What changed in this filing

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Item 1. Financial Statements

2023-08-14 compared with 2023-05-12 · 129 added, 90 removed, 432 unchanged (34% of the section changed)

4 unchanged sentences

Current assets:

Accounts receivable, net

Accounts receivable, net of credit loss reserve of $ 921 and $ 87 , respectively

Receivables of FiberCel litigation costs

7 unchanged sentences

Accounts payable

Accrued expenses

Accrued expenses and other current liabilities

Payables to tissue suppliers

1 unchanged sentence

Contingent liability for FiberCel litigation

Current operating lease liabilities and other

Current operating lease liabilities

Total current liabilities

6 unchanged sentences

Stockholders’ equity (deficit):

Class A Common stock, $ 0.001 par value, 200,000,000 shares authorized as of March 31, 2023 and December 31, 2022, and 11,876,792 and 11,823,445 shares issued and outstanding , as of March 31, 2023 and December 31, 2022, respectively

Class B Common stock, $ 0.001 par value, 20,000,000 shares authorized, as of March 31, 2023 and December 31, 2022 and 4,313,406 issued and outstanding as of March 31, 2023 and December 31, 2022

Class A Common stock, $ 0.001 par value, 200,000,000 shares authorized as of June 30, 2023 and December 31, 2022, and 11,936,441 and 11,823,445 shares issued and outstanding, as of June 30, 2023 and December 31, 2022, respectively

Class B Common stock, $ 0.001 par value, 20,000,000 shares authorized, as of June 30, 2023 and December 31, 2022 and 4,313,406 issued and outstanding as of June 30, 2023 and December 31, 2022

Additional paid-in capital

7 unchanged sentences

Three Months Ended

Six Months Ended

Cost of goods sold

16 unchanged sentences

Equity (Deficit)

Balance, March 31, 2023

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

Stock-based compensation

Balance, June 30, 2023

Balance, March 31, 2022

Vesting of restricted stock units

Stock-based compensation

Balance, June 30, 2022

Stockholders'

Equity (Deficit)

Balance, December 31, 2022

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

Stock-based compensation

Balance, March 31, 2023

Balance, June 30, 2023

Balance, December 31, 2021

3 unchanged sentences

Stock-based compensation

Balance, March 31, 2022

Balance, June 30, 2022

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

2 unchanged sentences

(In Thousands)

Three Months Ended

Six Months Ended

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

3 unchanged sentences

Stock-based compensation

Bad debt expense

Losses associated with viable bone matrix recall and market withdrawal

Changes in operating assets and liabilities:

2 unchanged sentences

Prepaid expenses and other

Accounts payable and accrued expenses

Accounts payable and accrued expenses and other current liabilities

Obligations to tissue suppliers

10 unchanged sentences

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

19 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, 2022.

The financial information as of March 31, 2023 and for the three months ended March 31, 2023 and 2022 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 June 30, 2023 and for the three and six months ended June 30, 2023 and 2022 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, 2022 was derived from audited financial statements but does not include all disclosures required by GAAP.

1 unchanged sentence

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries.

Intercompany accounts and transactions have been eliminated in consolidation.

Intercompany accounts and transactions have been eliminated in consolidaton.

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 three months ended March 31, 2023, the Company incurred a net loss of $ 8.0 million, and as of March 31, 2023, the Company had an accumulated deficit of $ 146.0 million.

In addition, during the three months ended March 31, 2023, the Company used $ 5.2 million of cash in operating activities, and expects to continue to incur cash outflows during the remainder of 2023.

For the six months ended June 30, 2023, the Company incurred a net loss of $ 18.6 million, and as of June 30, 2023, the Company had an accumulated deficit of $ 156.6 million.

In addition, during the six months ended June 30, 2023, the Company used $ 7.6 million of cash in operating activities, and expects to continue to incur cash outflows during the remainder of 2023.

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.

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

Additionally, the Company determined in its fourth quarter of 2022 that its operating and reportable segments are consistent with its major product groupings – Device Protection, Women’s Health, Orthobiologics and Cardiovascular.

Segment results for the three and six months ended June 30, 2022, have been recasted to conform to the new segment presentation.

Refer to the Segment Information in Note 10.

Use of Estimates

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ASU 2016-02 and certain additional ASUs are now codified as Accounting Standards Codification Standard 842 - “Leases” (“ASC 842”).

