What changed in this filing

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Item 1. Financial Statements

2022-11-14 compared with 2022-08-15 · 212 added, 342 removed, 389 unchanged (59% of the section changed)

3 unchanged sentences

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

September 30,

Current assets:

1 unchanged sentence

Accounts receivable, net

Receivables of FiberCel litigation costs

Prepaid expenses and other current assets

10 unchanged sentences

Revolving line of credit

Contingent liability for FiberCel litigation

Other current liabilities

6 unchanged sentences

Stockholders’ equity (deficit):

Class A Common stock, $ 0.001 par value, 200,000,000 shares authorized as of June 30, 2022 and December 31, 2021, and 9,306,838 and 9,245,146 shares issued and outstanding , as of June 30, 2022 and December 31, 2021, respectively

Class B Common stock, $ 0.001 par value, 20,000,000 shares authorized, as of June 30, 2022 and December 31, 2021 and 4,313,406 issued and outstanding as of June 30, 2022 and December 31, 2021

Class A Common stock, $ 0.001 par value, 200,000,000 shares authorized as of September 30, 2022 and December 31, 2021, and 9,460,964 and 9,245,146 shares issued and outstanding , as of September 30, 2022 and December 31, 2021, respectively

Class B Common stock, $ 0.001 par value, 20,000,000 shares authorized, as of September 30, 2022 and December 31, 2021 and 4,313,406 issued and outstanding as of September 30, 2022 and December 31, 2021

Additional paid-in capital

7 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Cost of goods sold

2 unchanged sentences

Research and development

FiberCel litigation costs

Total operating expenses

12 unchanged sentences

Equity (Deficit)

Balance, March 31, 2022

Balance, June 30, 2022

Proceeds from stock option exercises

Proceeds from sale of common stock through Employee Stock Purchase Plan

Vesting of restricted stock units

Vesting of restricted stock units, net of shares withheld and taxes paid

Issuance of warrants in connection with debt financing

Stock-based compensation

Balance, September 30, 2022

Balance, June 30, 2021

Balance, March 31, 2021

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

Stockholders'

4 unchanged sentences

Proceeds from sale of common stock through Employee Stock Purchase Plan

Vesting of restricted stock units

Vesting of restricted stock units, net of shares withheld and taxes paid

Issuance of warrants in connection with debt financing

Stock-based compensation

Balance, June 30, 2022

Balance, September 30, 2022

Balance, December 31, 2020

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

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

2 unchanged sentences

(In Thousands)

Six Months Ended

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

Amortization of deferred financing costs

(Gain) loss on extinguishment of debt

Amortization of deferred financing costs and debt discount

Interest expense recorded as additional revenue interest obligation

2 unchanged sentences

Accounts receivable

Receivables of FiberCel litigation costs

Prepaid expenses and other

1 unchanged sentence

Obligations to tissue suppliers

Contingent liability for FiberCel litigation

Deferred revenue and other liabilities

7 unchanged sentences

Proceeds from stock option exercises

Proceeds from long-term debt

Deferred financing costs

Repayments of long-term debt

Costs related to the extinguishment of debt

Payments on revenue interest obligation

Payments for taxes upon vesting of restricted stock units

Proceeds from sales of common stock through Employee Stock Purchase Plan

5 unchanged sentences

Cash paid for interest

Fair value of warrants issued

Forgiveness of SBA PPP loan

13 unchanged sentences

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, 2021.

The financial information as of June 30, 2022 and for the three and six months ended June 30, 2022 and 2021 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, 2022 and for the three and nine months ended September 30, 2022 and 2021 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, 2021 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.

For the six months ended June 30, 2022, the Company incurred a net loss of $ 17.5 million, and as of June 30, 2022, the Company had an accumulated deficit of $ 122.6 million.

In addition, during the six months ended June 30, 2022, the Company used $ 10.7 million and $ 3.0 million of cash in operating and financing activities, respectively, and expects to continue to incur cash outflows for the remainder of the year.

For the nine months ended September 30, 2022, the Company incurred a net loss of $ 27.5 million, and as of September 30, 2022, the Company had an accumulated deficit of $ 132.5 million.

In addition, during the nine months ended September 30, 2022, the Company used $ 16.2 million and $ 5.7 million of cash in operating and financing activities, respectively, and expects to continue to incur cash outflows for the remainder of the year.

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.

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, either refinance or restructure its Term Loan Facility and Revolving Credit Facility (as such terms are defined, and further described, in Note 6), restructure its Revenue Interest Obligation (as such term is defined, and further described, in Note 7), or pursue asset sale transactions.

However, such transactions may not be successful and the Company may not be able to raise additional equity, refinance or restructure its debt instruments or Revenue Interest Obligation, or sell assets on acceptable terms, or at all.

As such, based on its current operating plans, even after the recent debt refinancing described in Note 12, the Company believes there is

uncertainty as to whether its future cash flows along with its existing cash, availability under the SWK Loan Facility (described in Note 12) 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.

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 or debt, restructure its Revenue Interest Obligation (as such term is defined, and further described, in Note 7), or pursue asset sale or licensing transactions.

However, such transactions may not be successful and the Company may not be able to raise additional equity or debt, restructure its Revenue Interest Obligation, or sell or license assets 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, potential availability under the SWK Loan Facility (described in Note 6), issuances of additional equity 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 the Company’s ability to continue as a going concern within one year after the issuance of the financial statements.

1 unchanged sentence

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

Certain reclassifications have been made to prior year amounts to conform to current year financial statement presentation.

The reclassifications relate to the separate presentation of prior year costs related to the FiberCel Litigation (see Note 8 for further discussion).

Such costs were formerly shown as a component of general and administrative expenses in the accompanying condensed consolidated statements of operations.

