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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-39577

Aziyo Biologics, Inc.

(Exact name of registrant as specified in its charter)

Delaware

47-4790334

(State or other jurisdiction of incorporation or
organization)

(I.R.S. Employer Identification No.)

12510 Prosperity Drive, Suite 370

Silver Spring, MD 20904

(Address of principal executive offices and Zip Code)

(240) 247-1170

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

    

Trading Symbol(s)

    

Name of each exchange on which registered

Class A Common Stock, par value $0.001 per share

AZYO

The Nasdaq Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes    No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer       

    

Accelerated filer                           

Non-accelerated filer         

Smaller reporting company            

Emerging growth company           

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes    No  

As of November 9, 2021, there were 7,122,509 shares of the registrant’s Class A common stock and 3,134,162 shares of the registrant’s Class B common stock outstanding.

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FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (the “Quarterly Report”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts contained in this Quarterly Report, including statements regarding our results of operations, financial position, projected growth in our net sales, seasonality, business strategy, policies and approach, including, without limitation, expectations regarding our products and their targeted effects, plans for our sales and marketing growth and anticipated expansion of our product development and clinical and research activities, expectations regarding competition, our competitive advantages, regulations that impact our business, and overall clinical and commercial success, expectations regarding the lawsuits currently pending related to our recall of a single lot of Fiber Viable Bone Matrix (“FiberCel”) and the potential impact of the pandemic related to COVID-19 and variants thereof such as Delta on our business are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

Without limiting the foregoing, in some cases, you can identify forward-looking statements by terms such as “aim”, “believe,” “may,” “will,” “should,” “expect,” “exploring,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,” “seeks,” or “continue” or the negative of these terms or other similar expressions, although not all forward-looking statements contain these words. No forward-looking statement is a guarantee of future results, performance, or achievements, and one should avoid placing undue reliance on such statements.

Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to us. Such beliefs and assumptions may or may not prove to be correct. Additionally, such forward-looking statements are subject to a number of known and unknown risks, uncertainties and assumptions, and actual results may differ materially from those expressed or implied in the forward-looking statements due to various factors, including, but not limited to, the other important factors identified in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 1A. “Risk Factors” in this Quarterly Report, in Part I, Item 1A. “Risk Factors” and Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (the “Annual Report”) and in our other filings with the Securities and Exchange Commission (the “SEC”), each of which filings are accessible on the SEC’s website at www.sec.gov and the Investor Relations page of our website at https://investors.aziyo.com/reports. These risks and uncertainties include, but are not limited to:

·

our ability to enhance our products, expand our product indications and develop, acquire and commercialize additional product offerings;

·

our dependence on our commercial partners and independent sales agents to generate a substantial portion of our net sales;

·

our failure to maintain our relationships with our existing contract manufacturing customers and enter into agreements with new contract manufacturing customers, or if existing contract manufacturing customers reduce purchases of our products;

·

our ability to successfully expand, manage and maintain our direct sales force;

·

our ability to achieve or sustain profitability;

·

the adverse impacts of the novel strain of coronavirus disease, COVID-19 and variants thereof such as Delta or any other future pandemic, epidemic or outbreak of an infectious disease in the United States or worldwide;

1

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·

adverse changes in general domestic and global economic conditions and instability and disruption of credit markets;

·

physician awareness of the distinctive characteristics, benefits, safety, clinical efficacy and cost-effectiveness of our products;

·

the continued and future acceptance of our products by the medical community;

·

our ability to obtain regulatory approval or other marketing authorizations by the U.S. Food and Drug Administration (FDA) and comparable foreign authorities for our products and product candidates;

our ability to defend against the various lawsuits related to our recall of a single lot of FiberCel and avoid a material adverse financial consequence; and

·our ability to obtain, maintain and adequately protect our intellectual property rights.

Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties.

You should read this Quarterly Report and the documents that we reference in this Quarterly Report completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.

As used in this Quarterly Report, unless otherwise specified or the context otherwise requires, references to “we,” “us,” “our,” the “Company” and “Aziyo” refer to the operations of Aziyo Biologics, Inc. and its consolidated subsidiaries.

We may use our website as a distribution channel of material information about the Company. Financial and other important information regarding the Company is routinely posted on and accessible through the Investor Relations sections of its website at www.aziyo.com. In addition, you may automatically receive email alerts and other information about the Company when you enroll your email address by visiting the “Email Alerts” option under the IR Resources menu of the Investor Relations of our website at www.aziyo.com. The reference to our website address does not constitute incorporation by reference of the information contained on or available through our website, and you should not consider such information to be a part of this Quarterly Report.

