expense in the nine months ended September 30, 2020 was due to an increase in the average outstanding balance of our Revolving Credit Facility as well as the interest associated with the $3.0 million Silicon Valley Bank Promissory Note, entered into by us in May 2020 under the Paycheck Protection Program of the CARES Act. Other Expense, net Other expense, net was approximately $2.6 million in the nine months ended September 30, 2020 and $0 in the nine months ended September 30, 2019. The increase in the nine months ended September 30, 2020 was primarily attributable to the loss on early extinguishment of debt of $2.3 million. See Note 3 to the consolidated financial statements for further discussion. Accretion of Series A Preferred Stock Accretion of Series A Preferred Stock was $3.5 million in the nine months ended September 30, 2020 and $0 in the nine months ended September 30, 2019. The Accretion of Series A Preferred Stock relates to $3.5 million of deemed dividends related to the sale of the Convertible Preferred Stock in September 2020 below its fair value. See Note 7 to the condensed consolidated financial statements included elsewhere in this Quarterly Report for additional information. Non-GAAP Financial Measures This Quarterly Report presents our gross margin, excluding intangible asset amortization, for the three and nine months ended September 30, 2020 and 2019. 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, or 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. 27 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. The following table presents a reconciliation of our gross margin, excluding intangible asset amortization, for the three and nine months ended September 30, 2020 and 2019 to the most directly comparable GAAP financial measure, which is our GAAP gross margin (in thousands). Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Net sales $ 11,774 $ 11,138 $ 30,216 $ 30,847 Gross profit $ 5,541 $ 5,543 $ 14,540 $ 14,875 Intangible asset amortization expense $ 849 $ 849 $ 2,548 $ 2,548 Gross profit, excluding intangible asset amortization $ 6,390 $ 6,392 $ 17,088 $ 17,423 Gross margin 47.1 % 49.8 % 48.1 % 48.2 % Gross margin, excluding intangible asset amortization 54.3 % 57.4 % 56.6 % 56.5 % 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 States increasing 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. Liquidity and Capital Resources As of September 30, 2020, we had cash of approximately $1.6 million and 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 and sales of our products. Our historical cash outflows have primarily been associated with acquisition and integration, manufacturing costs, general and marketing, 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 September 30, 2020, our accumulated deficit was $74.9 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 $17.00 per share, resulting in net proceeds to us of approximately $43.0 million, after deducting the underwriting discount of approximately $3.5 million and offering expenses of approximately $3.5 million. We expect our losses to continue for the foreseeable future and these losses will continue to have an adverse effect on our financial position. Because of the numerous risks and uncertainties associated with our commercialization and development efforts, 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. As discussed below under “— Funding Requirements,” we may need additional funding to support our continuing operations and pursue our growth strategy. 28 We believe that the net proceeds from our initial public offering consummated on October 13, 2020 (the “IPO”), together with our existing cash and our availability under our Revolving Credit Facility, will be sufficient to fund our operating expenses and capital expenditure requirements through 2022. 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 Flows for the Nine Months Ended September 30, 2019 and 2020 Nine Months Ended September 30, 2020 2019 Net cash (used in) provided by: (in thousands) Operating activities $ (8,258 ) $ (4,652 ) Investing activities (525 ) (422 ) Financing activities 7,837 3,240 Net decrease in cash $ (946 ) $ (1,834 ) Net Cash Used in Operating Activities Net cash used in operating activities during the nine months ended September 30, 2020 totaled $8.3 million, primarily driven by a $16.5 million net loss reduced by non-cash related items, including $2.9 million in depreciation on fixed assets and amortization of intangible assets, $2.0 million in interest expense recorded as additional revenue interest obligation, $0.8 million of operating expenses satisfied through a preferred stock issuance and a $2.3 million loss on early extinguishment of debt. Working capital reductions of  $0.4 million also contributed to the net cash used for operations. Net cash used in operating activities during the nine months ended September, 2019 totaled $4.7 million primarily driven by a $9.2 million net loss reduced by non-cash related items, including $2.9 million in depreciation on fixed assets and amortization of intangible assets as well