AZIYO BIOLOGICS, INC. Management report and analysis of the financial situation and operating results. (Form 10-K)

The following discussion and analysis should be read in conjunction with our
consolidated financial statements and the related notes included elsewhere in
this Annual Report on Form 10-K (the "Annual Report"). This discussion contains
forward-looking statements reflecting our current expectations, estimates, plans
and assumptions concerning events and financial trends that involve risks and
may affect our future operating results and financial position. Actual results
and the timing of events may differ materially from those contained in these
forward-looking statements due to a number of factors, including those discussed
in the sections entitled "Forward-Looking Statements," "Risk Factors Summary"
and in Part I, Item 1A. "Risk Factors" of this Annual Report. A discussion of
the year ended December 31, 2020 compared to the year ended December 31, 2019
has been reported previously in our Annual Report on Form 10-K for the fiscal
year ended December 31, 2020, filed with the SEC on March 15, 2021, in Part II,
Item 7. "Management's Discussion and Analysis of Financial Condition and Results
of Operations."

Overview

We are a commercial-stage regenerative medicine company focused on creating the
next generation of differentiated products and improving outcomes in patients
undergoing surgery, concentrating on patients receiving implantable medical
devices. From our proprietary tissue processing platforms, we have developed a
portfolio of advanced regenerative medical products that are designed to be very
similar to natural biological material. Our proprietary products, which we refer
to as our Core Products, are designed to address the implantable electronic
device/cardiovascular, orthopedic/spinal repair and soft tissue reconstruction
markets, which represented a combined $3 billion market opportunity in the
United States in 2020. To expand our commercial reach, we have commercial
relationships with major medical device companies, such as Boston Scientific and
Biotronik, to promote and sell some of our Core Products. We

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believe that our focus on our unique regenerative medicine platforms and core products will ultimately maximize our likelihood of continued clinical and commercial success and create a long-term competitive advantage for us.

We estimate that more than two million patients were either implanted with
medical devices, such as pacemakers, defibrillators, neuro-stimulators, spinal
fusion and trauma fracture hardware or tissue expanders for breast
reconstruction, in the United States in 2019. This number is driven by advances
in medical device technologies and an aging population with a growing incidence
of comorbidities, including diabetes, obesity and cardiovascular and peripheral
vascular diseases. These comorbidities can exacerbate various immune responses
and other complications that can be triggered by a device implant.

Our Core Products are targeted to address unmet clinical needs with the goal of
promoting healthy tissue formation and avoiding complications associated with
medical device implants, such as scar-tissue formation, capsular contraction,
erosion, migration, non-union of implants and implant rejection. We believe that
we have developed the only biological envelope, which is covered by a number of
patents, that forms a natural, systemically vascularized pocket for holding
implanted electronic devices. We have a proprietary processing technology for
manufacturing bone regenerative products for use in orthopedic/spinal repair
that preserves a cell's ability to regenerate bone and decelerates cell
apoptosis or programmed cell death. We have a patented cell removal technology
that produces undamaged extracellular matrices for use in soft tissue
reconstruction. In pre-clinical and clinical studies, our products have
supported and, in some cases, accelerated tissue healing, and thereby improved
patient outcomes.

Our Non-Core Products are those fulfilled through tissue processing contracts at
our Richmond, California facility. These contracts serve to utilize as much as
possible of the starting human biological material from which we produce our
orthopedic/spinal repair and soft tissue reconstruction products, leverage our
existing overhead and improve our cash flow. The resulting processed materials,
including particulate bone, precision milled bone, cellular bone matrix,
acellular dermis and other soft tissue products, are sold to medical/surgical
companies as finished products and as a subcomponent of their products.
Additionally, we process amniotic membrane as finished product for selected
customers.

We process all of our products at our two manufacturing facilities in Roswell,
Georgia and Richmond, California, and stock inventory of raw materials,
components and finished goods at those locations. We rely on a single or limited
number of suppliers for certain raw materials and components. Except for the
porcine tissue supplier of our raw materials for our CanGaroo and cardiovascular
products, which is Cook Biotech, we generally have no long-term supply
agreements with our suppliers, as we obtain supplies on a purchase order basis.
Specifically, we acquire donated human tissue directly through tissue
procurement firms engaged by us. We primarily ship our Core Products from our
facilities directly to hospital customers.

Since inception, we have financed our operations primarily through private
placements of our convertible preferred stock, amounts borrowed under our credit
facilities, sales of our products and, more recently, our initial public
offering consummated on October 13, 2020 (the "IPO") and a private placement of
our common stock in December 2021. We have devoted the majority of our resources
to acquisitions and integration, manufacturing and administrative costs,
research and development, clinical activity and investing in our commercial
infrastructure through our direct sales force and our commercial partners in
order to expand our presence and to promote awareness and adoption of our
products. As of December 31, 2021, we had 176 employees, of which 31 were direct
sales representatives.