2

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TRADEMARKS, TRADE NAMES AND SERVICE MARKS

This Quarterly Report includes our trademarks, trade names and service marks, including, without limitation, “Aziyo®,” “CanGaroo®,” “ProxiCor®,” “Tyke®,” “VasCure®,” “FiberCel®,” “ViBone®,” “OsteGro®,” “SimpliDerm®” and our logo, which are our property and are protected under applicable intellectual property laws. This Quarterly Report also contains trademarks, trade names and service marks of other companies, which are the property of their respective owners. Solely for convenience, trademarks, trade names and service marks may appear in this Quarterly Report without the ®, TM and SM symbols, but such references are not intended to indicate, in any way, that we or the applicable owner forgo or will not assert, to the fullest extent permitted under applicable law, our rights or the rights of any applicable licensors to these trademarks, trade names and service marks. We do not intend our use or display of other parties’ trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties.

INDUSTRY AND OTHER DATA

Unless otherwise indicated, information contained in this Quarterly Report concerning our industry and the markets in which we operate, including our general expectations, market position and market opportunity, is based on our management’s estimates and research, as well as industry and general publications and research, surveys and studies conducted by third parties. We believe the information from these third-party publications, research, surveys and studies included in this Quarterly Report is reliable. Management’s estimates are derived from publicly available information, their knowledge of our industry and their assumptions based on such information and knowledge, which we believe to be reasonable. This data involves a number of assumptions and limitations which are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in this Quarterly Report under “Forward-Looking Statements” and “Risk Factors” and Part I, Item 1A. “Risk Factors” in our Annual Report which can be found at https://investors.aziyo.com/reports. These and other factors could cause our future performance to differ materially from our assumptions and estimates.

3

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Page

FORWARD-LOOKING STATEMENTS

1

TRADEMARKS, TRADE NAMES AND SERVICE MARKS

3

INDUSTRY AND OTHER DATA

3

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets

5

Condensed Consolidated Statements of Operations

6

Condensed Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders’ Equity (Deficit)

7

Condensed Consolidated Statements of Cash Flows

8

Notes to the Condensed Consolidated Financial Statements

9

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results Of Operations

26

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

42

Item 4.

Controls and Procedures

43

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

43

Item 1A.

Risk Factors

43

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

57

Item 3.

Defaults Upon Senior Securities

57

Item 4.

Mine Safety Disclosures

57

Item 5.

Other Information

57

Item 6.

Exhibits

58

Signatures

60

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PART I – FINANCIAL INFORMATION

Item 1.        Financial Statements.

AZIYO BIOLOGICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

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

(UNAUDITED)

September 30, 

December 31, 

    

2021

    

2020

    

Assets

Current assets:

Cash

$

22,543

$

39,150

Restricted cash

 

83

 

382

Accounts receivable, net

 

5,519

 

7,166

Inventory

 

9,832

 

10,117

Prepaid expenses and other current assets

 

1,277

 

2,892

Total current assets

 

39,254

 

59,707

Property and equipment, net

 

1,257

 

1,162

Intangible assets, net

 

19,316

 

21,865

Other assets

 

76

 

76

Total assets

$

59,903

$

82,810

Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable

$

1,689

$

2,054

Accrued expenses

 

5,232

 

6,323

Payables to tissue suppliers

 

2,714

 

2,295

Current portion of long-term debt

 

8,059

 

6,310

Current portion of revenue interest obligation

 

2,750

 

2,750

Revolving line of credit

 

1,956

 

6,514

Deferred revenue and other current liabilities

 

110

 

533

Total current liabilities

 

22,510

 

26,779

Long-term debt

 

12,046

 

17,811

Long-term revenue interest obligation

 

16,552

 

16,633

Deferred revenue and other long-term liabilities

 

936

 

756

Total liabilities

 

52,044

 

61,979

Commitments and contingencies (Note 9)

Stockholders’ equity (deficit):

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

7

7

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

3

3

Additional paid-in capital

 

103,876

 

101,080

Accumulated deficit

 

(96,027)

 

(80,259)

Total stockholders’ equity

 

7,859

 

20,831

Total liabilities and stockholders' equity

$

59,903

$

82,810

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

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AZIYO BIOLOGICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Share and Per Share Data)

(UNAUDITED)

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

  

2021

  

2020

  

2021

  

2020

  

Net sales

$

11,485

$

11,774

$

36,529

$

30,216

Cost of goods sold

 

7,796

 

6,233

 

20,897

 

15,676

Gross profit

 

3,689

 

5,541

 

15,632

 

14,540

Sales and marketing

 

4,783

 

4,301

 

14,285

 

12,845

General and administrative

 

3,593

 

2,667

 