Use of Estimates

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Net Loss per Share Attributable to Common Stockholders

Our common stock has a dual class structure, consisting of Class A common stock and Class B common stock.

Our common stock has a dual class structure, consisting of Class A common stock, $ 0.001 par value per share (the “Class A common stock) and Class B common stock, $ 0.001 par value per share (the “Class B common stock).

Other than voting rights, the Class B common stock has the same rights as the Class A common stock, and therefore both are treated as the same class of stock for purposes of the earnings per share calculation.

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, stock options and restricted stock units are considered to be common stock equivalents.

For purposes of the diluted net income (loss) per share attributable to common stockholders calculation, stock options and restricted stock units (“RSUs”) 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.

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The Company maintains cash balances that may, at times, exceed this insured limit.

Under the provisions of the Revolving Credit Facility (see Note 6), the Company has a lockbox arrangement with the banking institution whereby daily lockbox receipts are contractually utilized to pay down outstanding balances on the Revolving Credit Facility debt.

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.

Under the provisions of the Company’s former revolving credit facility, the MidCap Credit Facility (as such term is defined, and further described in Note 6), the Company had a lockbox arrangement with the banking institution whereby daily lockbox receipts were contractually utilized to pay down outstanding balances on the MidCap Credit Facility debt.

Lockbox receipts that had not yet been applied to the MidCap Credit Facility were 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).

September 30,

Restricted cash

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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.

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

17 unchanged sentences

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, 2022 or 2021.

There were no impairment losses for the three and nine months ended September 30, 2022 or 2021.

Revenue Recognition

3 unchanged sentences

(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.

As noted above, 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.

As noted above, the Company enters into contracts to sell and distribute products to healthcare providers or commercial partners, or produce and sell products under contract manufacturing arrangements with corporate customers, and in all such cases, customers 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.

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

At June 30, 2022, the Company maintained $ 16.7 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, 2022, the Company maintained $ 7.8 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.

The Company has not experienced any losses in such accounts.

3 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Percent of revenues derived from:

2 unchanged sentences

Medtronic Sofamor Danek USA

September 30,

Percent of accounts receivable derived from:

1 unchanged sentence

Surgalign Holdings

Medtronic Sofamor Danek USA

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, 2022 and 2021, 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, 2022 and 2021, 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.

7 unchanged sentences

Recently Issued Accounting Standards

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 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.

The ASU also establishes a general contract modification principle that entities can apply in other areas that may be affected by reference rate reform and certain elective hedge accounting expedients.

For eligible contract modifications, the principle generally allows an entity to account for and present modifications as an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination.

That is, the modified contract is accounted for as a continuation of the existing contract.

The standard was effective upon issuance on March 12,

2020, and the optional practical expedients can generally be applied to contract modifications made and hedging relationships entered into on or before December 31, 2024.

Borrowings under the Company’s term loan facility and revolving line of credit bear interest based on LIBOR or an alternate rate.

Provisions currently provide the Company with the ability to replace LIBOR with a different reference rate in the event that LIBOR ceases to exist.

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 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.

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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 FASB is also reconsidering its philosophy on establishing effective dates

for major standards for private companies, NFPs, EBPs and smaller public companies.

The FASB has developed a two-bucket approach that would give these entities more time to implement major new standards.

7 unchanged sentences

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 the fourth quarter of 2022 for the full 2022 year.

The Company is evaluating this standard to determine if adoption will have a material impact on the Company’s consolidated financial statements.

While early adoption is permitted, the Company will adopt the standard in the fourth quarter of 2022 for the full 2022 year, and expects to recognize right-of-use assets and lease liabilities for operating leases of approximately $ 2.4 million.

Stock-Based Compensation

5 unchanged sentences

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, 2022, the Company had essentially no shares of Class A common stock available for issuance under the 2020 Plan.

As of September 30, 2022, the Company had 756,809 shares of Class A common stock available for issuance under the 2020 Plan.

On June 21, 2022, C.

Randal Mills, Ph.D., a member of the Board of Directors (the “Board”) of the Company, was appointed as the Company’s Interim President and Chief Executive Officer and succeeds Ronald Lloyd, who stepped down as the Company’s President and Chief Executive Officer and as a member of the Board.

Randa l Mills, Ph.D., a member of the Board of Directors (the “Board”) of the Company, was appointed as the Company’s Interim President and Chief Executive Officer, succeeding Ronald Lloyd, who stepped down as the Company’s President and Chief Executive Officer and as a member of the Board.

In connection with his appointment as the Interim President and Chief Executive Officer, Dr.

Mills and the Company entered into an employment agreement for an initial term of 90 days (such period, the “Interim Period”).

On August 9, 2022, Dr.

Mills was appointed to the role of President and Chief Executive Officer of the Company, thereby ending the Interim Period, and his employment agreement was extended pursuant to the terms thereof.

In accordance with the terms of his employment agreement, Dr.

Mills (1) received a stock option award to purchase 456,278 shares of Class A common stock of the Company (the “Option Grant”) on June 21, 2022;

three-fifths of such Option Grant is subject to time-based vesting (the “Time-Based Options”) and two-fifths of such Option Grant is subject to performance-based vesting (the “Performance Based Options”) and (2) is eligible to receive 224,734 restricted stock units (the “RSU Grant”);

three-fifths of such RSU Grant is subject to time-based vesting (the “Time-Based RSUs”) and two-fifths of such RSU Grant is subject to performance-based vesting (the “Performance-Based RSUs”).

One-third of the Time-Based Options vested on August 9, 202 2 (end of the Interim Period), and two-thirds of the Time-Based Options vest over a four-year vesting schedule with 25 % vesting on the first anniversary of June 21, 2022 and the remaining portion vesting in twelve equal quarterly installments.