We have incurred significant operating losses since our inception. We incurred a
net loss of $24.8 million and $21.8 million for the years ended December 31,
2021 and 2020, respectively. Our accumulated deficit as of December 31, 2021 was
$105.1 million.

We expect to continue to incur significant expenses and operating losses for the
foreseeable future as we seek to grow our sales organization and expand our
product development and clinical and research activities. In addition, we expect
to continue to incur additional costs and expenses associated with operating as
a public company.

Our ability to achieve profitability will depend on our ability to generate sales of existing or new products sufficient to exceed our operating expenses and capital requirements. Due to the many risks and uncertainties affecting product sales and our ongoing marketing and product development efforts, we are unable to

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to predict with any certainty whether we will be able to increase sales of our
products or the timing or amount of ongoing expenditures we will be required to
incur. Accordingly, even if we are able to increase sales of our products, we
may not become profitable. As a result, we anticipate that we will need
additional funding to support our continuing operations and pursue our growth
strategy. Until such time as we are able to generate sufficient sales from our
products, we expect to finance our operations through equity offerings, debt
financings or other capital sources, which may include collaborations or license
agreements with other companies or other strategic transactions such as an asset
sale. We may not be able to raise additional funds or enter into such other
agreements or arrangements when needed on favorable terms or at all. If we fail
to raise capital or enter into such agreements in the short-term, we will be
unable to fund our operations and capital expenditure requirements at that time
which may result in there being substantial doubt about our ability to continue
as a going concern.

We believe that the net proceeds from our IPO, together with our existing cash,
availability under our Revolving Credit Facility and cash generated from
expected future commercial sales as well as the December 2021 PIPE financing
(see below) will be sufficient to fund our operating expenses, debt service
requirements and capital expenditure needs through at least twelve months from
the issuance date of the consolidated financial statements included elsewhere in
this Annual Report. We have based this estimate on assumptions that may prove to
be wrong, and we could exhaust our available capital resources sooner than

we
expect.

Impact of COVID-19

We are closely monitoring the impact of the COVID-19 pandemic on our 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 our 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 our products have been postponed or
cancelled, which has negatively impacted sales of our products. These measures
and challenges will likely continue for the duration of the pandemic, which is
uncertain, and will likely continue to reduce our net sales and negatively
impact our business, financial condition and results of operations while the
pandemic continues.

In addition, numerous state and local jurisdictions, including those where our
facilities are located, have imposed, and others in the future may impose or
re-impose, "shelter-in-place" orders, quarantines, executive orders and similar
government orders and restrictions for their residents to control the spread of
COVID-19. Such orders or restrictions have resulted in reduced operations at our
manufacturing facilities, travel restrictions and cancellation of events, and
have restricted the ability of our sales representatives and those of our
commercial partners and independent sales agents to attend procedures in which
our products are used, among other effects, thereby significantly and negatively
impacting our operations.

The extent to which the COVID-19 pandemic impacts our future financial condition
and results of operations will depend on future events and developments, which
are highly uncertain and cannot be predicted, including the severity and spread
of the disease and the effectiveness of actions to contain the disease or treat
its impact, among others. As new information regarding COVID-19 continues to
emerge, it is difficult to predict the degree to which this disease will
ultimately have on our business.

FiberCel Recall

On June 2, 2021, we issued a voluntary recall pertaining to a single donor lot
of our FiberCel Fiber Viable Bone Matrix, a bone repair product formerly
distributed by Medtronic, after learning of post-surgical infections reported in
several patients treated with the product, including some patients that tested
positive for tuberculosis.

Since the recall was issued, we have worked with the US Food and Drug Administration (“FDA”) and the US Centers for Disease Control and Prevention
(“CDC”) to identify and secure all unused products, verify the

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the condition of patients treated with the recalled product, understand if there is a relationship between post-surgical infections and the recalled lot of product, and determine the medical cause of these infections.

We have identified the 154 units comprising the single product lot in question.
Based on information from the CDC, 136 units within this product lot were
implanted into 113 patients and the remaining 18 units were returned to either
us or the CDC. Of these 113 patients, CDC has identified at least 75 patients
who have exhibited clinical or diagnostic findings consistent with tuberculosis
infection.

As part of our continuing cooperation with the FDA and CDC and our efforts to
conduct a prompt and fulsome investigation into this matter, we have reviewed
the processes for screening donors and producing FiberCel and have not
identified any deviations from our established protocols, which are designed to
comply with industry standards established by the American Association of Tissue
Banks ("AATB") as well as applicable FDA requirements and guidelines.