10,727

 

7,350

Research and development

 

2,289

 

1,264

 

5,890

 

3,981

Total operating expenses

10,665

8,232

30,902

24,176

Loss from operations

 

(6,976)

 

(2,691)

 

(15,270)

 

(9,636)

Interest expense

 

1,328

 

1,465

 

4,034

 

4,248

Other (income) expense, net

 

 

2,567

 

(3,579)

 

2,567

Loss before provision for income taxes

 

(8,304)

 

(6,723)

 

(15,725)

 

(16,451)

Income tax expense

 

12

 

8

 

43

 

18

Net loss

(8,316)

(6,731)

(15,768)

(16,469)

Accretion of Convertible Preferred Stock

3,510

3,510

Net loss attributable to common stockholders

$

(8,316)

$

(10,241)

$

(15,768)

$

(19,979)

Net loss per share - basic and diluted

$

(0.81)

$

(15.79)

$

(1.54)

$

(30.82)

Weighted average common shares outstanding - basic and diluted

 

10,235,350

 

648,436

 

10,229,974

 

648,331

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

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AZIYO BIOLOGICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN CONVERTIBLE

PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

(In Thousands, Except Share Amounts)

(UNAUDITED)

Convertible

Class A

Class B

Preferred Stock

Common Stock

Common Stock

Common Stock

  

  

Additional

  

Total

Number of

Number of

Number of

Number of

Paid-in

Accumulated

Stockholders'

    

Shares

    

Amount

  

  

Shares

    

Amount

    

Shares

    

Amount

    

Shares

    

Amount

    

Capital

    

Deficit

    

Equity

Balance, June 30, 2021

 

$

  

  

$

7,095,265

$

7

3,134,162

$

3

$

102,668

$

(87,711)

$

14,967

Proceeds from sale of common stock through Employee Stock Purchase Plan

 

  

  

 

27,244

 

208

 

 

208

Stock-based compensation

 

 

  

  

 

 

1,000

 

 

1,000

Net loss

 

 

  

  

 

 

 

(8,316)

 

(8,316)

Balance, September 30, 2021

 

$

  

  

$

7,122,509

$

7

3,134,162

$

3

$

103,876

$

(96,027)

$

7,859

Balance, June 30, 2020

 

45,000,000

$

44,899

  

  

648,277

$

1

$

$

$

1,952

$

(66,676)

$

(64,723)

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

5,414,427

8,184

Proceeds from stock option exercises

 

 

  

  

402

 

 

2

 

 

2

Accretion of Convertible Preferred Stock

 

 

3,510

  

  

 

 

(2,012)

 

(1,498)

 

(3,510)

Stock-based compensation

58

58

Net loss

(6,731)

(6,731)

Balance, September 30, 2020

 

50,414,427

$

56,593

648,679

$

1

$

$

$

$

(74,905)

$

(74,904)

Convertible

Class A

Class B

Preferred Stock

Common Stock

Common Stock

Common Stock

  

  

Additional

  

Total

Number of

Number of

Number of

Number of

Paid-in

Accumulated

Stockholders'

    

Shares

    

Amount

  

  

Shares

    

Amount

    

Shares

    

Amount

    

Shares

    

Amount

    

Capital

    

Deficit

    

Equity

Balance, December 31, 2020

 

$

  

  

$

7,091,960

$

7

3,134,162

$

3

$

101,080

$

(80,259)

$

20,831

Proceeds from stock option exercises

 

 

  

  

 

3,305

 

26

 

 

26

Proceeds from sale of common stock through Employee Stock Purchase Plan

 

  

  

 

27,244

 

208

 

 

208

Stock-based compensation

 

 

  

  

 

 

2,562

 

 

2,562

Net loss

 

 

  

  

 

 

 

(15,768)

 

(15,768)

Balance, September 30, 2021

 

$

  

  

$

7,122,509

$

7

3,134,162

$

3

$

103,876

$

(96,027)

$

7,859

Balance, December 31, 2019

 

44,550,230

$

44,449

  

  

648,277

$

1

$

$

$

1,826

$

(56,938)

$

(55,111)

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

5,864,197

8,634

Proceeds from stock option exercises

 

 

  

  

402

 

 

2

 

 

2

Accretion of Convertible Preferred Stock

 

 

3,510

  

  

 

 

(2,012)

 

(1,498)

 

(3,510)

Stock-based compensation

184

184

Net loss

(16,469)

(16,469)

Balance, September 30, 2020

 

50,414,427

$

56,593

648,679

$

1

$

$

$

$

(74,905)

$

(74,904)

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

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AZIYO BIOLOGICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(UNAUDITED)