One-third of the Time-Based RSUs vest on the grant date , and two-thirds of the Time-Based RSUs vest over a four-year vesting schedule in equal annual installments.

The Performance-Based Options and Performance-Based RSUs each vest in equal installments upon the achievement of certain share price thresholds for twenty consecutive days of trading at each respective threshold.

Pursuant to the terms of the employment agreement, all of these awards were deemed granted on June 21, 2022, for purposes of and in accordance with ASC 718, Accounting for Stock Based Compensation ;

however, the RSUs had not been legally granted as of September 30, 2022.

It is anticipated that such RSUs will be legally granted prior to December 31, 2022, and the vested shares underlying the award will be deemed outstanding as of such time.

In connection with his resignation as President and Chief Executive Officer, Mr.

Lloyd and the Company have entered into a separation agreement.

In connection therewith, Mr.

Lloyd will remain a full-time, non-officer employee of the Company through September 30, 2022 to assist with the transition of his duties to his successor.

Lloyd and the Company entered into a separation agreement, pursuant to which Mr.

Lloyd remained a full-time, non-officer employee of the Company through September 30, 2022 to assist with the transition of his duties to his successor.

On September 30, 2022, Mr.

Lloyd will be eligible to receive:

(i) cash severance in an amount equal to his base salary for a period of 12 months and 100 % of his annual target bonus;

(ii) an additional cash payment in an amount equal to the difference, if any, between (a) $ 279,656 and (b) the Fair Market Value (as defined in the Company’s 2020 Incentive Award Plan) as of September 8, 2022 of the 39,894 restricted stock units that will have vested in accordance with their terms on such date, payable in a lump sum;

(iii) subject to Mr.

Lloyd’s achievement of certain performance goals, an additional cash bonus of

up to $ 1,000,000 ;

and (iv) the COBRA benefits, during the 12-month period following the September 30, 2022.

The Company will recognize Mr.

Lloyd’s severance costs over the period from June 21, 2022 through September 30, 2022.

As of June 30, 2022, the Company has recognized $ 0.1 million of expense related to such severance and recorded such expense in Accrued Expenses in the accompanying condensed consolidated balance sheet as of June 30, 2022.

In connection with his appointment as Interim President and Chief Executive Officer, Dr.

Mills and the Company have entered into an employment agreement (the “Mills Employment Agreement”), pursuant to which Dr.

Mills’ employment commenced on June 21, 2022 (the “Mills Effective Date”) and ends on the 90-day anniversary of the Mills Effective Date (such period, the “Interim Period”), unless the parties mutually agree to extend the Interim Period or the Board determines that, at the end of the Interim Period, Dr.

Mills is suitable to assume the role of President and Chief Executive Officer.

In the event the Board makes such determination (which the Board determined in August 2022 as noted below), Dr.

Mills’ continued employment will commence on the day immediately following the Interim Period for an initial period ending on the second anniversary of the Mills Effective Date, which shall automatically be extended for successive one -year periods (the “Employment Period”).

In connection with his service as Interim President and Chief Executive Officer, Dr.

Mills (1) has received a stock option award to purchase 456,278 shares of common stock of the Company (the “Option Grant”), three-fifths of which Option Grant will be subject to time-based vesting (the “Time-Based Options”) and two-fifths of such Option Grant will be subject to performance-based vesting (the “Performance Based Options”) and (2) will be eligible to receive 224,734 restricted stock units (the “RSU Grant”), three-fifths of which RSU Grant will be subject to time-based vesting (the “Time-Based RSUs”) and two-fifths of such RSU Grant will be subject to performance-based vesting (the “Performance-Based RSUs”).

One-third of the Time-Based Options vest upon the end of the Interim Period, and two-thirds of the Time-Based Options vest over a four-year vesting schedule with 25 % vesting on the first anniversary of the June 21, 2022 and the remaining portion vesting in twelve equal quarterly installments.

One-third of the Time-Based RSUs vest upon the end of the Interim Period, and two-thirds of the Time-Based RSUs vest over a four-year vesting schedule in equal annual installments.

The Performance-Based Options and Performance-Based RSUs each vest in equal installments upon the achievement of escalating share price thresholds of $ 12.50 , $ 17.00 , $ 25.00 and $ 37.00 , respectively (calculated based on twenty consecutive days of trading at each respective threshold).

The vesting of the Option Grant and RSU Grant are subject to Dr.

Mills’ continuous service through each applicable vesting date.

These awards were deemed granted on June 21, 2022, in accordance with ASC 718, Accounting for Stock Based Compensation ;

however, the Company could not legally issue the RSUs because the available shares in the 2020 Plan were not sufficient as of June 30, 2022.

The Company expects such shares to become available on September 30, 2022 upon Mr.

Lloyd’s separation.

On August 9, 2022, Dr.

Mills was appointed to the role of President and Chief Executive Officer, thereby ending the Interim Period described above.

Lloyd received:

(i) cash severance in an amount equal to his base salary for a period of 12 months and 100 % of his annual target bonus and (ii) the COBRA benefits, during the 12-month period following September 30, 2022.

The Company recognized Mr.

Lloyd’s severance costs totaling approximately $ 0.6 million over the period from June 21, 2022 through September 30, 2022, and as of September 30, 2022, all such expenses were included in Accrued Expenses in the accompanying condensed consolidated balance sheets.

Stock Options

1 unchanged sentence

The Company’s stock options have contractual terms of seven to ten years , and generally 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, 2022 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, 2022 is as follows:

Number of Shares

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Outstanding, December 31, 2021

Outstanding, June 30, 2022

Vested and exercisable, June 30, 2022

The weighted average grant date fair value of options granted during the six months ended June 30, 2022 was $ 3.15 .

