What changed in this filing

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Item 1A. Risk Factors

2021-11-10 compared with 2021-08-10 · 55 added, 37 removed, 299 unchanged (24% of the section changed)

Risk Factors.

Our business, financial condition and operating results can be affected by a number of factors, whether current known or unknown, including but not limited to those described as risk factors, any one or more of which could, directly or indirectly, cause our actual operating results and financial condition to vary materially from past, or anticipated future, operating results and financial condition.

Our business, financial condition and operating results can be affected by a number of factors, whether currently known or unknown, including but not limited to those described as risk factors, any one or more of which could, directly

or indirectly, cause our actual operating results and financial condition to vary materially from past, or anticipated future, operating results and financial condition.

For a discussion of these potential risks and uncertainties, see Part I, Item 1A.

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We believe that the “Aziyo” name is important to attracting and retaining customers, and enhancing our name depends largely on our ability to provide high-quality and safe products.

Our name could be harmed if we fail to achieve

these objectives or if our public image were to be tarnished by events yielding negative perceptions and publicity.

Our name could be harmed if we fail to achieve these objectives or if our public image were to be tarnished by events yielding negative perceptions and publicity.

For example, on June 2, 2021, we issued a voluntary recall pertaining to a single donor lot of our FiberCel Fiber Viable Bone Matrix (“FiberCel”), a bone repair product made from human tissue that is used in various orthopedic and spinal procedures.

Notice of the voluntary recall was issued to hospitals that received products from this specific lot, following the Company’s learning of post-surgical infections in patients treated with FiberCel, including some patients who tested positive for tuberculosis, including eight cases that resulted in fatalities (the “FiberCel Recall”).

Notice of the voluntary recall was issued to hospitals that received products from this specific lot, following our learning of post-surgical infections in patients treated with FiberCel, including some patients who tested positive for tuberculosis, including eight cases that resulted in fatalities (the “FiberCel Recall”).

Following the public announcement of our voluntary recall, there has been various media coverage surrounding the recall and patients impacted, as well as lawsuits filed against Aziyo, which are described in Part II, Item 1, “Legal Proceedings” and Note 9 to the condensed consolidated financial statements included elsewhere in this Quarterly Report.

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In addition, certain of our commercial partners may, from time to time, account for a significant portion of our net sales and/or accounts receivable.

Sales to Surgalign Spine Technologies, one of our commercial partners, accounted for 11% of our net sales during the six months ended June 30, 2021 and represented 13% of our accounts receivable as of June 30, 2021.

Sales to Medtronic, also one of our commercial partners, accounted for 20% of our net sales during the six months ended June 30, 2021 and represented 30% of our accounts receivable as of June 30, 2021.

As more fully described elsewhere in this Quarterly Report, we issued a voluntary recall on June 2, 2021 pertaining to a single donor lot of our

FiberCel product after learning of post-surgical infections in several patients treated with the product, including some of whom tested positive for tuberculosis, and eight of whom suffered a fatal outcome.

Sales to Surgalign Spine Technologies, one of our commercial partners, accounted for 10% of our net sales during the nine months ended September 30, 2021 and represented 12% of our accounts receivable as of September 30, 2021.

Sales to Medtronic accounted for 14% of our net sales during the nine months ended September 30, 2021 and represented none of our accounts receivable as of September 30, 2021.

As more fully described elsewhere in this Quarterly Report, we issued a voluntary recall on June 2, 2021 pertaining to a single donor lot of our FiberCel product after learning of post-surgical infections in several patients treated with the product, including some of whom tested positive for tuberculosis, and eight of whom suffered a fatal outcome.

FiberCel is distributed by Medtronic and, in June 2021, Medtronic notified us that sales of FiberCel as well as all such other Non-Core products supplied to Medtronic would be suspended until further notice.

In October 2021, we were 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.

The loss of one or more significant commercial partners, a material reduction in their purchases of our products, such as what we are currently experiencing with Medtronic, or their inability to perform their contractual obligations, including, for example, committed purchase requirements, could adversely affect our business, financial condition and results of operations.