Nine Months Ended

September 30, 

2021

    

2020

 

  

 

 

  

Net loss

$

(15,768)

 

$

(16,469)

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

 

  

 

 

  

Depreciation and amortization

 

2,797

 

 

2,921

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

 

(3,029)

 

 

2,340

Gain on revaluation of revenue interest obligation and other

 

 

 

227

Amortization of deferred financing costs

 

91

 

 

91

Interest expense recorded as additional revenue interest obligation

 

1,987

 

 

2,011

Interest expense recorded as Convertible Preferred Stock

 

 

 

39

Stock-based compensation

 

2,562

 

 

184

Operating expense satisfied through Convertible Preferred Stock issuance

814

Changes in operating assets and liabilities:

 

 

  

Accounts receivable

 

1,647

 

 

134

Inventory

 

285

 

 

(2,598)

Prepaid expenses and other

 

1,615

 

 

(2,248)

Accounts payable and accrued expenses

 

(1,456)

 

 

4,641

Obligations to tissue suppliers

 

419

 

 

(55)

Deferred revenue and other liabilities

 

(209)

 

 

(290)

Net cash used in operating activities

 

(9,059)

 

 

(8,258)

INVESTING ACTIVITIES:

 

 

 

  

Expenditures for property, plant and equipment

 

(344)

 

 

(525)

Net cash used in investing activities

 

(344)

 

 

(525)

FINANCING ACTIVITIES:

 

  

 

 

  

Proceeds from issuance of Convertible Promissory Note

2,000

Net borrowings (repayments) under revolving line of credit

(4,558)

1,639

Proceeds from Convertible Preferred Stock issuance, net

 

 

 

3,441

Proceeds from stock option exercises

 

26

 

 

2

Proceeds from long-term debt

 

 

 

2,995

Repayments of long-term debt

 

(1,111)

 

 

(300)

Payments on revenue interest obligation

 

(2,068)

 

 

(1,940)

Proceeds from sales of common stock through Employee Stock Purchase Plan

 

208

 

 

Net cash (used in) provided by financing activities

 

(7,503)

 

 

7,837

Net decrease in cash and restricted cash

 

(16,906)

 

 

(946)

Cash and restricted cash, beginning of period

 

39,532

 

 

2,590

Cash and restricted cash, end of period

$

22,626

 

$

1,644

Supplemental Cash Flow and Non-Cash Financing Activities Disclosures:

 

  

 

 

  

Cash paid for interest

$

3,788

 

$

3,769

Cash paid for taxes

$

37

 

$

32

Conversion of Convertible Promissory Note to Convertible Preferred Stock

$

 

$

2,000

Forgiveness of SBA PPP loan

$

3,029

 

$

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

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AZIYO BIOLOGICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1. Organization and Description of Business

Aziyo Biologics, Inc. (together with its consolidated subsidiaries, "Aziyo” or the “Company”) is a regenerative medicine company, with a focus on patients receiving implantable medical devices. The Company has developed a portfolio of regenerative products using both human and porcine tissue that are designed to be as close to natural biological material as possible. Aziyo’s portfolio of core products span the implantable electronic devices/cardiovascular-related market, the orthopedic/spinal repair market and the soft tissue reconstruction market (“Core Products”). These products are primarily sold to healthcare providers or commercial partners. The Company also sells human tissue products under contract manufacturing and certain other arrangements (“Non-Core Products”) with corporate customers.

Reverse Stock Split and Initial Public Offering

On September 25, 2020, the Company's Board of Directors and stockholders approved an amendment to the Company's amended and restated certificate of incorporation to effect a 1-for-13.9549 reverse stock split of the Company's common stock, which was effected on September 29, 2020. The par value of the common stock was not adjusted as a result of the reverse stock split. Accordingly, all share and share-related information presented in these condensed consolidated financial statements and the accompanying notes has been retroactively adjusted for all periods presented to give effect to the reverse stock split.

On October 13, 2020, in connection with the Company’s initial public offering ("IPO"), the Company issued and sold 2,941,176 shares of common stock, consisting of 2,205,882 shares of Class A common stock and 735,294 shares of Class B common stock, at a price to the public of $17.00 per share, resulting in net proceeds to the Company of approximately $43.0 million, after deducting the underwriting discount of approximately $3.5 million and offering expenses of approximately $3.5 million.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the Company’s consolidated financial statements and accompanying notes included in the Company's annual report on Form 10-K (“Annual Report”) for the fiscal year ended December 31, 2020. The financial information as of September 30, 2021 and for the three and nine months ended September 30, 2021 and 2020 is unaudited, but in the opinion of management, all adjustments considered necessary for a fair statement of the results for these interim periods have been included.  The condensed consolidated balance sheet data as of December 31, 2020 was derived from audited financial statements but does not include all disclosures required by GAAP. The results of the Company’s operations for any interim period are not necessarily indicative of the results that may be expected for any other interim period or any future year or period.

