What changed in this filing

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Item 1. Financial Statements

2021-11-10 compared with 2021-08-10 · 244 added, 114 removed, 472 unchanged (43% of the section changed)

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(In Thousands, Except for Share and Per Share Data)

September 30,

Current assets:

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Stockholders’ equity (deficit):

Class A Common stock, $ 0.001 par value, 200,000,000 shares authorized as of June 30, 2021 and December 31, 2020, and 7,095,265 and 7,091,960 shares issued and outstanding , as of June 30, 2021 and December 31, 2020, respectively

Class B Common stock, $ 0.001 par value, 20,000,000 shares authorized, as of June 30, 2021 and December 31, 2020 and 3,134,162 issued and outstanding as of June 30, 2021 and December 31, 2020

Class A Common stock, $ 0.001 par value, 200,000,000 shares authorized as of September 30, 2021 and December 31, 2020, and 7,122,509 and 7,091,960 shares issued and outstanding , as of September 30, 2021 and December 31, 2020, respectively

Class B Common stock, $ 0.001 par value, 20,000,000 shares authorized, as of September 30, 2021 and December 31, 2020 and 3,134,162 issued and outstanding as of September 30, 2021 and December 31, 2020

Additional paid-in capital

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Cost of goods sold

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Income tax expense

Accretion of Convertible Preferred Stock

Net loss attributable to common stockholders

Net loss per share - basic and diluted

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Stockholders'

Balance, March 31, 2021

Proceeds from stock option exercises

Stock-based compensation

Balance, June 30, 2021

Balance, March 31, 2020

Proceeds from sale of common stock through Employee Stock Purchase Plan

Stock-based compensation

Balance, September 30, 2021

Balance, June 30, 2020

Issuance of Convertible Preferred Stock, net of issuance costs of $ 9

Proceeds from stock option exercises

Accretion of Convertible Preferred Stock

Stock-based compensation

Balance, September 30, 2020

Preferred Stock

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Proceeds from stock option exercises

Proceeds from sale of common stock through Employee Stock Purchase Plan

Stock-based compensation

Balance, June 30, 2021

Balance, September 30, 2021

Balance, December 31, 2019

Issuance of Convertible Preferred Stock

Issuance of Convertible Preferred Stock, net of issuance costs of $ 9

Proceeds from stock option exercises

Accretion of Convertible Preferred Stock

Stock-based compensation

Balance, June 30, 2020

Balance, September 30, 2020

The accompanying notes are an integral part of these condensed consolidated financial statements

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(In Thousands)

Six Months Ended

OPERATING ACTIVITIES:

Nine Months Ended

September 30,

Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization

Gain on forgiveness of debt

(Gain) loss on (forgiveness)/early extinguishment of debt

Gain on revaluation of revenue interest obligation and other

Amortization of deferred financing costs

Interest expense recorded as additional revenue interest obligation

Interest expense recorded as Convertible Preferred Stock

Stock-based compensation

Operating expense satisfied through Convertible Preferred Stock issuance

Changes in operating assets and liabilities:

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FINANCING ACTIVITIES:

Proceeds from Convertible Promissory Note

Proceeds from issuance of Convertible Promissory Note

Net borrowings (repayments) under revolving line of credit

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Payments on revenue interest obligation

Proceeds from sales of common stock through Employee Stock Purchase Plan

Net cash (used in) provided by financing activities

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Cash paid for taxes

Conversion of Convertible Promissory Note to Convertible Preferred Stock

Forgiveness of SBA PPP loan

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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 the Company’s 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 the Company of approximately $ 43.0 million, after deducting the underwriting discount of approximately $ 3.5 million and offering expenses of approximately $ 3.5 million.

On October 13, 2020, in connection with the Company’s initial public offering ("IPO"), the Company 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 the Company of approximately $ 43.0 million, after deducting the underwriting discount of approximately $ 3.5 million and offering expenses of approximately $ 3.5 million.

Summary of Significant Accounting Policies

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Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the Company’s consolidated financial statements and accompanying notes included in the Company's annual report on Form 10-K (“Annual Report”) for the fiscal year ended December 31, 2020.

The financial information as of June 30, 2021 and for the three and six months ended June 30, 2021 and 2020 is unaudited, but in the opinion of management, all adjustments considered necessary for a fair statement of the results for these interim periods have been included.

The financial information as of September 30, 2021 and for the three and nine months ended September 30, 2021 and 2020 is unaudited, but in the opinion of management, all adjustments considered necessary for a fair statement of the results for these interim periods have been included.

The condensed consolidated balance sheet data as of December 31, 2020 was derived from audited financial statements but does not include all disclosures required by GAAP.