as $2.1 million in interest expense recorded as additional revenue interest obligation. Working capital reductions of  $0.8 million also contributed to the net cash used for operations. Net Cash Used in Investing Activities Net cash used in investing activities during the nine months ended September 30, 2020 and 2019 totaled approximately $0.5 million and $0.4 million, respectively, and were, in each case, related to the purchase of property and equipment. Net Cash Provided by Financing Activities Net cash provided by financing activities in the nine months ended September 30, 2020 totaled $7.8 million, which includes $3.0 million of proceeds from a Paycheck Protection Program loan under the CARES Act, net borrowings from the Revolving Credit Facility of approximately $1.6 million, approximately $2.0 million in proceeds from the issuance of the 2020 Bridge Notes, and proceeds from Convertible Preferred Stock Issuance of approximately $3.4 million. These increases from financing activities were offset by approximately $1.9 million in payments on the revenue interest obligation. Net cash provided by financing activities in the nine months ended September 30, 2019 totaled $3.2 million, which was generated primarily from the $3.9 million of net borrowings from the Revolving Credit Facility offset by approximately $1.4 million in payments on revenue interest obligation. Credit Facilities General On 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 million tranche (Term Loan Tranche 1), a $5.0 million tranche (Term Loan Tranche 2) and a $3.0 million tranche (Term Loan Tranche 3)), and established a new $3.5 million tranche (Term Loan Tranche 4) and a new $5.0 million tranche (Term Loan Tranche 5). Commitments in respect 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. 29 On July 15, 2019, the Borrowers also entered into an amended and restated revolving credit agreement (the “Revolving Credit Agreement”), with Midcap Funding IV Trust, as agent and lender, and the other lenders party thereto, which provided for an $8.0 million asset-based revolving credit facility (the “Revolving Credit Facility”). As of September 30, 2020, we had $19.7 million of indebtedness outstanding under our Term Loan Facility (net of  $0.3 million of unamortized discount and deferred financing costs) and $ 5.9 million outstanding under our Revolving Credit Facility (with $2.1 million of 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 below) 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). The amount available for borrowing under the Revolving Credit Facility may also be reduced by certain reserve amounts that may be established by the administrative agent from time to time . In addition to paying interest on the principal amounts outstanding under the Revolving Credit Facility, we are required to pay an unused line fee to the lenders under the Revolving Credit Facility in respect of the unutilized commitments thereunder equal to 0.50% multiplied by the lesser of  (1) the unutilized commitments and (2) $8,000,000 minus 40% of the Borrowing Base. Mandatory Prepayments 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 $250,000 with 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. 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) $8,000,000 and (2) the Borrowing Base. Optional Prepayment 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 equal to the amount prepaid multiplied by, in the case of Term Loan Tranche 1, Term Loan Tranche 2 or Term Loan Tranche 3, 3.0% until July 15, 2021 and 2.0% thereafter, and, in the case of Term Loan Tranche 4, 4.0% until November 21, 2020, 3.0% until November 21, 2021 and 2.0% 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 $100,000 or a higher integral multiple of $25,000. 30 Amortization and Final Maturity The Borrowers are required to make interest-only payments prior to February 1, 2021, the Initial Amortization Start Date. Commencing on the Initial Amortization Start Date, and continuing on the first day of each calendar month thereafter, in addition to interest payments, the Borrowers must repay an amount equal to the total principal amount of borrowings under the Term Loan Facility divided by 42, for a 42-month straight-line amortization of equal monthly principal payments; provided, however, that if certain conditions are satisfied prior to December 1, 2020 (including our completion of a qualified initial public offering and no continuing default or event of default), the Initial Amortization Start Date may, upon our request, be extended to August 1, 2021, in which case the principal payments to be made in respect of borrowings under the Term Loan Facility 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. Outstanding borrowings under the Revolving Credit Facility do not amortize and are due and payable on July 15, 2024. Security 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. Covenants 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 indebtedness; · incur certain liens; · pay dividends or make other distributions on equity interests; · enter into agreements