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.  

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 and nine

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months ended September 30, 2021, the Company incurred net losses of $8.3 million and $15.8 million, respectively, and as of September 30, 2021, the Company had an accumulated deficit of $96.0 million. Because of the numerous risks and uncertainties associated with the Company’s commercialization and development efforts, the Company is unable to predict when it will become profitable, and it may never become profitable. The Company’s inability to achieve and then maintain profitability would negatively affect its business, financial condition, results of operations and cash flows.

As further described in Note 6, the Company’s Term Debt Facility (“Term Debt”) and Revolving Line of Credit (the “Revolver”) include monthly revenue covenants, the non-compliance of which would permit our lenders to accelerate the repayment of these outstanding borrowings. In October 2021, the Company was informed by Medtronic that they would no longer be distributing cellular bone products such as FiberCel and, as such, the two companies are working towards a mutual termination of the associated FiberCel distribution agreement (“FiberCel Agreement”). Such termination will follow the suspension of all FiberCel purchases by Medtronic after Aziyo’s voluntary recall pertaining to a single donor lot of FiberCel in June 2021. Given the associated revenues derived from the FiberCel Agreement, its suspension and then termination may negatively affect the Company’s future revenues. As such, while Aziyo is currently in compliance with all revenue covenants, the Company’s ability to comply with these covenants in the future is uncertain. Additionally, in August 2021, the Company commenced the principal repayment of its Term Debt with such repayments totaling approximately $556,000 per month.  

In order to mitigate the current and potential future liquidity issues caused by the matters noted above, the Company may seek to raise capital through the issuance of common stock and to either refinance or restructure its Term Debt and Revolver.  However, the Company may not be able to raise additional equity or refinance its Term Debt and Revolver on acceptable terms, or at all. As such, based on its current operating plans, the Company believes there is uncertainty as to whether its future cash flows along with its existing cash, availability under its Revolver and cash generated from expected future sales will be sufficient to meet the Company’s anticipated operating needs through twelve months from the financial statement issuance date. Due to these factors, there is substantial doubt about Aziyo’s ability to continue as a going concern within one year after the issuance of the financial statements.

The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. That is, the accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities in the ordinary course of business.

Reclassifications

Certain reclassifications have been made to prior year amounts to conform with current year financial statement presentation.  The reclassifications relate to certain executive compensation costs and technical operations expenses at the Company’s Richmond, California plant. As follows are the total amounts reclassified for the three and nine months ended September 30, 2020 along with the line items in the condensed consolidated statement of operations that were impacted (in thousands).

    

Increase (Decrease) From Previously Reported Amounts

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

2020

    

2020

Sales and marketing

$

127

    

$

374

General and administrative

 

(528)

 

(1,544)

Research and development

 

401

 

1,170

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

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported

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amounts of revenues and expenses during the reporting period. Estimates and assumptions relating to inventory, receivables, long-lived assets, the valuation of stock-based awards, the valuation of the preferred stock warrant liability and deferred income taxes are made at the end of each financial reporting period by management. Management continually re-evaluates its estimates, judgments and assumptions, and management's evaluation could change. Actual results could differ from those estimates.

Impact of COVID-19

The Company continues to closely monitor the impact of the COVID-19 pandemic on its business. In March 2020, the World Health Organization declared COVID-19 a global pandemic and recommended various containment and mitigation measures worldwide. Since that time, the number of procedures performed using the Company's products has decreased significantly, as governmental authorities in the United States have recommended, and in certain cases required, that elective, specialty and other non-emergency procedures and appointments be suspended or canceled in order to avoid patient exposure to medical environments and the risk of potential infection with COVID-19, and to focus limited resources and personnel capacity on the treatment of COVID-19 patients. As a result, beginning in March 2020, a significant number of procedures using the Company's products have been postponed or cancelled and the access of Aziyo’s sales representatives to the associated healthcare facilities has been curtailed, all of which has negatively impacted sales of its products. These measures and challenges will likely continue for the duration of the pandemic, which is uncertain, and will likely continue to reduce the Company's net sales and negatively impact its business, financial condition and results of operations while the pandemic continues.