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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, availability under its Revolving Line of Credit (the “Revolver”) and cash generated from expected future commercial sales, will be sufficient to fund its operating expenses and capital expenditure requirements through at least one year after the issuance date of the accompanying condensed consolidated financial statements.

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.

For the three and nine

months ended September 30, 2021, the Company incurred net losses of $ 8.3 million and $ 15.8 million, respectively, and as of September 30, 2021, the Company had an accumulated deficit of $ 96.0 million.

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.

As further described in Note 6, the Company’s Term Debt Facility (“Term Debt”) and Revolving Line of Credit (the “Revolver”) include monthly revenue covenants, the non-compliance of which would permit our lenders to accelerate the repayment of these outstanding borrowings.

In October 2021, the Company was informed by Medtronic that they would no longer be distributing cellular bone products such as FiberCel and, as such, the two companies are working towards a mutual termination of the associated FiberCel distribution agreement (“FiberCel Agreement”).

Such termination will follow the suspension of all FiberCel purchases by Medtronic after Aziyo’s voluntary recall pertaining to a single donor lot of FiberCel in June 2021.

Given the associated revenues derived from the FiberCel Agreement, its suspension and then termination may negatively affect the Company’s future revenues.

As such, while Aziyo is currently in compliance with all revenue covenants, the Company’s ability to comply with these covenants in the future is uncertain.

Additionally, in August 2021, the Company commenced the principal repayment of its Term Debt with such repayments totaling approximately $ 556,000 per month .

In order to mitigate the current and potential future liquidity issues caused by the matters noted above, the Company may seek to raise capital through the issuance of common stock and to either refinance or restructure its Term Debt and Revolver.

However, the Company may not be able to raise additional equity or refinance its Term Debt and Revolver on acceptable terms, or at all.

As such, based on its current operating plans, the Company believes there is uncertainty as to whether its future cash flows along with its existing cash, availability under its Revolver and cash generated from expected future sales will be sufficient to meet the Company’s anticipated operating needs through twelve months from the financial statement issuance date.

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

The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

That is, the accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities in the ordinary course of business.

Reclassifications

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The reclassifications relate to certain executive compensation costs and technical operations expenses at the Company’s Richmond, California plant.

As follows are the total amounts reclassified for the three and six months ended June 30, 2020 along with the line items in the condensed consolidated statement of operations that were impacted (in thousands).

As follows are the total amounts reclassified for the three and nine months ended September 30, 2020 along with the line items in the condensed consolidated statement of operations that were impacted (in thousands).

Increase (Decrease) From Previously Reported Amounts

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Sales and marketing

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Research and development

These reclassifications did not impact the Company’s consolidated earnings or assets for the three and six months ended June 30, 2020.

These reclassifications did not impact the Company’s consolidated earnings or assets for the three and nine months ended September 30, 2020.

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.

amounts of revenues and expenses during the reporting period.

Estimates and assumptions relating to inventory, 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.

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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.

As a result, beginning in March 2020, a significant number of procedures using the Company's products have been postponed or cancelled and the access of Aziyo’s sales representatives to the associated healthcare facilities has been curtailed, all of 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.

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Lockbox receipts that have not yet been applied to the Revolving Credit Facility are classified as restricted cash in the accompanying condensed 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).

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,

Restricted cash

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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 for the three and six months ended June 30, 2021 or 2020.

There were no impairment losses for the three and nine months ended September 30, 2021 or 2020.

Revenue Recognition

The Company’s revenue is generated from contracts with customers in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) No.

606, “Revenue from Contracts with Customers”.

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.

606, “Revenue from Contracts with Customers.” 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:

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Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash.

At June 30, 2021, the Company maintained $ 28.8 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.

At September 30, 2021, the Company maintained $ 23.3 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.

The Company sells certain of its products under large contract manufacturing or distribution arrangements.

The following table presents percentage of total revenues derived from the Company’s largest customers as well as their respective percentage of total accounts receivable:

Three Months Ended

September 30,

Nine Months Ended

September 30,

Percent of revenues derived from:

Medtronic Sofamor Danek USA

Surgalign Holdings

September 30, 2021

December 31, 2020

Percent of accounts receivable derived from:

Medtronic Sofamor Danek USA

Surgalign Holdings

Comprehensive Income (Loss)

Comprehensive income (loss) comprises net income (loss) and other changes in equity that are excluded from net income (loss).

For the three and six months ended June 30, 2021 and 2020, the Company’s net loss equaled its comprehensive loss and accordingly, no additional disclosure is presented.

For the three and nine months ended September 30, 2021 and 2020, the Company’s net loss equaled its comprehensive loss and accordingly, no additional disclosure is presented.

The Company uses the asset and liability method of accounting for income taxes.

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In March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting.