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We have incurred net losses since our inception in 2015.

For the six months ended June 30, 2021 and 2020, we had net losses of $7.5 million and $9.7 million, respectively.

As of June 30, 2021, we had an accumulated deficit of $87.7 million.

To date, 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.

For the nine months ended September 30, 2021, we had net losses of $15.8 million and as of September 30, 2021, we had an accumulated deficit of $96.0 million.

To date, 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 and, more recently, with proceeds from our IPO.

We have devoted the majority of our resources to acquisition and integration, manufacturing costs, research and development, clinical activity and investing in our commercial infrastructure through our direct sales force and commercial partners in order to expand our presence and to promote awareness and adoption of our products.

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In addition, failure of our products to significantly penetrate existing or new markets would negatively affect our business, financial condition and results of operations.

We have identified conditions and events that raise substantial doubt about our ability to continue as a going concern.

We anticipate our operating losses to continue for the foreseeable future due to, among other things, costs related to research and development of our product candidates, sales and marketing costs, and our administrative organization.

We will require substantial additional financing to fund our operations and to continue to execute our strategy, and we will pursue a range of options to secure additional capital.

As described in Note 2 to the condensed consolidated financial statements included elsewhere in this Quarterly Report, without additional capital, there is substantial doubt about our

ability to continue as going concern within one year after the issuance of the financial statements included in this Quarterly Report.

We will need to raise additional capital to fund our future operations and remain as a going concern.

There can be no assurance that we will be able to obtain additional funding on acceptable terms, if at all.

To the extent that we raise additional capital through future equity offerings, the ownership interest of common stockholders will be diluted, which dilution may be significant.

However, we cannot guarantee that we will be able to obtain any or sufficient additional funding or that such funding, if available, will be obtainable on terms satisfactory to us.

In the event we are unable to obtain any or sufficient additional funding, there can be no assurance that we will be able to continue as going concern.

Our future growth depends on physician awareness of the distinctive characteristics, benefits, safety, clinical efficacy and cost-effectiveness of our products.

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Even if we are able to increase awareness of our products among healthcare professionals, there can be no assurance that this will translate into greater acceptance of our products by the medical community.

We believe physicians, surgeons and other healthcare professionals will only adopt our products if they determine, based on experience, clinical data and published peer reviewed journal articles, that the use of our products in a particular procedure is a favorable

alternative to other available methods.

In light of the events surrounding the FiberCel Recall, described in Part II, Item 1, “Legal Proceedings” and Note 9 to the condensed consolidated financial statements included elsewhere in this Quarterly Report, such positive evaluation of our Bone Repair products may become more challenging.

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In addition, we believe recommendations for, and support of our products by, influential physicians are essential for market acceptance and adoption.

If we do not receive this support (e.g., because we are unable to demonstrate favorable

long-term clinical data or otherwise), physicians and hospitals may not use our products, which would significantly impair our ability to increase our sales and prevent us from achieving and sustaining profitability.

If we do not receive this support (e.g., because we are unable to demonstrate favorable long-term clinical data or otherwise), physicians and hospitals may not use our products, which would significantly impair our ability to increase our sales and prevent us from achieving and sustaining profitability.

We face significant and continuing competition from other companies, some of which have longer operating histories, more established products and/or greater resources than we do, which could adversely affect our business, financial condition and results of operations.

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Certain competitors’ products, such as competitors of SimpliDerm, are subject to a simpler reimbursement process than are our products.

Competitors may also be able to leverage their market share and other resources to set prices at a level below that which is profitable for us.

Competitors may also be able to leverage their market

share and other resources to set prices at a level below that which is profitable for us.

These companies may also enjoy other competitive advantages, including, without limitation:

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For example, on June 2, 2021, we issued a voluntary recall pertaining to a single donor lot of our FiberCel Fiber Viable Bone Matrix, a bone repair product made from human tissue that is used in various orthopedic and spinal procedures.