Net Loss per Share Attributable to Common Stockholders

The Company calculates basic and diluted net loss per share attributable to common stockholders in conformity with the two-class method required for participating securities. The Convertible Preferred Stock was considered a participating security through the completion of the IPO. The two-class method requires income (loss) available to common stockholders for the period to be allocated between common and participating securities based upon their respective rights to share in the earnings as if all income (loss) for the period had been distributed. Under the two-class method, the net loss attributable to common stockholders is not allocated to the Convertible Preferred Stock as the holders of the preferred stock do not have a contractual obligation to share in losses.

Our common stock has a dual class structure, consisting of Class A common stock and 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, Convertible Preferred Stock, stock options, and preferred and common stock warrants are considered to be common stock equivalents. All common stock equivalents have been excluded from the calculation of diluted net loss per share attributable to common stockholders, as their effect would be anti-dilutive for all periods presented. Therefore, basic and diluted net loss per share were the same for both periods presented.

Fair Value of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:

Level 1 - Valuations based on quoted prices for identical assets and liabilities in active markets.

Level 2 - Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

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Level 3 - Valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.

The estimated fair value of financial instruments disclosed in the financial statements has been determined by using available market information and appropriate valuation methodologies. The carrying value of all current assets and current liabilities approximates fair value because of their short-term nature.

Cash and Restricted Cash

The Company maintains its cash balances at banks and financial institutions. The balances are insured up to the legal limit. The Company maintains cash balances that may, at times, exceed this insured limit.

Under the provisions of the Revolving Credit Facility (see Note 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.  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, 

    

2021

    

2020

Cash

$

22,543

$

1,544

Restricted cash

 

83

 

100

Total cash and restricted cash shown in statements of cash flows

$

22,626

$

1,644

Accounts Receivable and Allowances

Accounts receivable in the accompanying balance sheets are presented net of allowances for doubtful accounts and other credits. The Company grants credit to customers in the normal course of business, but generally does not require collateral or any other security to support its receivables.

The Company evaluates the collectability of accounts receivable based on a combination of factors. In circumstances where a specific customer is unable to meet its financial obligations to the Company, a provision to the allowance for doubtful accounts is recorded to reduce the net recognized receivable to the amount that is reasonably expected to be collected. For all other customers, a provision to the allowance for doubtful accounts is recorded based on factors including the length of time the receivables are past due, the current business environment and the Company’s historical experience. Provisions to the allowance for doubtful accounts are recorded to general and administrative expenses. Account balances are charged off against the allowance when it is probable that the receivable will not be recovered.

Inventory

Inventory, consisting of purchased materials, direct labor and manufacturing overhead, are stated at the lower of cost or net realizable value, with cost determined generally using the average cost method. Inventory write-downs for unprocessed and certain processed donor tissue are recorded based on the estimated amount of inventory that will not pass the quality control process based on historical data. At each balance sheet date, the Company also evaluates inventory for excess quantities, obsolescence or shelf life expiration. This evaluation includes analysis of the Company’s current and future strategic plans, historical sales levels by product, projections of future demand, the risk of technological or competitive obsolescence for products, general market conditions and a review of the shelf life expiration dates for products. To the extent that management determines there is excess or obsolete inventory or quantities with a shelf life that is too near its expiration for the Company to reasonably expect that it can sell those products prior to their expiration, the Company adjusts the carrying value to estimated net realizable value.

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Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line method over the following estimated useful lives of the assets:

Processing and research equipment

    

5 to 10 years

Office equipment and furniture

 

3 to 5 years

Computer hardware and software

 

3 years

Leasehold improvements are amortized on the straight-line method over the shorter of the lease term or the estimated useful life of the asset.

Repairs and maintenance costs are expensed as incurred.

Long-Lived Assets

Purchased intangible assets with finite lives are carried at acquired fair value, less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets.

The Company periodically evaluates the period of depreciation or amortization for long-lived assets to determine whether current circumstances warrant revised estimates of useful lives. The Company reviews its property and equipment and intangible assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. Impairment exists when the carrying value of the company’s asset exceeds the related estimated undiscounted future cash flows expected to be derived from the asset. If impairment exists, the carrying value of that asset is adjusted to its fair value. A discounted cash flow analysis is used to estimate an asset’s fair value, using assumptions that market participants would apply. The results of impairment tests are subject to management’s estimates and assumptions of projected cash flows and operating results. Changes in assumptions or market conditions could result in a change in estimated future cash flows and could result in a lower fair value and therefore an impairment, which could impact reported results. There were no impairment losses for the three and nine months ended September 30, 2021 or 2020.

Revenue Recognition

The Company’s revenue is generated from contracts with customers in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) No. 606, “Revenue from Contracts with Customers.” The core principle of ASC 606 is that the Company recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The ASC 606 revenue recognition model consists of the following five steps: (1) identify the contracts with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when (or as) the entity satisfies a performance obligation.