The ASU provides temporary relief from some of the existing rules governing contract modifications when the modification is related to the

replacement of the London Interbank Offered Rate (“LIBOR”) or other reference rates discontinued as a result of reference rate reform.

The ASU provides temporary relief from some of the existing rules governing contract modifications when the modification is related to the replacement of the London Interbank Offered Rate (“LIBOR”) or other reference rates discontinued as a result of reference rate reform.

The ASU specifically provides optional practical expedients for contract modification accounting related to contracts subject to ASC 310, Receivables, ASC 470, Debt, ASC 842, Leases, and ASC 815, Derivatives and Hedging.

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The adoption of this standard on January 1, 2021 did not have a material impact on the Company’s consolidated financial statements.

In November 2019, the FASB issued ASU 2019-10, “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 filers with the Securities and Exchange Commission (the “SEC”) that are not smaller reporting companies (SRCs) to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

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.

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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, 2022.

In November 2019, the FASB issued 2019-10 which extended the adoption of ASU 2016-02 for the Company to be effective for periods ending after December 15, 2022.

While early adoption is permitted, the Company intends to adopt in accordance with the revised timeline provided by the FASB.

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Shares of Class A common stock totaling 1,636,000 were initially reserved for issuance pursuant to the 2020 Plan.

In addition, the shares reserved for issuance under the 2020 Plan will also include shares reserved but not issued

under the 2015 Plan as well as an annual increase as set forth in the 2020 Plan.

As of June 30, 2021, the Company had 432,864 shares of Class A common stock available for issuance under the 2020 Plan.

In addition, the shares reserved for issuance under the 2020 Plan will also include shares reserved but not issued under the 2015 Plan as well as an annual increase as set forth in the 2020 Plan.

As of September 30, 2021, the Company had 343,999 shares of Class A common stock available for issuance under the 2020 Plan.

Stock Options

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The Company’s stock options have contractual terms of seven to ten years , and vest over a four-year period from the date of grant.

A summary of stock option activity under the Company’s 2015 Plan and 2020 Plan for the six months ended June 30, 2021 is as follows:

A summary of stock option activity under the Company’s 2015 Plan and 2020 Plan for the nine months ended September 30, 2021 is as follows:

Number of Shares

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Outstanding, December 31, 2020

Outstanding, June 30, 2021

Vested and exercisable, June 30, 2021

As of June 30, 2021, there was approximately $ 7.7 million of total unrecognized compensation expense related to unvested stock options.

Outstanding, September 30, 2021

Vested and exercisable, September 30, 2021

As of September 30, 2021, there was approximately $ 7.3 million of total unrecognized compensation expense related to unvested stock options.

These costs are expected to be recognized over a weighted-average period of 3.1 years.

The weighted average grant date fair value of options granted during the six months ended June 30, 2021 was $ 7.98 .

The weighted average grant date fair value of options granted during the nine months ended September 30, 2021 was $ 7.31 .

Restricted Stock Units

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There is no exercise price and no monetary payment is required for receipt of restricted stock units or the shares issued in settlement of the award.

A summary of the RSU activity under the Company’s 2020 Plan for the six months ended June 30, 2021 is as follows:

A summary of the RSU activity under the Company’s 2020 Plan for the nine months ended September 30, 2021 is as follows:

Unvested, December 31, 2020

Unvested, June 30, 2021

The total fair value of the RSUs granted during the six months ended June 30, 2021 of $ 1.2 million was based on the fair market value of the Company's Class A common stock on the date of grant.

Unvested, September 30, 2021

The total fair value of the RSUs granted during the nine months ended September 30, 2021 of $ 1.3 million was based on the fair market value of the Company's Class A common stock on the date of grant.

The fair value at the time of the grant is amortized to expense on a straight-line basis over the vesting period of three to four years .

As of June 30, 2021, $ 3.3 million of unrecognized compensation costs related to RSUs is expected to be recognized over a weighted average period of 3.0 years.

As of September 30, 2021, $ 2.8 million of unrecognized compensation costs related to RSUs is expected to be recognized over a weighted average period of 2.6 years.

Employee Stock Purchase Plan

The Company makes shares of its Class A common stock available for purchase under the Aziyo Biologics, Inc.

2020 Employee Stock Purchase Plan (the “ESPP”).

The ESPP provides for separate six-month offering periods that begin in March and September of each year.

Under the ESPP, employees may purchase a limited number of shares of Aziyo Class A common stock at 85 % of the fair market value on either the first day of the offering period or the purchase date, whichever is lower.

The ESPP is considered compensatory for purposes of stock-based compensation expense.