As of June 30, 2022, there was approximately $ 8.1 million of total unrecognized compensation expense related to unvested stock options.

Outstanding, September 30, 2022

Vested and exercisable, September 30, 2022

The weighted average grant date fair value of options granted during the nine months ended September 30, 2022 was $ 3.15 .

As of September 30, 2022, there was approximately $ 4.1 million of total unrecognized compensation expense related to unvested stock options.

These costs are expected to be recognized over a weighted-average period of 2.5 years.

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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 granted during the six months ended June 30, 2022 and 2021:

Six Months Ended

The following weighted-average assumptions were used to determine the fair value of options granted during the nine months ended September 30, 2022 and 2021:

Nine Months Ended

September 30,

Expected term (years)

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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, 2022 is as follows:

The Company’s RSUs generally vest over a three to four year period from the date of grant.

A summary of the RSU activity under the Company’s 2020 Plan for the nine months ended September 30, 2022 is as follows:

Number of Shares

1 unchanged sentence

Unvested, December 31, 2021

Unvested, June 30, 2022

The total fair value of the RSUs granted during the six months ended June 30, 2022 was $ 2.4 million.

Of this total, $ 1.7 million was based on the fair market value of the Company's Class A common stock on the date of grant and such fair value at the time of the grant is amortized to expense on a straight-line basis over vesting periods of six months to four years .

With respect to Performance-Based RSUs, during the six months ended June 30, 2022, the Company granted RSUs totaling (i) 199,388 and accounted for these awards as market condition awards and pursuant to which such RSUs will only vest if or when the Company’s Class A common stock closing price is at or exceeds $ 10 per share for 30 consecutive days by March 8, 2024, subject to the grantee’s continued employment with the Company and (ii) 89,894 to Dr.

Mills as described above.

Given the nature of these market condition arrangements, an option pricing model, the Monte Carlo model, was used to determine the fair value of these RSUs which totaled $ 0.7 million, and the expense is being recorded using the graded vesting method over a period of two to three years .

As of June 30, 2022, $ 3.6 million of unrecognized compensation costs related to RSUs is expected to be recognized over a weighted average period of two years .

Unvested, September 30, 2022

The total fair value of the RSUs granted during the nine months ended September 30, 2022 was $ 2.4 million.

During the nine months ended September 30, 2022, the Company granted 289,282 Performance-Based RSUs.

All such RSUs, including those granted to Dr.

Mills and described above, vest only if or when the Company’s Class A common stock closing price is at or exceeds a defined share price for a defined period of time.

As such, all of these awards have been accounted for as market condition awards.

Given the nature of these market condition arrangements, an option pricing model, the Monte Carlo model, was used to determine the fair value of these RSUs as well as the expense recognition term of two to three years using the graded vesting method.

As of September 30, 2022, $ 1.7 million of unrecognized compensation costs related to RSUs is expected to be recognized over a weighted average period of two years .

Employee Stock Purchase Plan

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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 as set forth in the ESPP.

As of June 30, 2022, the total shares of Class A common stock authorized for issuance under the ESPP was 380,997 , of which 311,408 remained available for future issuance.

During the six months ended June 30, 2022, 42,345 shares of Class A common stock were issued under the ESPP.

As of September 30, 2022, the total shares of Class A common stock

authorized for issuance under the ESPP was 380,997 , of which 279,345 remained available for future issuance.

During the nine months ended September 30, 2022, 74,408 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, 2022 and 2021 was comprised of the following (in thousands):

Stock-based compensation expense recognized during the three and nine months ended September 30, 2022 and 2021 was comprised of the following (in thousands):

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Sales and marketing

4 unchanged sentences

Inventory was comprised of the following (in thousands):

September 30,

Raw materials

2 unchanged sentences

Long-Term Debt

On May 31, 2017, in connection with the Company’s acquisition of CorMatrix described in Note 7, Aziyo entered into a $ 12 million term loan facility (the “Term Loan Facility”) and an $ 8.0 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 June 30, 2022 and December 31, 2021, the Company’s borrowing capacity under its Revolving Credit Facility was $ 7.5 million and $ 6.9 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.

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.

On May 31, 2017, in connection with the Company’s acquisition of CorMatrix described in Note 7, Aziyo entered into a $ 12 million term loan facility (the “MidCap Loan Facility”) and an $ 8.0 million asset-backed revolving line of credit (the “MidCap Credit Facility”), under which the Company’s borrowing capacity was limited by certain qualifying assets, with a financial institution (the “May 2017 Financing”).

The MidCap 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 MidCap Loan Facility to $ 20 million.

The borrowings under the MidCap Loan Facility and the MidCap Credit Facility were fully repaid with a portion of the proceeds from the SWK Loan Facility (as defined below) as more fully described below.

On August 10, 2022 (the “Closing Date”), the Company entered into a senior, secured term loan facility with SWK Funding LLC, as agent, and other lenders party thereto (the “SWK Loan Facility”) for an aggregate principal amount of $ 25 million, with $ 21 million drawn on the Closing Date (the “Initial Term Loan”) and $ 4 million that becomes available, subject to the achievement of specified operational and financial metrics by September 30, 2023 (the “Additional Term Loan”).

The SWK Loan Facility also allows for the establishment of a separate, new asset-based revolving loan facility of up to $ 8 million, which had not been entered into as of September 30, 2022.

The SWK Loan Facility matures on August 10, 2027 and accrues interest, payable quarterly in arrears.