ASC 842 supersedes the lease accounting guidance in Accounting

Standards Codification 840 “Leases” (“ASC 840”) and requires lessees to recognize a lease liability and a corresponding lease asset for virtually all lease contracts.

ASC 842 supersedes the lease accounting guidance in Accounting Standards Codification 840 “Leases” (“ASC 840”) and requires lessees to recognize a lease liability and a corresponding lease asset for virtually all lease contracts.

The Company determines if an arrangement contains a lease at inception.

15 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 months ended March 31, 2023 or 2022.

There were no impairment losses for the three and six months ended June 30, 2023 or 2022.

Revenue Recognition

11 unchanged sentences

The Company elected to account for shipping and handling activities as a fulfillment cost rather than a separate performance obligation.

Amounts billed to customers for shipping and handling are included as part of the transaction

price and recognized as revenue when control of the underlying products is transferred to the customer.

Amounts billed to customers for shipping and handling are included as part of the transaction price and recognized as revenue when control of the underlying products is transferred to the customer.

The related shipping and freight charges incurred by the Company are included in sales and marketing costs.

14 unchanged sentences

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

At March 31, 2023, the Company maintained $ 11.7 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 June 30, 2023, the Company maintained $ 9.3 million in bank deposit accounts that are in excess of the $0.25 million insurance provided by the Federal Deposit Insurance Corporation in one federally insured financial institution.

Market conditions can impact the viability of these institutions.

1 unchanged sentence

The Company has not experienced any losses in such accounts.

On June 19, 2023, Surgalign Holdings, Inc.

(“Surgalign”) and certain of its direct and indirect subsidiaries commenced voluntary proceedings under chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas.

The percentage of the Company’s total revenues derived from Surgalign was 10 % during the three and six months ended June 30, 2023 and 2022.

As of June 30, 2023, the Company’s gross accounts receivable from Surgalign totaled $ 1.1 million, of which $ 0.8 million has been reserved at June 30, 2023 due to the uncertainty of collection.

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 months ended March 31, 2023 and 2022, the Company’s net loss equaled its comprehensive loss and accordingly, no additional disclosure is presented.

For the three and six months ended June 30, 2023 and 2022, 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.

3 unchanged sentences

Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply.

In accordance with the authoritative guidance on accounting for uncertainty in income taxes, the Company recognizes tax liabilities for uncertain tax positions when it is more likely than not that a tax position will not be sustained

upon examination and settlement with various taxing authorities.

Liabilities for uncertain tax positions are measured based upon the largest amount of benefit that is more likely than not (greater than 50%) of being realized upon settlement.

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2015 Stock Option/Stock Issuance Plan, as amended (the “2015 Plan”) which provided for the granting of incentive and non-qualified stock options to employees, directors and consultants of the Company.

On October 7, 2020, in connection with the Company’s IPO, the Company adopted the Aziyo Biologics, Inc.

2020 Incentive Award Plan (the “2020 Plan”), which authorizes the grant of incentive and non-qualified stock options, restricted stock, restricted stock units and stock appreciation rights to employees, directors and consultants.

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

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

As of March 31, 2023, the Company had 1,630,411 shares of Class A common stock available for issuance under the 2020 Plan.

On October 7, 2020, the Company adopted the Aziyo Biologics, Inc.

2020 Incentive Award Plan, which was amended and restated on June 8, 2023 (the “2020 Plan”).

The 2020 Plan authorizes the grant of incentive and non-qualified stock options, restricted stock, restricted stock units and stock appreciation rights to employees, directors and consultants.

Shares of Class A common stock totaling 3,636,000 have been reserved for issuance under the 2020 Plan.

In addition, the shares reserved for issuance under the 2020 Plan 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, 2023, the Company had 3,308,997 shares of Class A common stock available for issuance under the 2020 Plan.

On June 21, 2022, C.

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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 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”).

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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 March 31, 2023.

Such RSUs were legally granted in April 2023 and the vested shares underlying the award were deemed outstanding as of such time.

however, the RSUs were not legally granted until April 2023 and the vested shares underlying the award were not deemed outstanding until such time.