The number of shares reserved under the ESPP will automatically increase on the first day of each fiscal year through January 1, 2030, in an amount equal to the lesser of (i) 1 % of the total shares of Class A common stock outstanding on the final day of the immediately preceding calendar year;

or (ii) a lesser number of shares determined by our board of directors.

As of September 30, 2021, the total shares of Class A common stock authorized for issuance under the ESPP was 214,069 , of which 186,825 remained available for future issuance.

During the nine months ended September 30, 2021, 27,244 shares of Class A common stock were issued under the ESPP.

Stock-Based Compensation Expense

Stock-based compensation expense recognized during the three and six months ended June 30, 2021 and 2020 was comprised of the following (in thousands):

Stock-based compensation expense recognized during the three and nine months ended September 30, 2021 and 2020 was comprised of the following (in thousands):

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Sales and marketing

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The period expense is then determined based on the valuation of the options, and is recognized on a straight-line basis over the requisite service period for the entire award.

The following weighted-average assumptions were used to determine the fair value of options during the six months ended June 30, 2021 and 2020:

Six Months Ended

The following weighted-average assumptions were used to determine the fair value of options during the nine months ended September 30, 2021 and 2020:

Nine Months Ended

September 30,

Expected term (years)

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Inventory was comprised of the following (in thousands):

September 30,

Raw materials

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On May 31, 2017, in connection with the Company’s acquisition of CorMatrix described in Note 7, Aziyo entered into a $ 10 million term loan facility (the “Term Loan Facility”) and an $ 8 million asset-backed revolving line of credit (the “Revolving Credit Facility”), under which the Company’s borrowing capacity is limited by certain qualifying assets, with a financial institution (the “May 2017 Financing”).

As of both June 30, 2021 and December 31, 2020, the Company’s borrowing capacity under its Revolving Credit Facility was $ 8.0 million.

As of September 30, 2021 and December 31, 2020, the Company’s borrowing capacity under its Revolving Credit Facility was $ 6.4 million and $ 8.0 million, respectively.

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, $ 3.0 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.

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dollar deposits divided by 1.00 minus the maximum effective reserve percentage for Eurocurrency funding (“LIBOR”) plus (y) 7.25 %.

In January 2021, based on its IPO, the Company exercised its right to extend the interest-only payment period for the Term Loan Facility to August 1, 2021 and, accordingly, interest and equal principal payments will be made beginning August 1, 2021 through maturity in July 2024.

In January 2021, based on its IPO, the Company exercised its right to extend the interest-only payment period for the Term Loan Facility to August 1, 2021 and, accordingly, interest and equal principal payments of approximately $ 556,000 per month began on August 1, 2021 and will continue through maturity in July 2024.

The agreement that governs the Term Loan Facility, as amended, requires certain mandatory prepayments, subject to certain exceptions, with:

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In addition, the Company is required to prepay all outstanding obligations under the Term Loan Facility upon the termination of all commitments under the Revolving Credit Facility and the repayment of the outstanding borrowings thereunder.

No such mandatory prepayments were required during the three and six months ended June 30, 2021 and 2020.

No such mandatory prepayments were required during the three and nine months ended September 30, 2021 and 2020.

Both the Term Loan Facility and the Revolving Credit Facility also permit 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 weighted average interest rate on Term Loan Facility borrowings was 7.3 % and 7.6 %, respectively, for the three months ended June 30, 2021 and 2020 and 7.4 % and 8.1 %, respectively for the six months ended June 30 2021 and 2020.

The weighted average interest rate on Term Loan Facility borrowings was 7.3 % and 7.4 %, respectively, for the three months ended September 30, 2021 and 2020 and 7.4 % and 7.9 %, respectively for the nine months ended September 30 2021 and 2020.

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 Revolving Credit Facility borrowings was 5.0 % and 5.3 %, respectively, for the three months ended June 30, 2021 and 2020 and 5.1 % and 5.8 %, respectively, for the six months ended June 30, 2021 and 2020 .

The weighted average interest rate on Revolving Credit Facility borrowings was 5.0 % and 5.1 %, respectively, for the three months ended September 30, 2021 and 2020 and 5.1 % and 5.5 %, respectively, for the nine months ended September 30, 2021 and 2020.

Both debt instruments contain events of default, including, most significantly, a failure to timely pay interest or principal, insolvency, or an action by the United States 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 June 30, 2021, Aziyo was in compliance with this financial covenant.

As of September 30, 2021, Aziyo was in compliance with this financial covenant and all other covenants.

When finalized, the mutual termination of the Company’s Supply Agreement for FiberCel with Medtronic referred to in Note 2 would have triggered an event of default;

however, such event of default was waived by the Company’s lenders.

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.

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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 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 both 2021 and 2020, the Company’s senior lender restricted payment of the amounts due.