restricting their subsidiaries’ ability to pay dividends; · redeem, repurchase or refinance subordinated indebtedness; · consolidate, merge or sell or otherwise dispose of their assets; · make investments, loans, advances, guarantees and acquisitions; · enter into transactions with affiliates; · amend or modify their governing documents; · amend or modify certain material agreements; · alter the business conducted by them and their subsidiaries; and · enter into sale and 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. The Term Loan Credit Agreement and the Revolving Credit Agreement each contains events of default, including, most significantly, a failure to timely pay interest or principal, insolvency, or an action by the FDA or such other material adverse event impacting the operations of Aziyo. 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. PPP Loan In May 2020, we entered into a promissory note with Silicon Valley Bank, or SVB, under 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 matures in May 2022, bears interest at a rate of 1.0% per annum and requires no payments during the first six months from the date of the loan. The PPP Loan is unsecured and guaranteed by the Small Business Administration, or the SBA. 31 Under the terms of the PPP Loan, the principal amount of the loan may be forgiven to the extent it is used for qualifying expenses as described in the CARES Act and we otherwise request forgiveness in accordance with the terms of the PPP Loan and the requirements of the SBA. The agreement governing the PPP Loan also provides that if we knowingly use the proceeds of such loan for unauthorized purposes, we may be subject to liability, including charges of fraud. We will be required to repay any principal amount of the PPP Loan that is not forgiven, together with accrued and unpaid interest, in equal monthly installments prior to the maturity date of the loan. In addition, we are permitted to prepay the PPP Loan at any time without penalty or premium. SVB will be permitted to accelerate all outstanding borrowings and other obligations and exercise other specified remedies upon the occurrence of certain events of default, 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 to our ownership or business structure. 2020 Bridge Notes In April 2020, we entered into a bridge note purchase agreement pursuant to which we issued approximately $2.0 million in aggregate principal amount of convertible promissory notes (the “2020 Bridge Notes”), to HighCape Partners QP, HighCape Partners and Deerfield. The 2020 Bridge Notes had a maturity date of April 1, 2025 and accrued interest at 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 September 2020. Funding Requirements We expect to continue to incur significant expenses and operating losses for the foreseeable future as we grow our sales organization and expand our product development and clinical and research activities. In addition, we expect to incur additional costs and expenses associated with operating as a public company. Based on our current and planned business operations, we believe that the net proceeds from the IPO, together with our existing cash and our availability under our Revolving Credit Facility, will be sufficient to fund our operating expenses and capital expenditure requirements through 2022. 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, collaborations or licensing arrangements. 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 patient, physician and market acceptance of our products; · the scope, rate of progress and cost of our current and future pre-clinical studies and clinical trials; · the cost of our research and development activities and the cost and timing of commercializing new products or technologies; · the cost and timing of expanding our sales and marketing capabilities; · the cost of filing and prosecuting patent applications and maintaining, defending and enforcing our patent or other intellectual property rights; · the cost of defending, in litigation or otherwise, any claims that we infringe, misappropriate or otherwise violate third-party patents or other intellectual property rights; · the cost and timing of additional regulatory approvals; · costs associated with any product recall that may occur; · the effect of competing technological and market developments; · the expenses we incur in manufacturing and selling 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; · the costs of operating as a public company; · unanticipated 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. 32 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 II, 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 As of September 30, 2020, we did not have any off-balance sheet arrangements, as defined under SEC Regulation S-K Item 303(a)(4)(ii). Contractual Obligations Except as updated in the Prospectus, there have been no material changes to our contractual obligations as of December 13, 2019, as described under the section of the Prospectus entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Contractual Obligations.”