To help ensure the safety of future production lots, we have implemented a
number of potential safeguards against Mycobacterium tuberculosis that we
believe exceed applicable industry standards and currently available
FDA-approved testing.  We have implemented additional donor screening procedures
to include screening for any donor utilizing hemodialysis for an extended period
of time and to request additional background and information on any time spent
by the donor outside the United States.  In addition, we have developed and
begun utilizing a methodology for testing processed viable cell bone matrix
tissue products for Mycobacterium tuberculosis as a further enhancement of our
donor screening.  As far as we are aware, there are no commercially available
testing methods authorized by the FDA for detecting the presence of
Mycobacterium tuberculosis in these products. For an update on the legal
proceedings related to the FiberCel Recall, see Part I, Item 3, "Legal
Proceedings" and Note 16 to the  consolidated financial statements included
elsewhere in this Annual Report.

Defending any current or future claims, proceedings or lawsuits, regardless of
merit, could be costly, divert management attention and result in adverse
publicity, which could result in the withdrawal of, or reduced acceptance of,
our products in the market. If we cannot successfully defend against product
liability claims, we could incur substantial liability and costs. Additionally,
following the public announcement of our voluntary recall, there has been
various media coverage surrounding the recall and patients impacted. Such
negative publicity related to the perceived quality and safety of our products
could affect our brand image, decrease confidence in our products or have an
adverse effect on our ability to retain existing and attract new customers,
suppliers and distribution partners, any one of which could result in decreased
revenue, having an adverse effect on our business, financial condition and
operating results.

Components of our operating results

Net sales

We recognize revenue on the sale of our Core Products and our Non-Core Products.
With respect to our Core Products, CanGaroo and our cardiovascular products are
sold to hospitals and other healthcare facilities primarily through our direct
sales force, commercial partners or independent sales agents. Our
orthopedic/spinal repair products are sold through commercial partners. Our soft
tissue reconstruction product SimpliDerm is sold directly to hospitals and other
healthcare facilities through independent sales agents. Our contract
manufacturing products are sold directly to corporate customers. Gross to net
sales adjustments include sales returns and prompt payment and volume discounts.

Expenses

In recent years, we have incurred significant costs in the operation of our
business. We expect our expenses to continue to increase for the foreseeable
future as we grow our sales and marketing organization, expand our product
development and clinical activities and increase our administrative
infrastructure. As a result, we will need to generate significant net sales in
order to achieve profitability. Below is a breakdown of our main expense
categories and the related expenses incurred in each category:

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Costs of Goods Sold

Our cost of goods sold relates to raw materials purchased and the costs of processing and converting those raw materials, consisting primarily of salaries and benefits, supplies, quality control testing and manufacturing overhead incurred in our processing facilities at Richmond, California and Roswell, Georgia. Both facilities have additional capacity which, if utilized, would further leverage our fixed overhead. Cost of goods sold also includes the amortization of intangible assets generated by the acquisition of CorMatrix in 2017.

Sales and marketing expenses

Sales and marketing expenses are primarily related to our direct sales force,
consisting of salaries, commission compensation, fringe benefits, meals and
other expenses. Auto and travel costs have also historically contributed to
sales and marketing expenses, albeit to a lesser extent due to the COVID-19
pandemic. Outside of our direct sales force, we incur significant expenses
relating to commissions to our CanGaroo commercial partners and independent
sales agents. Additionally, this expense category includes distribution costs as
well as market research, trade show attendance, advertising and public relations
and customer service expenses. We expect sales and marketing expenses to grow
commensurate with sales increases, and to an even larger degree in the near-term
due to a continued focus on growing our direct sales force and increasing
marketing activities to coincide with new product launches.

General and administrative expenses

General and administrative ("G&A") expenses consist of compensation, consulting,
legal, human resources, information technology, accounting, insurance and
general business expenses. Our G&A expenses have increased as a result of
operating as a public company, especially as a result of hiring additional
personnel and incurring greater director and officer insurance premiums, greater
investor and public relations costs, and additional costs associated with
accounting, legal, tax-related and other services associated with maintaining
compliance with exchange listing and SEC requirements.

Research and development costs

Research and development ("R&D") expenses consist primarily of salaries and
fringe benefits, laboratory supplies, clinical studies and outside service
costs. Our product development efforts primarily relate to new offerings in
support of the orthopedic/spinal repair market and activities associated with
the development of a CanGaroo Envelope with antibiotics. We also conduct
clinical studies to validate the performance characteristics of our products and
to capture patient data necessary to support our commercial efforts.