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Small Business Administration that the entire balance of the Company’s PPP Loan and all related accrued interest was forgiven.

Such forgiveness resulted in a gain to the Company of approximately $ 3.0 million which has been recorded as other income in the accompanying condensed consolidated statements of operations for the three and six months ended June 30, 2021.

Long-term debt was comprised of the following (in thousands):

September 30,

Term Loan Facility, net of unamortized discount and deferred financing costs

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Long-Term Debt

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 June 30, 2021 and December 31, 2020.

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, 2021 and December 31, 2020.

Revenue Interest Obligation

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At each reporting period, the value of the Revenue Interest Obligation is re-measured based on current estimates of future payments, with changes to be recorded in the condensed consolidated statements of operations using the catch-up method.

There was no change to estimated future payments during the three and six months ended June 30, 2021 and 2020, and thus, no re-measurement gain or loss was recognized.

Interest expense related to the Revenue Interest Obligation was approximately $ 0.7 million for both the three months ended June 30, 2021 and 2020, respectively, and approximately $ 1.3 million for both the six months ended June 30, 2021 and 2020, respectively.

There was no change to estimated future payments during the three and nine months ended September 30, 2021 and 2020, and thus, no re-measurement gain or loss was recognized.

Interest expense related to the Revenue Interest Obligation was approximately $ 0.7 million for both the three months ended September 30, 2021 and 2020, respectively, and approximately $ 2.0 million for both the nine months ended September 30, 2021 and 2020, respectively.

Stockholders’ Equity

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”).

From inception through the Company’s IPO, the Company issued an additional 30.9 million shares of Convertible Preferred Stock yielding proceeds of approximately $ 30.4 million, which were used for general corporate purposes and the CorMatrix Acquisition.

During the nine months ended September 30, 2020, Convertible Preferred Stock offerings totaled approximately $ 5.4 million.

The Convertible Preferred Stock issued during the nine months ended December 31, 2020 occurred primarily in September 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 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 Statements of Operations to arrive at “Net Loss Attributable to Common Shareholders” and was included in the numerator of basic Earnings Per Share.

With respect to the Consolidated 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 (income) expense, net in the accompanying Consolidated Statements of Operations.

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, the Company’s 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.

Commitments and Contingencies

3 unchanged sentences

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 was approximately $ 0.3 million for both the three months ended June 30, 2021 and 2020, respectively, and was approximately $ 0.6 million for both the six months ended June 30, 2021 and 2020, respectively, and is included as a component of either cost of goods sold or general and administrative expenses.

Rent expense was approximately $ 0.3 million for both the three months ended September 30, 2021 and 2020, respectively, and was approximately $ 0.9 million for both the nine months ended September 30, 2021 and 2020, respectively, and is included as a component of either cost of goods sold or general and administrative expenses.

Cook Biotech License and Supply Agreements

4 unchanged sentences

The supply agreement expires on the same date as the related license agreement.

No royalties were paid to Cook during the three and six months ended June 31, 2021 or 2020.

No royalties were paid to Cook during the three and nine months ended September 30, 2021 or 2020.

Aziyo has also entered into an amendment to the Cook license agreement (the “Cook Amendment”) in order to add fields of exclusive use.

8 unchanged sentences

These accruals are adjusted periodically as assessments change or additional information becomes available.

Between June 21, 2021 to present, 27 lawsuits in Indiana, Delaware, Florida, and Maryland have been filed against Aziyo Biologics Inc., certain Medtronic entities, and others alleging that the plaintiffs contracted tuberculosis and suffered substantial symptoms and complications following the implantation of FiberCel during spinal fusion operations.

Thirteen lawsuits were filed in Indiana state court, captioned, respectively:

Between June 21, 2021 and November 5, 2021, forty-one lawsuits in Indiana, Delaware, Florida, Maryland, Colorado, Michigan, Ohio, and North Carolina have been filed against Aziyo Biologics Inc., certain Medtronic entities, and others alleging that the plaintiffs contracted tuberculosis and/or suffered substantial symptoms and complications following the implantation of FiberCel during spinal fusion operations.

Seventeen lawsuits were filed in Indiana state court, captioned, respectively:

(1) John Dukes and Kimberly Smith v.

Aziyo Biologics, Inc., et al., Case No.

49D06-2106- CT-020915;

49D02-2109-CT-032234 (case dismissed without prejudice on 09/16/2021 and re-filed on 09/24/2021);

(2) Tamara and Richard Marksberry v.

Aziyo Biologics, Inc., et al., Case No.

49D04-2106-CT-021649;

49D04-2106-CT-021649 (consolidated);

(3) Ramon Cabello v.

Aziyo Biologics, Inc., et al., Case No.