Stock Options

1 unchanged sentence

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

A summary of stock option activity under the Company’s 2015 Plan and 2020 Plan for the three months ended March 31, 2023 is as follows:

A summary of stock option activity under the Company’s 2015 Plan and 2020 Plan for the six months ended June 30, 2023 is as follows:

Number of Shares

1 unchanged sentence

Outstanding, December 31, 2022

Outstanding, March 31, 2023

Vested and exercisable, March 31, 2023

The weighted average grant date fair value of options granted during the three months ended March 31, 2023 was $ 2.79 .

As of March 31, 2023, there was approximately $ 3.4 million of total unrecognized compensation expense related to unvested stock options.

Outstanding, June 30, 2023

Vested and exercisable, June 30, 2023

The weighted average grant date fair value of options granted during the six months ended June 30, 2023 was $ 1.63 .

As of June 30, 2023, there was approximately $ 3.1 million of total unrecognized compensation expense related to unvested stock options.

These costs are expected to be recognized over a weighted-average period of 2.2 years.

8 unchanged sentences

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 three months ended March 31, 2023 and 2022:

Three Months Ended

The following weighted-average assumptions were used to determine the fair value of options granted during the six months ended June 30, 2023 and 2022:

Six Months Ended

Expected term (years)

2 unchanged sentences

Dividend yield

For the Performance-Based Options granted as described above, the Company accounted for the awards as market condition awards and used an option pricing model, the Monte Carlo model, to determine the fair value of the respective equity instruments and an expense recognition term of approximately three years .

For the Performance-Based Options with a market condition granted as described above, the Company used an option pricing model, the Monte Carlo model, to determine the fair value of the respective equity instruments and an expense recognition term of approximately three years .

Restricted Stock Units

2 unchanged sentences

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 three months ended March 31, 2023 is as follows:

A summary of the RSU activity under the Company’s 2020 Plan for the six months ended June 30, 2023 is as follows:

Number of Shares

1 unchanged sentence

Unvested, December 31, 2022

Unvested, March 31, 2023

Unvested, June 30, 2023

For the Performance-Based RSUs, including those granted to Dr.

Mills as described above, the Company accounted for the awards as market condition awards and used an option pricing model, the Monte Carlo model, to determine the fair value of the respective equity instruments and an expense recognition term of two to three years using the graded vesting method.

As of March 31, 2023, $ 1.1 million of unrecognized compensation costs related to RSUs is expected to be recognized over a weighted average period of approximately two years .

As of June 30, 2023, $ 0.9 million of unrecognized compensation costs related to RSUs is expected to be recognized over a weighted average period of approximately two years .

Employee Stock Purchase Plan

5 unchanged sentences

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 March 31, 2023, the total shares of Class A common stock authorized for issuance under the ESPP was 542,365 , of which 399,436 remained available for future issuance.

During the three months ended March 31, 2023, 41,277 shares of Class A common stock were issued under the ESPP.

As of June 30, 2023, the total shares of Class A common stock authorized for issuance under the ESPP was 542,365 , of which 399,436 remained available for future issuance.

During the three and six months ended June 30, 2023, 41,277 shares of Class A common stock were issued under the ESPP.

Stock-Based Compensation Expense

Stock-based compensation expense recognized during the three months ended March 31, 2023 and 2022 was comprised of the following (in thousands):

Stock-based compensation expense recognized during the three and six months ended June 30, 2023 and 2022 was comprised of the following (in thousands):

Three Months Ended

Six Months Ended

Sales and marketing

8 unchanged sentences

Long-Term Debt

On May 31, 2017, 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.

O n August 10, 2022 (the “Closing Date”), the Company entered into a senior secured term loan facility with SWK Funding LLC (“SWK”), as agent, and other lenders party thereto (the “SWK Loan Facility”) for an aggregate principal amount of $ 25 million.

An initial draw of $ 21 million drawn was made on the Closing Date with the additional $ 4 million drawn on December 14, 2022 upon satisfaction of the amended terms enabling such receipt.

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 March 31, 2023.

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 June 30, 2023.

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

1 unchanged sentence

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

As of March 31, 2023, quarterly principal payments are scheduled to begin on November 15, 2024, in an amount equal to 5 % of the outstanding principal on such principal payment commencement date 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 March 31, 2023, Aziyo was in compliance with its financial covenants under the agreement governing the SWK Loan Facility (the “SWK Loan Facility Agreement”).

As of June 30, 2023, quarterly principal payments are scheduled to begin on November 15, 2024, in an amount equal to 5 % of the outstanding principal on such principal payment commencement date with the balance paid at maturity.