Principal amortization of the SWK Loan Facility starts on November 15, 2024, which amortization may be extended to November 17, 2025 if conditions to draw the Additional Term Loan have been satisfied.

Principal payments during the amortization period will be limited based on revenue-based caps.

As of September 30, 2022, quarterly principal payments are scheduled to begin on November 15, 2024, in an amount equal to 5 % of the Initial Term Loan with the balance paid at maturity.

T he SWK Loan Facility also includes both revenue and liquidity covenants, restrictions as to payment of dividends, and is secured by all assets of the Company, subject to certain customary exceptions.

As of September 30, 2022, Aziyo was in compliance with its financial covenants under the agreement governing the SWK Loan Facility (the “SWK Loan Facility Agreement”).

All of the SWK Loan Facility borrowings take the form of Secured Overnight Financing Rate (“SOFR”) loans and bear interest at a rate per annum equal to the sum of an applicable margin of (i) 8.75 % and the “Term SOFR Rate” (based upon an interest period of 3 months), or (ii) if the Company has elected the PIK Interest option (as defined below), 4.75 % and the “Term SOFR Rate.” The Company may elect a portion of the interest due, to be paid in-kind at a rate per annum of 4.5 % (“PIK Interest”), and such election may be made (x) until November 15, 2024 if the conditions to draw the Additional Term Loan have not been met, or (y) if such conditions to draw the Additional Term Loan have been satisfied, until November 17, 2025.

The “Term SOFR Rate” is subject to a floor of 2.75 %.

The agreement governing the SWK Loan Facility also includes an exit fee equal to 6.5 % of the aggregate principal amount funded prior to termination and prepayment penalties equal to:

(i) if such prepayment occurs prior to the first anniversary of the Closing Date, 2 % of the aggregate principal amount funded prior to the termination plus remaining unpaid interest payments scheduled to be paid during the first year of the loan or (ii) if such prepayment occurs after the first anniversary of the Closing Date but prior to the second anniversary of the Closing Date, 2 % of the aggregate principal amount funded prior to the termination.

The weighted average interest rate on the SWK Loan Facility was 11.7 % for the period from August 10, 2022 through September 30, 2022.

On August 10, 2022, the Company issued to SWK Funding LLC a warrant (the “Warrant”) to purchase, in the aggregate, up to 187,969 shares of Class A common stock of the Company, $ 0.001 par value per share at an exercise price of $ 6.65 per share.

The Warrant is immediately exercisable for up to 157,894 shares of Class A common stock from time to time on or after the Closing Date.

Subject to and effective upon the borrowing of the Additional Term Loan, the Warrant will be exercisable for up to an additional 30,075 shares of Class A common stock.

The exercise price and number of shares of Class A common stock issuable upon exercise of the Warrant are subject to adjustment in the event of stock dividends, stock splits and certain other events affecting the Class A common stock.

Unless earlier exercised or terminated in accordance with its terms, the Warrant will expire on the seventh anniversary of the Closing Date.

Upon issuance, the Company valued the Warrant at approximately $ 0.6 million using the Black Scholes model.

The recognition of the Warrant as well as deferred financing costs of approximately $ 0.5 million incurred in securing the SWK Loan Facility served to reduce the recorded value of the associated debt.

The debt discount and deferred financing costs will be recognized as interest expense through the maturity of the loan.

The Company used $ 16 million of the proceeds of the SWK Loan Facility to repay all outstanding obligations on the MidCap Loan Facility and MidCap Credit Facility.

Such payment included (i) $ 12.8 million to repay all outstanding principal and accrued interest on the MidCap Loan Facility, (ii) $ 1.7 million to pay the prepayment and exit fees on the MidCap Loan Facility and (iii) $ 1.5 million to repay the outstanding balance, accrued interest and exit fees on the MidCap Credit Facility.

The prepayment fees, payment of unaccrued exit fees and the write-off of unamortized deferred financing costs resulted in a loss to the Company of approximately $ 1.2 million which has been recorded as other expense in the accompanying condensed consolidated statements of operations for the three and nine months ended September 30, 2022.

The SWK Loan Facility Agreement requires certain mandatory prepayments, subject to certain exceptions, with:

(1) 100 % of any net casualty proceeds in excess of $ 250,000 and (2) for non-ordinary course asset sales, an amount equal to the difference between (x) the proportion of divested gross profit (as defined in the SWK Loan Facility Agreement) to the Company’s total gross profit (as defined in the SWK Loan Facility Agreement) multiplied by the outstanding loans under the SWK Loan Facility and (y) the difference between $ 1,000,000 and the aggregate sale proceeds of any assets previously sold during the fiscal year.

No such mandatory prepayments were required during the three and nine months ended September 30, 2022.

Borrowings under the MidCap Loan Facility, as amended, bore 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 %.

The weighted average interest rate on Term Loan Facility borrowings was 9.5 % for both the three and six months ended June 30, 2022 and 2021.

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.

However, the Term Loan Facility also provides that if certain conditions were satisfied prior to December 1, 2020 (including the completion of a qualified initial public offering and no continuing default or event of default), interest only payments may, upon the Company’s request, be extended to August 1, 2021.

Accordingly, based on the Company’s successful completion of its IPO, Aziyo exercised this interest-only period extension right and as such, interest and equal principal payments commenced 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:

(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 of the Revolving Credit Facility is calculated.

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, 2022 and 2021.

The agreement governing the Term Loan Facility also includes an exit fee of 6.5 % of the aggregate principal amount and prepayment penalties which, based on an amendment to the Term Loan Facility executed in January 2022, shall be equal to the amount prepaid multiplied by 3.0 % until January 21, 2023 and 2.0 % thereafter.