49D13-2106-CT-021650;

49D13-2106-CT-021650 (consolidated);

(4) Luis Caban v.

Aziyo Biologics, Inc., Case No.

49D13-2107-CT-022413;

49D13-2107-CT-022413 (consolidated);

(5) Machell and Samuel Hargrave v.

Aziyo Biologics, Inc., et al., Case No.

49D01-2106-CT-021275;

49D01-2106-CT-021275 (consolidated);

(6) Georgia Flinn as Personal Representative of the Estate of Gregory Flinn v.

Aziyo Biologics, Inc., et al., Case No.

49D12-2107-CT-024051;

49D12-2107-CT-024051 (consolidated);

(7) Ruth and William Flynn v.

Aziyo Biologics, Inc., et al., Case No.

49D12-2107-CT-024624;

49D12-2107-CT-024624 (consolidated);

(8) Tracy Warner and Kristin Foate v.

Aziyo Biologics, Inc., et al., Case No.

49D04-2107-CT-024631;

49D04-2107-CT-024631 (consolidated);

(9) Donna Schilling v.

Aziyo Biologics, Inc., et al., Case No.

49D04-2107-CT-024443;

49D04-2107-CT-024443 (consolidated);

(10) Robby and Stephanie Anderson v.

Aziyo Biologics, Inc., et al., Case No.

49D13-2107-CT-025221;

49D13-2107-CT-025221 (consolidated);

(11) Max Shepard v.

Aziyo Biologics, Inc., et al., Case No.

49D11-2108-CT-025984;

49D11-2108-CT-025984 (consolidated);

(12) Leon Chew v.

Aziyo Biologics, Inc., et al., Case No.

49D12-2108-CT-025967;

49D12-2108-CT-025967 (consolidated);

and (13) Candace Kozor, Kenneth Largin and Anthony Young v.

Aziyo Biologics, Inc., et al., Case No.

49D04-2107-CT-024626 (collectively, the “Indiana State Complaints”).

One lawsuit was filed in the United States District Court for the Southern District of Indiana, Indianapolis Division, captioned, James and Lauri Ann Jackson v.

49D04-2107-CT-024626 (consolidated);

(14) James and Lauri Ann Jackson v.

Aziyo Biologics, Inc., et al., Case No.

1:21-cv-01823 (the “Indiana Federal

Ten lawsuits were filed in the Superior Court of the State of Delaware, captioned respectively:

49D02-2108-CT-028321 (re-filed in state court and consolidated);

(15) James and Kathy Shaw v.

Aziyo Biologics, Inc., et al, Case No.

49D11-2108-CT-028669 (consolidated);

(16) Larry Szynski v.

Aziyo Biologics, Inc., et al., Case No.

49D05-2108-CT-029225 (consolidated);

(17) Jerrold Jenkins v.

Aziyo Biologics, Inc., et al., Case No.

49D03-2108-CT-029367 (consolidated) (collectively, the “Indiana State Complaints”).

On September 20, 2021, a motion was granted to consolidate the cases pending in the Marion Superior Court in the State of Indiana for purposes of discovery and pre-trial practice.

Fifteen lawsuits were filed in the Superior Court of the State of Delaware, captioned respectively:

(1) Richard Williams v.

1 unchanged sentence

N21C-06-166 EMD;

(2) George and Jean Shante v.

(2) Jean and Shante Georges v.

Aziyo, Biologics Inc., et al., C.A.

23 unchanged sentences

Aziyo, Biologics Inc., et al., C.A.

N21C-07-005-EMD (collectively, the “Delaware State Complaints”).

N21C-07-005-EMD;

(11) Carl Stevens v.

Aziyo, Biologics Inc., et al., C.A.

N21C-08-149-DJB;

(12) Joel and Melissa Stanton v.

Aziyo, Biologics Inc., et al., C.A.

N21C-08-212-AML;

(13) Bruce and Beverly Carroll v.

Aziyo, Biologics Inc., et al., C.A.

N21C-08-130-DJB;

(14) Margaret Cook v.

Aziyo, Biologics Inc., et al., C.A.

N21C-08-131-DJB;

(15) Robert Jr.

and Kelly Aspinall v.

Aziyo, Biologics Inc., et al., C.A.

N21C-09-065-DJB (collectively, the “Delaware State Complaints”).

One lawsuit has been re-filed in the Circuit Court of Maryland (previously filed on 07/21/2021 and dismissed without prejudice on 08/12/2021 in the U.S.

District Court of Maryland), captioned:

Diana and James Hanson v.

Aziyo Biologics, Inc., et al., Case No.

C-02-CV-21-001094 (“Maryland State Complaint”).

One lawsuit has been filed in the Court of Common Pleas of Ohio, captioned:

Michelle and Charles Weethee v.