Notice of the voluntary recall was issued to hospitals that received product from this specific lot following the Company’s learning of post-surgical infections in patients treated with FiberCel, including some patients that tested positive for tuberculosis.

Notice of the voluntary recall was issued to hospitals that received product from this specific lot following our learning of post-surgical infections in patients treated with FiberCel, including some patients that tested positive for

tuberculosis.

The lot consisted of 154 units of FiberCel, all derived from a single donor, that were shipped to facilities in 20 states.

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Our business exposes us to the risk of product liability claims that are inherent in the manufacturing, processing, investigating and marketing of medical devices and human and animal tissue products.

For example, since the voluntary recall pertaining to a single donor lot of our FiberCel Fiber Viable Bone Matrix was issued, we have received notice of 41 separate lawsuits alleging that the plaintiffs contracted tuberculosis and/or suffered substantial symptoms and complications following the implantation of FiberCel during spinal fusion operations.

We have notified our insurers of the known lawsuits and claims and a defense has been tendered to us (with reservation of rights), and counsel has been retained to defend us in the litigation.

We are, and may in the future be, subject to product liability claims and lawsuits, including potential class actions or mass tort claims, alleging that our products have resulted or could result in an unsafe condition or injury.

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For example, the Company and certain Medtronic entities have been named in complaints alleging that plaintiffs contracted tuberculosis following the implantation of FiberCel during spinal fusion operations and seeking unspecified compensatory and punitive damages and medical monitoring.

See Part II, Item

1, “Legal Proceedings” and Note 8 to the condensed consolidated financial statements included elsewhere in this Quarterly Report.

See Part II, Item 1, “Legal Proceedings” and Note 9 to the condensed consolidated financial statements included elsewhere in this Quarterly Report.

Additionally, we may be subject to product liability claims, proceedings and lawsuits, even if the apparent injury is due to the actions of others or the pre-existing health of the patient.

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Our facilities and those of our suppliers, commercial partners and independent sales agents are also subject to periodic regulatory inspections.

If the FDA or a foreign authority were to conclude that we have failed to comply with any of these requirements, it could institute a wide variety of enforcement actions, ranging from a public warning letter to more severe sanctions, such as product recalls or seizures, withdrawals, monetary penalties, consent decrees, injunctive actions to halt the manufacture or distribution of products, import detentions of products made outside the United States, export restrictions, restrictions on operations or other civil or criminal sanctions.

If the FDA or a foreign authority were to conclude that we have failed to comply with any of these requirements, it could institute a wide variety of enforcement actions, ranging from a

public warning letter to more severe sanctions, such as product recalls or seizures, withdrawals, monetary penalties, consent decrees, injunctive actions to halt the manufacture or distribution of products, import detentions of products made outside the United States, export restrictions, restrictions on operations or other civil or criminal sanctions.

Civil or criminal sanctions could be assessed against our officers, employees, or us.

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We face significant litigation related to FiberCel.

The Company has been named in several lawsuits alleging that the plaintiffs contracted tuberculosis and are suffering substantial adverse symptoms following the implantation of FiberCel during spinal fusion operations.

See Part II, Item 1, “Legal Proceedings” and Note 8 to the condensed consolidated financial statements included elsewhere in this

Quarterly Report.

We have been named in several lawsuits alleging that the plaintiffs contracted tuberculosis and are suffering substantial adverse symptoms following the implantation of FiberCel during spinal fusion operations.

See Part II, Item 1, “Legal Proceedings” and Note 9 to the condensed consolidated financial statements included elsewhere in this Quarterly Report.

We have incurred and will continue to incur costs to defend these lawsuits and are not currently able to estimate damage amounts, if any, that we may be required to pay in connection with these lawsuits.

Furthermore, these proceedings are still expected to continue for the reasonably foreseeable future, and we cannot predict the course the proceedings will take or their ultimate outcome.