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

On May 12, 2023, the Company entered into that certain First Amendment to the SWK Loan Facility Agreement with SWK, as agent, and the other lenders party thereto (the “Amendment”).

The Amendment modified the minimum liquidity covenant applicable to the Company under the SWK Loan Facility Agreement, such that the Company must maintain a minimum liquidity of at least $ 5.0 million until August 15, 2023 (which date may be extended by SWK in its commercially-reasonable discretion, to November 15, 2023), and after such date, a minimum liquidity of at least the greater of (i) $ 5.0 million, and (ii) the sum of the operating cash burn (as defined in the SWK Loan Facility Agreement) for the two prior consecutive fiscal quarters then ended.

As of June 30, 2023, 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) 7.75 % 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), 3.75 % 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:

The agreement, as amended, governing

the SWK Loan Facility also includes an exit fee equal to 6.5 % of the aggregate principal amount funded prior to termination plus $ 62,500 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 13.7 % for the three months ended March 31, 2023.

The weighted average interest rate on the SWK Loan Facility was 13.0 % and 12.9 % for the three and six months ended June 30, 2023, respectively.

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.

3 unchanged sentences

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 recognition of the Warrant as well as deferred financing costs of approximately $ 0.5 million incurred in securing the SWK Loan Facility resulted in a reduction in 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.

1 unchanged sentence

(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 months ended March 31, 2023.

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.

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.

No such mandatory prepayments were required during the three and six months ended June 30, 2023.

In connection with the August 2022 debt refinancing, the Company used $ 16 million of the proceeds of the SWK Loan Facility to repay all outstanding obligations on its former MidCap term loan (“MidCap Loan Facility”) and former asset-backed revolving line of credit (“MidCap Credit Facility”).

Borrowings under the MidCap Loan Facility 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 MidCap Loan Facility was 9.5 % for the three months ended March 31, 2022.

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

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 % for the three months ended March 31, 2022.

On May 12, 2023, the Company entered into a first amendment to the SWK Loan Facility Agreement with SWK and the other lenders party thereto .

The amendment is described in further detail in Note 11 to these condensed consolidated financial statements.

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

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

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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 March 31, 2023 and December 31, 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 June 30, 2023 and December 31, 2022.

Revenue Interest Obligation

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(“CorMatrix”) and acquired all CorMatrix commercial assets and related intellectual property (the “CorMatrix Acquisition”).

As part of the CorMatrix Acquisition, the Company assumed a restructured, long-term obligation (the “Revenue Interest Obligation”) to Ligand Pharmaceuticals (“Ligand”) with an estimated present value on the acquisition date of $ 27.7 million.

As part of the CorMatrix Acquisition, the Company assumed a restructured, long-term obligation (the

“Revenue Interest Obligation”) to Ligand Pharmaceuticals (“Ligand”) with an estimated present value on the acquisition date of $ 27.7 million.

Subject to annual minimum payments of $ 2.75 million per year, the terms of the Revenue Interest Obligation require Aziyo to pay Ligand, 5 % of future sales of the products Aziyo acquired from CorMatrix, including CanGaroo, ProxiCor, Tyke and VasCure, as well as products substantially similar to those products, such as the version of CanGaroo Aziyo is currently developing that is designed to include antibiotics.

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

There was no change to estimated future payments during the three months ended March 31, 2023 and 2022, and thus, no re-measurement gain or loss was recognized.

Interest expense related to the Revenue Interest Obligation of approximately $ 0.5 million and $ 0.7 million was recorded for the three months ended March 30, 2023 and 2022, respectively.

There was no change to estimated future payments during the three and six months ended June 30, 2023 and 2022, and thus, no re-measurement gain or loss was recognized.

Interest expense related to the Revenue Interest Obligation of approximately $ 0.5 million and $ 0.7 million was recorded for the three months ended June 30, 2023 and 2022, respectively and approximately $ 1.1 million and $ 1.3 million was recorded for the six months ended June 30, 2023 and 2022, respectively.

Commitments and Contingencies

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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 months ended March 31, 2023 or 2022.

No royalties were paid to Cook during the three and six months ended June 30, 2023 or 2022.