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. Revenue is recognized when the Company has met its performance obligations pursuant to its contracts with its customers in an amount that the Company expects to be entitled to in exchange for the transfer of control of the products to the Company’s customers. For all product sales, the Company has no further performance obligations and revenue is recognized at the point control transfers which occurs either when: i) the product is shipped via common carrier; or ii) the product is delivered to the customer or distributor, in accordance with the terms of the agreement.

A portion of the Company’s product revenue is generated from consigned inventory maintained at hospitals and from inventory physically held by direct sales representatives. For these types of products sales, the Company retains control until the product has been used or implanted, at which time revenue is recognized.

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The Company elected to account for shipping and handling activities as a fulfillment cost rather than a separate performance obligation. Amounts billed to customers for shipping and handling are included as part of the transaction price and recognized as revenue when control of the underlying products is transferred to the customer. The related shipping and freight charges incurred by the Company are included in sales and marketing costs.

Contracts with customers state the final terms of the sale, including the description, quantity, and price of each implant distributed. The payment terms and conditions in the Company’s contracts vary; however, as a common business practice, payment terms are typically due in full within 30 to 60 days of delivery. The Company, at times, extends volume discounts to customers.

The Company permits returns of its products in accordance with the terms of contractual agreements with customers. Allowances for returns are provided based upon analysis of the Company’s historical patterns of returns matched against the revenues from which they originated. The Company records estimated returns as a reduction of revenue in the same period revenue is recognized.

Deferred Rent

The Company recognizes rent expense by the straight-line method over the lease term. Funds received from the lessor used to reimburse the Company for the cost of leasehold improvements are recorded as a deferred credit resulting from a lease incentive and are amortized over the lease term as a reduction of rent expense.

Stock-Based Compensation Plans

The Company accounts for its stock-based compensation plans in accordance with FASB Accounting Standards Codification (“ASC”) 718, Accounting for Stock Compensation. FASB ASC 718 requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors, including employee stock options and restricted stock. Stock-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense on a straight-line basis over the requisite service period of the entire award.

Research and Development Costs

Research and development costs, which include mainly salaries, outside services and supplies, are expensed as incurred.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash. At September 30, 2021, the Company maintained $23.3 million in bank deposit accounts that are in excess of the $0.25 million insurance provided by the Federal Deposit Insurance Corporation in one federally insured financial institution. The Company has not experienced any losses in such accounts.

The Company sells certain of its products under large contract manufacturing or distribution arrangements. The following table presents percentage of total revenues derived from the Company’s largest customers as well as their respective percentage of total accounts receivable:

 

Three Months Ended

September 30,

Nine Months Ended

September 30,

 

2021

2020

2021

2020

Percent of revenues derived from:

Medtronic Sofamor Danek USA

3%

18%

14%

16%

Surgalign Holdings

9%

10%

10%

9%

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September 30, 2021

December 31, 2020

Percent of accounts receivable derived from:

Medtronic Sofamor Danek USA

0%

34%

Surgalign Holdings

12%

13%

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

Income Taxes

The Company uses the asset and liability method of accounting for income taxes. Deferred income taxes are recorded to reflect the tax consequences on future years for differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to amounts that are more likely than not to be realized.

The Company is subject to income taxes in the federal and state jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. In accordance with the authoritative guidance on accounting for uncertainty in income taxes, the Company recognizes tax liabilities for uncertain tax positions when it is more likely than not that a tax position will not be sustained upon examination and settlement with various taxing authorities. Liabilities for uncertain tax positions are measured based upon the largest amount of benefit that is more likely than not (greater than 50%) of being realized upon settlement. The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense.

Note 3. Recently Issued Accounting Standards

In 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, 2022. 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 December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes, which clarifies and simplifies certain aspects of the accounting for income taxes. The standard is effective for years beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2020. The adoption of this standard on January 1, 2021 did not have a material impact on the Company’s consolidated financial statements.

In November 2019, the FASB issued ASU 2019-10, “Instruments - Credit Losses (Topic 326), Derivative and Hedging (Topic 815), and Leases (Topic 842), Effective Dates.” The FASB deferred the effective dates of the new credit losses standard for all entities except filers with the Securities and Exchange Commission (the “SEC”) that are not smaller