Aziyo, Biologics Inc., et al., Case No.

2021 CV 03621 (“Ohio State Complaint”).

One lawsuit has been filed in the Circuit Court of Michigan, captioned:

Ilona and Christian Hildebrandt v.

Aziyo Biologics, Inc., Case No.

2021-003804-NP (“Michigan State Complaint”).

One lawsuit has been filed in the Superior Court of North Carolina, captioned:

Aurelia and Belvin Sherrill v.

Aziyo Biologics, Inc., et al., Case No.

21cvs2797 (“North Carolina State Complaint”).

One lawsuit has been filed in the U.S.

District Court for the Northern District of Florida and one lawsuit is pending in the U.S.

District Court of Maryland.

Those cases are captioned:

Deborah Rice v.

District Court for the Northern District of Florida, captioned Deborah Rice v.

Aziyo Biologics, Inc., et al., Case No.

5:21-cv-00135-MW-MJF (“Florida Federal Complaint”) and Diana and James Hanson v.

5:21-cv-00135-MW-MJF (“Florida Federal Complaint”).

One lawsuit has been filed in the U.S.

District Court for the Eastern District of Michigan, captioned:

Karrold Dudley v.

Aziyo, Biologics Inc., et al., Case No.

1:21-cv-01807-ADC (“Maryland Federal Complaint”) respectively.

Lastly, one lawsuit has been filed in the state court of Maryland, captioned Tracey and Stan Gearhart v.

2:21-cv-11813-GAD-EAS (“Michigan Federal Complaint”).

One lawsuit has been filed in the U.S.

District Court for the District of Colorado, captioned Christopher and Julie Buri v.

Aziyo Biologics, Inc., et al., Case No.

C-02-CV-21-000997.

(“Maryland State Complaint.”)

1:21-cv-02789-SKC (“Colorado Federal Complaint”).

Lastly, two lawsuits have been dismissed:

(1) in the state court of Maryland, captioned Tracey and Stan Gearhart v.

Aziyo Biologics, Inc., et al., Case No.

C-02-CV-21-000997(dismissed without prejudice on 09/14/2021), and (2) in the U.S.

District Court for the Northern District of Indiana, captioned:

David Hahn v.

Aziyo Biologics, Inc., et al., Case No.

2:21-cv-00265-PPS-JEM (dismissed without prejudice on 09/30/2021).

Plaintiffs in the Indiana State Complaints allege a cause of action under Indiana’s Product Liability Act, citing manufacturing defects, defective design and failure to properly warn and instruct, and several of the complaints allege loss of consortium.

Plaintiffs in these actions assert that the defendants are strictly liable or have breached the duty of care owed to plaintiffs by failing to exercise reasonable care in designing, manufacturing, marketing and labeling FiberCel and are seeking various types of damages, including economic damages, non-economic damages and loss of consortium.

Plaintiffs in the Indiana Federal Complaint have asserted causes of action for product liability, negligence, and breaches of implied and express warranties and allege as part of the negligence claim, that defendants breached their duty of care owed to plaintiffs.

Plaintiffs in the Indiana Federal Complaint are seeking damages for loss of services, society and consortium.

Plaintiffs in one of the Indiana State Complaints allege causes of action for product liability, negligence, breach of express and implied warranties, and punitive damages.

Each of the plaintiffs in the Delaware State Complaints allege negligence, breach of implied warranty, breach of express warranty, medical monitoring and punitive damages, and two also allege loss of consortium.

Plaintiffs in the Delaware State Complaints are seeking economic, consequential, and punitive damages.

Both the Florida and Maryland Federal Complaints assert claims of negligence, breach of implied warranty, breach of express warranty and claims for costs of medical monitoring.

The Maryland Complaint asserts claims of negligence, breach of implied warranty, breach of express warranty, medical monitoring, and loss of consortium.

The Florida Federal Complaint also contains three strict liability claims for defective design, defective manufacture, and failure to warn.

A claim for punitive damages is also pled.

The Maryland State Complaint pleads eight counts against Aziyo;

three strict liability claims alleging defective design, manufacturing and failure to warn;

one count of negligence;

breaches of express and implied warranties, and one claim of loss of consortium.

The Maryland State Complaint also pleads punitive damages.

We refer to all of the aforementioned litigation collectively as the “FiberCel Litigation.”

In order to reasonably estimate a possible loss or range of possible loss for the FiberCel Litigation, the Company must assess a variety of factors, including, (i) what claims, if any, will survive dispositive motion practice, (ii) the extent of the claims, particularly when damages are not specified or are indeterminate, (iii) how the discovery process will affect the litigation, (iv) the settlement posture of the other parties to the litigation and (v) any other factors that may have a material effect on the litigation.