Given the inherent difficulty of predicting the outcome of litigation and costs involved to defend against the claims, we are currently unable to reasonably estimate the possible loss or range of loss with respect to the these lawsuits.

Any unfavorable outcome that results in the payment of substantial damages could have a material adverse effect on our business, cash flow, results of operations, financial position and prospects.

Our indebtedness and our Revenue Interest Obligation to Ligand Pharmaceuticals Incorporated may limit our flexibility in operating our business and adversely affect our financial health and competitive position.

As of June 30, 2021, we had $21.2 million of indebtedness outstanding, consisting of $19.8 million outstanding under our Term Loan Facility (net of $0.2 million of unamortized discount and deferred financing costs), $2.9 million outstanding under our Revolving Credit Facility (with $5.1 million of additional borrowings available thereunder), and a $1.4 million promissory note payable to one of our suppliers.

As of September 30, 2021, we had $22.1 million of indebtedness outstanding, consisting of $18.7 million outstanding under our Term Loan Facility (net of $0.2 million of unamortized discount and deferred financing costs), $2.0 million outstanding under our Revolving Credit Facility (with $4.5 million of additional borrowings available thereunder), and a $1.4 million promissory note payable to one of our suppliers.

In addition, we are party to a royalty agreement with Ligand Pharmaceuticals Incorporated (“Ligand”) pursuant to which we assumed a restructured, long-term obligation to Ligand (the “Revenue Interest Obligation”), that requires us to pay Ligand 5.0% of future sales of the products we acquired from CorMatrix (as well as products substantially similar to those products), subject to annual minimum payments of $2.75 million and certain milestone payments if sales of the acquired products exceed certain thresholds.

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In addition to these covenants, the agreements governing our Term Loan Facility and Revolving Credit Facility also contain a financial covenant, which is tested on a monthly basis, and requires us to achieve a specified minimum net product revenue (as defined therein) for the preceding 12-month period.

While we were in compliance with all covenants under these agreements as of June 30, 2021, we have had past breaches requiring waivers and there can be no guarantee that we will not breach these covenants in the future.

While we were in compliance with all covenants under these agreements as of September 30, 2021, we have had past breaches requiring waivers and there can be no guarantee that we will not breach these covenants in the future.

To this end, when finalized, the mutual termination of our Supply Agreement for FiberCel with Medtronic referred to in Note 2 to the condensed consolidated financial statements included elsewhere in this Quarterly Report would have triggered an event of default;

however, such event of default was waived by our lenders.

Furthermore, the Supply Agreement’s termination may negatively affect future revenues and as such, Aziyo’s ability to comply with the revenue covenants in the future is uncertain.

Our ability to comply with these covenants may be affected by events and factors beyond our control.

In the event that we breach one or more covenants, our lenders may choose to declare an event of default and require that we immediately repay all amounts outstanding, terminate any commitment to extend further credit and foreclose on the collateral granted to them to collateralize such indebtedness.

collateral granted to them to collateralize such indebtedness.

The occurrence of any of these events could have a material adverse effect on our business, financial condition and results of operations.

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Various events permit the lender under the Term Loan Facility and Revolving Credit Facility to terminate the agreement, following a cure period.

Such events include, without limitation, legal proceedings or the termination of a material contract, both of which could be implicated based on the facts involving the FiberCel Recall and the FiberCel Litigation.

Such events include, without limitation, legal proceedings which could be implicated based on the facts involving the FiberCel Recall and the FiberCel Litigation.

If the lender were to terminate either the Term Loan Facility or the Revolving Credit Facility, the lender may declare all or any portion of these obligations to become immediately due and payable.

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.

We believe that the net proceeds from our IPO, together with our existing cash, availability under our Revolving Credit Facility and cash generated from expected future commercial sales, will enable us to fund our operating expenses and capital expenditure requirements through the third quarter of 2022.

However, we have based these estimates on assumptions that may prove to be incorrect, and we could spend our available financial resources much faster than we currently expect.