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reporting companies (“SRCs”) to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Board also aligned the effective dates of ASU 2017-04 on goodwill impairment with the new effective dates of the credit losses standard. The FASB deferred the effective dates of its new standards on hedging and leases for entities that are not public business entities (“PBEs”) (and for leases, for entities that are not non-for-profit (“NFP”) entities that have issues, or are conduit bond obligors for, certain securities; and are not employee benefit plans (“EBPs”) that file or furnish financial statements with or to the SEC) to fiscal years beginning after December 15, 2020, and interim periods in the following year. The FASB is also reconsidering its philosophy on establishing effective dates for major standards for private companies, NFPs, EBPs and smaller public companies. The board has developed a two-bucket approach that would give these entities more time to implement major new standards. The Company is evaluating this standard to determine if adoption will have a material impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases. The standard requires that lessees recognize a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meet the definition of a short-term lease). The liability will be equal to the present value of lease payments. The asset will be based on the liability subject to certain adjustments. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Operating leases will result in straight-line expense (similar to current operating leases) while finance leases will result in a front-loaded expense pattern (similar to current capital leases). In November 2019, the FASB issued 2019-10 which extended the adoption of ASU 2016-02 for the Company to be effective for periods ending after December 15, 2022. While early adoption is permitted, the Company intends to adopt in accordance with the revised timeline provided by the FASB. The Company is evaluating this standard to determine if adoption will have a material impact on the Company’s consolidated financial statements.

Note 4. Stock-Based Compensation

In 2015, the Company established the Aziyo Biologics, Inc. 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 September 30, 2021, the Company had 343,999 shares of Class A common stock available for issuance under the 2020 Plan.

Stock Options

The Company’s policy is to grant stock options at an exercise price equal to 100% of the market value of a share of Class A common stock at closing on the date of the grant. The Company’s stock options have contractual terms of seven to ten years, and vest over a four-year period from the date of grant.

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

Weighted-

Average

Weighted-

Remaining

Aggregate

Average

Contractual

Intrinsic

    

    

Exercise

    

Term

    

Value

Number of Shares

Price

(years)

(in thousands)

Outstanding, December 31, 2020

917,437

$

13.68

8.1

 

$

2,070

Granted

492,017

$

12.71

Exercised

(3,305)

$

7.91

Forfeited

(15,915)

$

15.92

Outstanding, September 30, 2021

1,390,234

$

13.32

8.1

$

328

Vested and exercisable, September 30, 2021

222,652

$

6.05

3.3

$

282

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As of September 30, 2021, there was approximately $7.3 million of total unrecognized compensation expense related to unvested stock options. These costs are expected to be recognized over a weighted-average period of 3.1 years. The weighted average grant date fair value of options granted during the nine months ended September 30, 2021 was $7.31.  

Restricted Stock Units

Restricted stock units (“RSUs”) represent rights to receive common shares at a future date. 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 nine months ended September 30, 2021 is as follows:

    

Number of

    

Weighted-

Shares 

Average

Underlying

Grant Date

RSUs

Fair Value

Unvested, December 31, 2020

 

147,883

$

17.00

Granted

 

91,182

$

14.40

Vested

 

$

Forfeited

 

(3,180)

$

13.86

Unvested, September 30, 2021

 

235,885

$

16.08

The total fair value of the RSUs granted during the nine months ended September 30, 2021 of $1.3 million was based on the fair market value of the Company's Class A common stock on the date of grant. The fair value at the time of the grant is amortized to expense on a straight-line basis over the vesting period of three to four years. As of September 30, 2021, $2.8 million of unrecognized compensation costs related to RSUs is expected to be recognized over a weighted average period of 2.6 years.  

Employee Stock Purchase Plan

The Company makes shares of its Class A common stock available for purchase under the Aziyo Biologics, Inc. 2020 Employee Stock Purchase Plan (the “ESPP”). The ESPP provides for separate six-month offering periods that begin in March and September of each year. Under the ESPP, employees may purchase a limited number of shares of Aziyo Class A common stock at 85% of the fair market value on either the first day of the offering period or the purchase date, whichever is lower. The ESPP is considered compensatory for purposes of stock-based compensation expense.  The number of shares reserved under the ESPP will automatically increase on the first day of each fiscal year through January 1, 2030, in an amount equal to the lesser of (i) 1% of the total shares of Class A common stock outstanding on the final day of the immediately preceding calendar year; or (ii) a lesser number of shares determined by our board of directors. As of September 30, 2021, the total shares of Class A common stock authorized for issuance under the ESPP was 214,069, of which 186,825 remained available for future issuance. During the nine months ended September 30, 2021, 27,244 shares of Class A common stock were issued under the ESPP.

Stock-Based Compensation Expense

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

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2021

    

2020

    

2021

    

2020

  

Sales and marketing

    

$

185

    

$

    

$

488

    

$

General and administrative

 

622

 

59

 

1,557

 

186

Research and development

 

139

 

 

391

 

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Cost of goods sold

 

53

 

 

126

 

Total stock-based compensation expense