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 based on an amendment to the Revolving Credit Facility executed in January 2022, prepayment penalties equal to $ 8.0 million multiplied by 3.0 % until January 21, 2023 and 2.0 % thereafter.

The weighted average interest rate on Revolving Credit Facility borrowings was 7.2 % for the three and six months ended June 30, 2022 and 2021.

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, 2022, Aziyo was in compliance with this financial covenant.

The weighted average interest rate on MidCap Loan Facility was 9.5 % from January 1, 2022 through August 10, 2022 (the “Repayment Date”) and July 1, 2022 through the Repayment Date.

The weighted average interest rate on the MidCap Loan Facility was 9.5 % for both the three and nine months ended September 30, 2021.

Borrowings under the MidCap Credit Facility bore 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 weighted average interest rate on MidCap Credit Facility was 7.2 % from

January 1, 2022 through the Repayment Date and July 1, 2022 through the Repayment Date.

The weighted average interest rate on MidCap Credit Facility was 7.2 % for both the three and nine months ended September 30, 2021.

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, 2021.

The notes are subordinated in payment to the Term Loan Facility and Revolving Credit Facility and in both 2022 and 2021, the Company’s senior lender restricted payment of the amounts due.

The Company used $ 1.4 million of the proceeds from the SWK Loan Facility to repay the remaining balance on the promissory note;

however the accrued interest on the promissory note was forgiven by the lender.

Such forgiveness resulted in a gain to the Company of approximately $ 0.4 million which has been recorded as other income in the accompanying condensed consolidated statements of operations for the three and nine months ended September 30, 2022.

In May 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”).

In June 2021, Aziyo was notified by the U.S.

In September 2021, Aziyo was notified by the U.S.

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):

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

September 30,

SWK/MidCap Loan Facility, net of unamortized discount and deferred financing costs

Note to Tissue Supplier

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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, 2022 and December 31, 2021.

Refer to Note 12 for discussion of the repayment of the Term Loan Facility, Revolving Credit Facility and tissue supplier promissory note subsequent to June 30, 2022.

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, 2022 and December 31, 2021.

Revenue Interest Obligation

5 unchanged sentences

The Company 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, along with the expected payment timing of the first $ 5.0 million sales milestone payment noted above, serving to establish the short-term portion.

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, 2022 and 2021, and thus, no re-measurement gain or loss was recognized.

Interest expense related to the Revenue Interest Obligation of approximately $ 0.7 million was recorded for both the three months ended June 30, 2022 and 2021 and approximately $ 1.3 million for both the six months ended June 30, 2022 and 2021.

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 nine months ended September 30, 2022 and 2021, and thus, no re-measurement gain or loss was recognized.

Interest expense related to the Revenue Interest Obligation of approximately

$ 0.7 million was recorded for both the three months ended September 30, 2022 and 2021 and approximately $ 2.0 million for both the nine months ended September 30, 2022 and 2021.

Commitments and Contingencies

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The Company leases two production facilities and one administrative and research facility under non-cancelable operating lease arrangements that expire through November 2025.

All leases contain renewal options and escalation clauses based upon increases in the lessors’ operating expenses and other charges.

Each of these leases contain renewal options and escalation clauses based upon increases in the lessors’ operating expenses and other charges.

The Company also has a short-term lease for a small administrative-only facility.

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, 2022 and 2021, and was approximately $ 0.6 million for both the six months ended June 30, 2022 and 2021, 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, 2022 and 2021, and was approximately $ 0.9 million for both the nine months ended September 30, 2022 and 2021, and is included as a component of either cost of goods sold or general and administrative expenses.

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.

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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 30, 2022 or 2021.

No royalties were paid to Cook during the three and nine months ended September 30, 2022 or 2021.

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

1 unchanged sentence

The Cook Amendment includes license fee payments of $ 0.1 million per year in each of the years 2021 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.

Such license payments would accelerate if a change in control, as defined in the Cook Amendment, occurs within Aziyo.

The Company, in its sole discretion, can terminate the Cook License Agreement at any time.

Legal Proceedings

3 unchanged sentences

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

FiberCel Litigation

In June 2021, the Company announced a voluntary recall of a single lot of FiberCel fiber viable bone matrix.

Between June 21, 2021 and July 19, 2022, fifty-one lawsuits in Indiana, Delaware, Florida, Maryland, Colorado, Michigan, Ohio, Kentucky, Oregon, North Carolina and Louisiana 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.

Twenty-one lawsuits were filed in Indiana state court, captioned, respectively:

(1) John Dukes and Kimberly Smith v.

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

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.

CT-021649 (consolidated);

(3) Ramon Cabello v.

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

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

(4) Luis Caban v.

Aziyo Biologics, Inc., Case No.

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

(5) Machell and Samuel Hargrave v.

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

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 (consolidated);

(7) Ruth and William Flynn v.

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

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

(8) Tracy Warner and Kristin Foate v.

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

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

(9) Donna Schilling v.

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

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

(10) Robby and Stephanie Anderson v.

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

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

(11) Max Shepard v.

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

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

(12) Leon Chew v.

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

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

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

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

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

(14) James and Lauri Ann Jackson v.

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

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;

(18) Hon Vien v.

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

49D01-2202-CT-004812;

(19) Jayson Hartman v.

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

49D12-2202-CT-004835;

(20) Randy Smith v.

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

49D01-2202-CT-005184;

and (21) Jason and Sherry Haywood v.

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

49D11-206-CT-021446 (collectively, the “Indiana State Complaints”).

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

(1) Richard Williams v.

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

N21C-06-166 EMD;

(2) Jean and Shante Georges v.

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

N21C-06-256-DJB;

(3) Marjorie Hitchens v.

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

N21C-06-214-DJB;

(4) Larry and Joanne Fortner v.