Our future capital needs are uncertain and, as such, we may seek to raise additional capital through equity offerings, debt financings, collaborations or licensing arrangements.

Any future funding requirements will depend on many factors, including, among other things:

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● unanticipated general, legal and administrative expenses;

● the effects on any of the above of the COVID-19 pandemic, incluing due to variants thereof, or any other pandemic, epidemic or outbreak of infectious disease.

● the effects on any of the above of the COVID-19 pandemic, including due to variants thereof, or any other pandemic, epidemic or outbreak of infectious disease.

In addition, our operating plan 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.

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As a result, our estimates of the annual total addressable market for any of our products may prove to be incorrect.

If the actual number of procedures, the price at which we are able to sell any of our

products, or the annual total addressable market is smaller than we have estimated, it may impair our sales growth and have an adverse impact on our business, financial condition and results of operations.

If the actual number of procedures, the price at which we are able to sell any of our products, or the annual total addressable market is smaller than we have estimated, it may impair our sales growth and have an adverse impact on our business, financial condition and results of operations.

We may face additional issues associated with the voluntary recall of the single donor lot of FiberCel if we are unable to show that we initiated a timely recall and recalled all deficient lots.

On June 2, 2021, we issued a voluntary recall pertaining to a single donor lot of FiberCel Fiber Viable Bone Matrix, a bone repair product made from human tissue that is used in various orthopedic and spinal procedures.

We investigated the source of the infections in coordination with our distributor of the product, the FDA and the CDC.

The FDA has since inspected our Richmond, California production facility and this did not result in any Form-483 observations.

At this time, we have identified the 154 units comprising the single product lot in question.

Based on information from the CDC, 136 units within this product lot were implanted into 113 patients and the remaining 18 units were returned to either us or the CDC.

Of these 113 patients, CDC has identified at least 75 patients who have exhibited clinical or diagnostic findings consistent with tuberculosis infection.

The CDC has advised us that the CDC, working with state health agencies,

has contacted all patients treated with the recalled lot of FiberCel to help ensure they are directed to appropriate medical treatment and has informed us that all patients were started on standard four-drug treatment for tuberculosis.

If it is determined that there are other lots that are similarly affected or we experience the same or similar circumstances in the future, this could adversely affect our ability to generate revenue and have an adverse effect on our financial condition and results of operations.

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The FDA’s authority to require a recall for a medical device must be based on a finding that there is reasonable probability that the device could cause serious injury or death.

With respect to HCT/Ps, the FDA may also require a recall where the conditions of manufacture of the HCT/P do not provide adequate protections against risks of communicable disease transmission, or where the HCT/P is infected or contaminated so as to be a source of dangerous infections to humans.

With respect to human cells, tissues, and cellular and tissue-based products (“HCT/Ps”), the FDA may also require a recall where the conditions of manufacture of the HCT/P do not provide adequate protections against risks of communicable disease transmission, or where the HCT/P is infected or contaminated so as to be a source of dangerous infections to humans.

We may also choose to voluntarily recall a product if any material deficiency is found.

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Broad market and industry factors may significantly affect the market price of our Class A common stock, regardless of our actual operating performance.

If the market price of shares of our Class A common stock does not ever exceed the price you paid for your shares, you may not realize any return on your investment in us and may lose some or all of your investment.

If the market price of shares

of our Class A common stock does not ever exceed the price you paid for your shares, you may not realize any return on your investment in us and may lose some or all of your investment.

In addition, in the past, class action litigation has often been instituted against companies whose securities have experienced periods of volatility in market price.

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We are a “controlled company” within the meaning of the Nasdaq Stock Market LLC (“Nasdaq”) and, as a result, qualify for, and may rely on, exemptions from certain corporate governance requirements.

Affiliates of HighCape Partners control a majority of our outstanding common stock.

Affiliates of HighCape Partners control a majority of our outstanding Class A common stock.

As a result, we qualify as a “controlled company” within the meaning of Nasdaq’s corporate governance standards.

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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 1A. Risk Factors