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

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

Since September 2021, 71 lawsuits ( 73 plaintiffs) in Indiana, Delaware, Florida, Maryland, Colorado, Michigan, Ohio, Kentucky, Oregon, North Carolina, Louisiana, Illinois, Virginia, California and Arizona 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.

Since September 2021, 76 lawsuits ( 78 plaintiffs) in Indiana, Delaware, Florida, Maryland, Colorado, Michigan, Ohio, Kentucky, Oregon, North Carolina, Louisiana, Illinois, Virginia, California, Pennsylvania, and Arizona 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”);

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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”);

the Court of Common Pleas of Ohio and the U.S.

District Court of the Southern District of Ohio (collectively, the “Ohio Complaints”);

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

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

District Court for the Northern District of Florida and the U.S.

District Court for the Southern District of Florida (collectively, the “Florida Federal Complaints”);

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

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

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

District Court for the Western District of Louisiana (“Louisiana Federal Complaint”) and the Circuit Court of Cook County, Illinois (“Illinois State Complaint”);

Loudon County Virginia Circuit Court (“Virginia State Complaint”);

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

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

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

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

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

Philadelphia County Court of Common Pleas (“Pennsylvania State Complaint”);

District Court for the Central District of California (“California Federal Complaint”) and the U.S.

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The Kentucky Complaints assert strict liability claims based on manufacturing defect, design defect, failure to warn, negligence, breach of implied warranty, breach of express warranty, and seek recovery for medical monitoring, loss of consortium, compensatory damages, and punitive damages.

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.

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.

The Illinois State Complaints contain claims of strict liability- defective design and manufacturing, breach of express warranty, breach of implied warranty and negligence and seek compensatory damages.

The Virginia State Complaint asserts causes of action for negligent failure to warn, negligence, breach of implied warranty, breach of express warranty and seeks recovery for medical monitoring, compensatory damages and punitive damages.

The California Federal Complaint advances claims of strict liability (defective design and manufacture), negligence and breach of implied warranty and seeks compensatory damages and recovery for medical monitoring.

The California Federal Complaint advances claims of strict liability

(defective design and manufacture), negligence and breach of implied warranty and seeks compensatory damages and recovery for medical monitoring.

The Arizona Federal Complaint asserts strict product liability claims for defective design, manufacture and failure to warn, negligence, breach of implied warranty and breach of express warranty and seeks recovery for medical monitoring, loss of consortium, compensatory damages, and punitive damages.

Plaintiff in the Pennsylvania State Complaint asserts claims for strict liability, negligence, breach of implied warranty, and breach of express warranty, as well as claims under the Wrongful Death Act and the Survival Act and seeks compensatory and punitive damages.

In addition to the above, there are 31 claims related to the FiberCel recall that have not yet resulted in a lawsuit.

2 unchanged sentences

In total, Aziyo’s liability in 27 of the cases was settled for a total of approximately $ 7.5 million.

Of these settled matters, 21 cases were both settled and paid as of March 31, 2023 for a total cash outlay of $ 6.2 million.

For the remaining 83 cases for which settlements have not been reached, the Company estimated a probable loss related to each case and has recorded a liability at an estimated amount of $ 13.2 million bringing the total estimated liability at March 31, 2023 to $ 14.3 million, which is recorded as Contingent Liability for FiberCel Litigation in the accompanying consolidated balance sheets.

Of these settled matters, 26 cases were both settled and paid as of June 30, 2023 for a total cash outlay of $ 7.3 million.

For the remaining 82 cases for which settlements have not been reached, the Company estimated a probable loss related to each case and has recorded a liability at an estimated amount of $ 14.3 million bringing the total estimated liability at June 30, 2023 to $ 14.5 million, which is recorded as Contingent Liability for FiberCel Litigation in the accompanying consolidated balance sheets.

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

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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 March 31, 2023 totaled $ 10.9 million and are recorded as Receivables of FiberCel Litigation Costs in the accompanying consolidated balance sheets.

The indemnity and contribution receivables amount at March 31, 2023 represents amounts that are not believed to be subject to any current dispute.

At March 31, 2023, 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.

These receivables at June 30, 2023 totaled $ 8.9 million and are recorded as Receivables of FiberCel Litigation Costs in the accompanying consolidated balance sheets.

The indemnity and contribution receivables amount at June 30, 2023 represents amounts that are not believed to be subject to any current dispute.

At June 30, 2023, 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.