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

N21C-06-215-DJB;

(5) Nancy and John Smith v.

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

N21C-06-219-DJB;

(6) Joan Trincia v.

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

N21C-06-220-DJB;

(7) Bernadette Burgess v.

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

N21C-06-264-DJB;

(8) Summer Fitzhugh v.

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

N21C-06-221-DJB;

(9) Linda Shields v.

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

N21C-06-166-DJB;

(10) Sharon Riddick v.

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

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;

and (15) Robert Jr.

and Kelly Aspinall v.

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

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

Two lawsuits were filed in the Circuit Court of Maryland, captioned:

(1) (previously filed on 07/21/2021 and dismissed without prejudice on 08/12/2021 in the U.S.

District Court of Maryland), Diana and James Hanson v.

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

C-02-CV-21-001094 and (2) John Christensen v.

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

C-15-CV-22-002044 (collectively, the “Maryland State Complaints”).

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 was filed in the Northern District of Ohio, captioned:

Heath Raker and Neal Raker v.

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

1:22-cv-54 (“Ohio Federal Complaint”).

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

Aurelia and Belvin Sherrill v.

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

21-cvs-2797 has since been removed to the U.S.

Since September 2021, 55 lawsuits in Indiana, Delaware, Florida, Maryland, Colorado, Michigan, Ohio, Kentucky, Oregon, North Carolina and Louisiana have been filed against Aziyo Biologics Inc., certain Medtronic entities, and others alleging that the plaintiffs were exposed to and/or contracted tuberculosis and/or suffered substantial symptoms and complications following the implantation of FiberCel during spinal fusion operations.

Such lawsuits were filed in Indiana state court (collectively, the “Indiana State Complaints”);

the Superior Court of the State of Delaware (collectively, the “Delaware State Complaints”);

the Circuit Court of Maryland (collectively, the “Maryland State Complaints”);

the Court of Common Pleas of Ohio (“Ohio State Complaint”);

the Northern District of Ohio (“Ohio Federal Complaint”);

District Court for the Western District of North Carolina (“North Carolina Federal Complaint”);

One lawsuit has been filed in the U.S.

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”).

Two lawsuits were filed in the U.S.

District Court for the Eastern District of Michigan, captioned:

(1) Karrold Dudley v.

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

2:21-cv-11813-GAD-EAS and (2) Diane Parron v.

Aziyo Biologics Inc.,

et al., Case No.

2:22-cv-10522-NGE-EAS.

A third lawsuit originally filed in the Circuit Court of Michigan, captioned:

(3) Ilona and Christian Hildebrandt v.

Aziyo Biologics, Inc., Case No.

2021-003804-NP has since been removed to the Eastern District of Michigan (collectively “Michigan Federal Complaints.”).

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.

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

One lawsuit has been filed in the U.S.

District Court for the District of Oregon, captioned Christy Bryant v.

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

1:21-cv-01759-AA (“Oregon Federal Complaint”).

Two lawsuits have been filed in Fayette, Kentucky Circuit Court, captioned:

(1) Earl Wesley Robinson and Joyce Ann Robinson v.

Aziyo Biologics, Inc., Case No.

21-CI-03842 and (2) Horace B.

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

22-CI-00895 (the “Nelson suit”).

The Nelson suit was subsequently removed to the U.S.

District Court

for the Northern District of Florida (“Florida Federal Complaint”);

District Court for the Eastern District of Michigan and the Eastern District of Michigan (collectively “Michigan Federal Complaints.”);

District Court for the District of Colorado (“Colorado Federal Complaint”);

District Court for the District of Oregon (“Oregon Federal Complaint”);

the Fayette, Kentucky Circuit Court and the U.S.

District Court for the Eastern District of Kentucky (collectively, “Kentucky Complaints.”);

One lawsuit has been filed in the U.S.

District Court for the Western District of Louisiana, captioned Freddie J.

Smith and Loretta D.

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

5:22-cv-01288-EEF-KDM (“Louisiana 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).

District Court for the Western District of Louisiana (“Louisiana Federal Complaint”).

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.

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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.

Each of the plaintiffs in the Delaware State Complaints alleges negligence, breach of implied warranty, breach of express warranty, and 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.

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

The Maryland State Complaints assert claims of negligence, breach of implied warranty, breach of express warranty, medical monitoring, and loss of consortium.

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

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The Louisiana Federal Complaint asserts claims of violation of the Louisiana products liability act, negligence and gross negligence, breach of implied warranty, breach of express warranty and seek recovery for medical monitoring.

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

In addition to the above, there have been 42 claims related to the FiberCel recall that have not yet resulted in a lawsuit.

The Company refers 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 the Company’s insurance policies.

In certain circumstances, insurance carriers reserve their rights to contest or deny coverage.

The Company intends to contest vigorously any disputes with its insurance carriers and to enforce its rights under the terms of its insurance policies.

Accordingly, the Company will record receivables with respect to amounts due under these policies only when the realization of the potential claim for recovery is considered probable.

Amounts recovered under the Company’s insurance policies could be materially less than stated coverage limits and may not be adequate to cover damages, other relief and/or costs relating to claims.

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

As of both June 30, 2022 and December 31, 2021, the Company was not a party to, or aware of, any material legal matters or claims except for the FiberCel Litigation.

In October 2022, the Company engaged in a process to negotiate and attempt to resolve many of the cases in the FiberCel Litigation.

The Company also mediated and resolved a Maryland lawsuit in August 2022.

In total, Aziyo’s liability in 24 of the cases was settled ( 23 of which are pending finalization of the related settlement agreements) for a total of approximately $ 7.2 million.