At present, it is not possible for Aziyo to estimate a range of possible loss in the FiberCel Litigation;

however, while unknown, the possible loss could have a material effect on the Company’s financial position and results of operations.

The Ohio State Complaint alleges causes of action for product liability and negligence, and seeks compensatory damages.

The Michigan State Complaint asserts causes of action for product defect and breach of implied warranty, product defect and breach of express warranty, negligence, gross negligence, and possible knowledge of defect, and seeks compensatory and exemplary damages.

The Colorado Federal Complaint asserts causes of action for strict product liability, misrepresentation, negligence, breach of express warranty, and breach of implied warranty of merchantability.

The Michigan Federal Complaint asserts causes of action for negligence, breach of implied warranty, breach of express warranty, intentional infliction of emotional distress, and liability under the res ipsa loquitur doctrine.

The Michigan Federal Complaint seeks compensatory damages and punitive damages.

The North Carolina State Complaint alleges causes of action for negligence, defective design, breach of implied warranty, breach of express warranty, and loss of consortium, and seeks both compensatory and punitive damages.

In addition to the above, there have been thirty-five claims related to the FiberCel recall, which have not yet resulted in a lawsuit.

We refer to all of the aforementioned litigation, or claim notices, collectively as the “FiberCel Litigation.”

In order to reasonably estimate a loss or range of loss for the FiberCel Litigation, the Company must assess a variety of factors, including, (i) what claims, if any, will survive dispositive motion practice, (ii) the extent of the claims, particularly when damages are not specified or are indeterminate, (iii) how the discovery process will affect the litigation, (iv) the settlement posture of the other parties to the litigation and (v) any other factors that may have a material effect on the litigation.

At present, it is not possible for Aziyo to estimate a range of probable loss in the FiberCel Litigation;

however, while unknown, the probable loss could have a material effect on the Company’s financial position and results of operations.

Should Aziyo be required to pay claims related to the FiberCel Litigation, the Company believes that certain settlements and judgments, as well as legal defense costs, may be covered in whole or in part under our insurance policies with two insurance carriers.

4 unchanged sentences

In addition, there is no guarantee that insurers will pay claims or that coverage will otherwise be available.

As of both June 30, 2021 and December 31, 2020, the Company was not a party to, or aware of, any material legal matters or claims except for the FiberCel Litigation.

As of both September 30, 2021 and December 31, 2020, the Company was not a party to, or aware of, any material legal matters or claims except for the FiberCel Litigation.

Net Loss Per Share Attributable to Common Stockholders

Three Months Ended

Six Months Ended

Nine Months Ended

(in thousands, except share and per share data)

September 30,

Net loss attributable to common stockholders

4 unchanged sentences

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:

September 30,

Convertible Preferred Stock

5 unchanged sentences

Prior to the IPO, the Company had a management services agreement with an affiliate of HighCape Partners through which strategic, operational and management consulting services are provided to the Company.

During the three and six months ended June 30, 2020, the Company recorded expenses totaling $ 0.1 million.

During the three and nine months ended September 30, 2020, the Company recorded expenses totaling $ 0.1 million and $ 0.2 million, respectively.

The management services agreement terminated upon completion of the IPO and all amounts due thereunder were paid as of December 31, 2020.

As part of the contribution of assets transacted from Tissue Banks International, now KeraLink International, to Aziyo upon formation of the Company, a provision existed which guaranteed a certain level of working capital, as defined, on the opening balance sheet of Aziyo.

As part of the contribution of assets transacted from Tissue Banks International, now KeraLink International (“KeraLink”), to Aziyo upon formation of the Company, a provision existed which guaranteed a certain level of working capital, as defined, on the opening balance sheet of Aziyo.

Such guarantee was largely finalized in 2016;

2 unchanged sentences

In May 2021, KeraLink sold Aziyo common shares for proceeds in excess of $ 550,000 , and as such, remitted $ 550,000 to Aziyo in full satisfaction of the 2018 settlement.

Amounts received in connection with this settlement were recorded as other income in the accompanying condensed consolidated statements of operations for the three and six months ended June 30, 2021.

Amounts received in connection with this settlement were recorded as other income in the accompanying condensed consolidated statements of operations for the nine months ended September 30, 2021.

Segment Information

1 unchanged sentence

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 six months ended June 30, 2021 and 2020, the Company’s net sales disaggregated by the major sources - Core Products and Non-Core Products (see Note 1) - were as follows (in thousands):

For the three and nine months ended September 30, 2021 and 2020, 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

Six Months Ended

Nine Months Ended

September 30,

Sales by product

3 unchanged sentences

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

What changed 10-Q

Item 1. Financial Statements