As of both March 31, 2023 and 2022, the Company was not a party to, or aware of, any legal matters or claims with material financial exposure, except for the FiberCel Litigation.

Viable Bone Matrix Recall

In July 2023, the Company announced a voluntary recall of a single lot of a certain viable bone matrix (“VBM”) product and the market withdrawal of all of its VBM products produced after a specified date (the “VBM Matter”).

Such VBM products are within the Company’s Orthobiologics business.

Notice of the voluntary recall was issued to centers after the Company learned of post-surgical Mycobacterium tuberculosis (MTB) infections in two patients treated with a VBM product from a single donor lot.

Prior to release, samples from this specific lot had tested negative for MTB by an independent laboratory using a nucleic acid test that is designed to specifically detect the MTB organism.

The VBM recall and market withdrawal necessitated the establishment of a product returns reserve and reversal of revenue totaling $ 3.0 million, which is included in accrued expenses and other current liabilities in the condensed consolidated balance sheet as of June 30, 2023.

Furthermore, the Company has written off the full value of its VBM inventory on-hand at June 30, 2023 resulting in a $ 2.0 million charge to cost of goods sold in the condensed consolidated income statement for the three and six months ended June 30, 2023.

Such writedown was deemed necessary due to the limited shelf-life of the inventory and the inability to sell the VBM inventory until a valid MTB test can be identified or developed, both of which are uncertain at this time.

At present, no lawsuits have been filed or claims asserted as a result of the VBM Matter.

Management has determined that there is a reasonably possible likelihood of material claims due to the recall and market withdrawal but does not believe that the claims are probable or estimable.

Consequently, management has determined that no liability for such possible claims would be recognized for the VBM recall and market withdrawal as of June 30, 2023.

While unknown at this time, possible losses in connection with the VBM Matter could have a material effect on the Company’s financial position and results of operations.

Consistent with the FiberCel Litigation above, the Company has purchased insurance coverage that, subject to common contract exclusions, provide coverage for the possible claims associated with the VBM Matter as well as legal defense costs.

As of both June 30, 2023 and 2022, the Company was not a party to, or aware of, any legal matters or claims with material financial exposure, except for the FiberCel Litigation.

Net Loss Per Share Attributable to Common Stockholders

Three Months Ended

Six Months Ended

(in thousands, except share and per share data)

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The Company determined its operating and reportable segments to be consistent with its major product groupings – Device Protection, Women’s Health, Orthobiologics and Cardiovascular.

For the three months ended March 31, 2023 and 2022, the Company’s net sales disaggregated by segment were as follows (in thousands):

The Company’s net sales disaggregated by segment were as follows (in thousands):

Three Months Ended

Six Months Ended

Device protection

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Total Net Sales

For the three months ended March 31, 2023 and 2022, the Company’s gross profit disaggregated by segment were as follows (in thousands):

The Company’s gross profit disaggregated by segment were as follows (in thousands):

Three Months Ended

Six Months Ended

Gross profit:

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Intangible asset amortization expense

The following table is a reconciliation of segment gross profit to the consolidated loss before provision for income taxes for the three months ended March 31, 2023 and 2022 (in thousands):

The following table is a reconciliation of segment gross profit to the consolidated loss before provision for income taxes (in thousands):

Three Months Ended

Six Months Ended

Gross profit, excluding intangible asset amortization

Intangible asset amortization expense

Sales and marketing

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Loss before provision for income taxes

Subsequent Event

On May 12, 2023, the Company entered into that certain First Amendment to the SWK Loan Facility Agreement with SWK, as agent, and the other lenders party thereto (the “Amendment”).

Pursuant to the Amendment, the exit fee payable upon loan maturity or the earlier repayment in full of all outstanding obligations under the SWK Loan Facility Agreement was modified to be an amount equal to 6.5 % of the aggregate principal amount funded prior to termination plus $ 62,500 .

In addition, the Amendment modified the minimum liquidity covenant applicable to the Company under the SWK Loan Facility Agreement, and now requires the Company to maintain a minimum liquidity of at least $ 5.0 million until August 15, 2023 (which date may be extended by SWK in its commercially-reasonable discretion, to November 15, 2023), and after such date, a minimum liquidity of at least the greater of (i) $ 5.0 million, and (ii) the sum of the operating cash burn (as defined in the SWK Loan Facility Agreement) for the two prior consecutive fiscal quarters then ended.

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