The settled matters included cases from the Indiana State Complaints, Ohio State Complaint, Florida Federal Complaint, Colorado Federal Complaint, Delaware State Complaints and Maryland Complaint, along with claims in six states.

Of these settled matters, one case was both settled and paid as of September 30, 2022 for a total cash outlay of $ 1.3 million.

For the remaining 73 cases, the Company estimated a probable loss related to each case and has recorded a liability at an estimated amount of $ 11.7 million bringing the total estimated liability at September 30, 2022 to $ 17.6 million, which is recorded as Contingent Liability for FiberCel Litigation in the accompanying condensed consolidated balance sheets.

Although we believe there is a possibility that a loss in excess of the amount recognized exists, we are unable to estimate the possible loss or range of loss in excess of the amount recognized at this time.

In order to reasonably estimate the liability for the unsettled FiberCel Litigation cases, the Company, along with outside legal counsel, has assessed a variety of factors, including (i) the extent of the injuries incurred, (ii) recent experience on the settled claims, (iii) settlement offers made to the other parties to the litigation and (iv) any other factors that may have a material effect on the FiberCel Litigation.

While the Company believes its estimated liability to be reasonable, the actual

loss amounts are highly variable and turn on a case-by-case analysis of the relevant facts.

As more information is learned about asserted claims and potential future trends, adjustments may be made to this Contingent Liability for FiberCel Litigation as appropriate.

Defense costs are recognized in the accompanying condensed consolidated statements of operations as incurred.

The Company has purchased insurance coverage that, subject to common contract exclusions, provided coverage for the FiberCel Litigation product liability losses as well as legal defense costs.

Additionally, the Company has various potential indemnity and/or contribution rights against third party sources with respect to certain product liability losses.

When settlements are reached and/or amounts are recorded in the related Contingent Liability for FiberCel Litigation, the Company calculates amounts due to be reimbursed pursuant to the terms of the coverage and related agreements, and pursuant to other indemnity or contribution claims, in respect of product liability losses and related defense costs.

The amounts probable of reimbursement or recovery from this calculation are recorded as receivables.

The determination that the recorded receivables are probable of collection is based on the terms of agreements reached in respect of indemnity and contribution claims as well as the advice of the Company’s outside legal counsel.

These receivables at September 30, 2022 totaled $ 17.2 million and are recorded as Receivables of FiberCel Litigation Costs in the accompanying condensed consolidated balance sheets.

The indemnity and contribution receivables amount at September 30, 2022 represents amounts that are not believed to be subject to any current dispute.

At September 30, 2022, the Company continues to pursue up to $ 3.8 million or more in additional amounts in respect of such indemnity and contribution claims and as such, has not been reflected as part of this receivable.

The Company will vigorously pursue its position with respect to this amount and while uncertain, does expect to be successful in recovering at least an additional $ 3.8 million or more.

As of both September 30, 2022 and December 31, 2021, 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,

Options to purchase common stock

6 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, 2022 and 2021, 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, 2022 and 2021, 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

2 unchanged sentences

Total Net Sales

Subsequent Event

On August 10, 2022 (the “Closing Date”), the Company entered into a term loan facility agreement with SWK Funding LLC (the “SWK Loan Facility”) for principal amount of $ 25 million, with $ 21 million funded at closing and $ 4 million that becomes available, subject to the achievement of specified operational and financial metrics by September 30, 2023 (the “Additional Term Loan”).

The SWK Loan Facility allows for the establishment of a new asset-based revolving loan facility of up to $ 8 million.

The SWK Loan Facility matures on August 10, 2027 and accrues interest, payable quarterly in arrears.

Principal payments during the amortization period will be limited based on revenue-based caps.

The SWK Loan Facility also includes both revenue and liquidity covenants, as defined.

All of the SWK Loan Facility borrowings take the form of Secured Overnight Financing Rate (“SOFR”) loans and will bear interest at a rate per annum equal to the sum of an applicable margin of (i) 8.75 % and the “Term SOFR Rate” (based upon an interest period of 3 months), or (ii) if the Company has elected the PIK Interest option (as defined below), 4.75 % and the “Term SOFR Rate.” The Company may elect a portion of the interest due, to be paid in-kind at a rate per annum of 4.5 % (“PIK Interest”), and such election may be made (x) until November 15, 2024 if the conditions to draw the Additional Term Loan have not been met, or (y) if such conditions to draw the Additional Term Loan have been satisfied, until November 17, 2025.

The “Term SOFR Rate” is subject to a floor of 2.75 %.

The Warrant is immediately exercisable for up to 157,894 shares of Common Stock from time to time on or after the Closing Date.

Subject to and effective upon the borrowing by the Borrower of the Additional Term Loan, the Warrant will be exercisable for up to an additional 30,075 shares of Common Stock.

The exercise price and number of shares of Common Stock issuable upon exercise of the Warrant are subject to

adjustment in the event of stock dividends, stock splits and certain other events affecting the Common Stock.

Unless earlier exercised or terminated in accordance with its terms, the Warrant will expire on the seventh anniversary of the Closing Date.

The Company used $ 16 million of the proceeds of the SWK Loan Facility to prepay all of the remaining outstanding principal and accrued interest and pay all associated payoff fees on the $ 20 million Term Loan Facility and $ 8 million Revolving Credit Facility.

Such payments included $ 12.8 million to prepay all outstanding principal and accrued interest as well as $ 1.7 million to pay the required prepayment and exit fees on the Term Loan Facility and $ 1.2 million to repay the outstanding balance and accrued interest as well as $ 0.3 million to pay the required exit fees on the Revolving Credit Facility.

The Company also used $ 1.4 million of the proceeds to repay the remaining balance on the promissory note with a tissue supplier.

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