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Results of Operations

Comparison of the years ended December 31, 2021 and 2020

                                                  Year Ended December 31,
                                               2021                      2020                Change 2020 / 2021
                                                    % of Net                  % of Net

(in thousands, except percentages)      Amount       Sales        Amount   

   Sales            $               %
Net sales                             $   47,390       100.0 %  $   42,682       100.0 %  $       4,708        11.0 %
Cost of goods sold                        28,368        59.9 %      22,121        51.8 %          6,247        28.2 %
Gross profit                              19,022        40.1 %      20,561        48.2 %        (1,539)       (7.5) %
Sales and marketing                       18,825        39.7 %      17,565        41.2 %          1,260         7.2 %
General and administrative                13,963        29.5 %      10,641        24.9 %          3,322        31.2 %
Research and development                   9,266        19.6 %       5,954        13.9 %          3,312        55.6 %
Total operating expenses                  42,054        88.7 %      34,160        80.0 %          7,894        23.1 %
Loss from operations                    (23,032)      (48.6) %    (13,599)      (31.9) %        (9,433)        69.4 %
Interest expense                           5,324        11.2 %       5,633        13.2 %          (309)       (5.5) %
Other (income) expense, net              (3,579)       (7.6) %       2,567         6.0 %        (6,146)          NM
Loss before provision of income
taxes                                   (24,777)      (52.3) %    (21,799)      (51.1) %        (2,978)        13.7 %
Income tax expense                            55         0.1 %          26         0.1 %             29       111.5 %
Net loss                                (24,832)      (52.4) %    (21,825)      (51.1) %        (3,007)        13.8 %
Accretion of Convertible Preferred
Stock                                          -           - %       3,510         8.2 %        (3,510)          NM
Net loss attributable to common
stockholders                          $ (24,832)      (52.4) %  $ (25,335)      (59.4) %  $         503       (2.0) %


NM = not meaningful

Net Sales

Net sales increased $4.7 million, or 11.0%, to $47.4 million in the year ended
December 31, 2021 compared to $42.7 million in the year ended December 31, 2020.
The increase in net sales was due to growth in our Core Products and Non-Core
Products of  $1.4 million and $3.3 million, respectively.

Net sales information for our Core Products and Non-Core Products is summarized
as follows:

                                          Year Ended December 31,
                                        2021                    2020
                                            % of Net                % of Net      Change 2020 / 2021
(in thousands, except
percentages)                     Amount      Sales       Amount      Sales           $            %
Products:
Core Products                   $ 37,603        79.3 %  $ 36,216        84.9 %  $     1,387        3.8 %
Non-Core Products                  9,787        20.7 %     6,466        15.1 %        3,321       51.4 %
Total Net Sales                 $ 47,390       100.0 %  $ 42,682       100.0 %  $     4,708       11.0 %


Net sales generated by our Core Products grew $1.4 million, or 3.8%, to $37.6
million in the year ended December 31, 2021 compared to $36.2 million in the
year ended December 31, 2020. The Core Products net sales growth can be largely
attributed to the volume growth of both our CanGaroo and SimpliDerm partially
offset by a decline in our revenues from our bone repair products. A portion of
the volume growth in CanGaroo and SimpliDerm was due to the impact of the of the
COVID-19 pandemic, which negatively affected our sales principally during the
second quarter of 2020, but a majority of the growth was due to increased demand
in 2021 compared to 2020. The decline in net sales of our bone repair products
can be attributed to the cessation of purchases by Medtronic of FiberCel
following our recall of a single lot of FiberCel in June 2021. Sales of

FiberCel at Medtronic were $4.9 million and $6.9 million in the past years
December 31, 2021 and 2020, respectively.

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Net sales generated by our Non-Core Products increased $3.3 million, or 51.4%,
to $9.8 million in the year ended December 31, 2021 from $6.5 million in the
year ended December 31, 2020. The net sales increase was primarily due to
revenues associated with new contracts signed in the latter half of 2020 and by
one contract manufacturing customer building inventory for a new product launch,
along with the decreased revenue impact of COVID-19 in the year ended December
31, 2021 compared to such impact in the year ended December 31, 2020.

Cost of Goods Sold

Cost of goods sold increased $6.2 million, or 28.2%, to $28.4 million in the
year ended December 31, 2021 compared to $22.1 million in the year ended
December 31, 2020, and included, in each period, $3.4 million of intangible
asset amortization expenses. Gross margin was 40.1%, in the year ended December
31, 2021 compared to 48.2% in the year ended December 31, 2020. Gross margin,
excluding intangible asset amortization, was 47.3%, in the year ended December
31, 2021 compared to 56.1% in the year ended December 31, 2020. The decrease in
gross margin was primarily due to product mix as our Non-Core Product sales
generally have lower margins than Core Products. Also contributing to the
decreased gross margins in 2021 were lower yields in our orthopedic and spinal
repair product lines related to heightened donor screening criteria ahead of the
implementation of enhanced product testing, as well as write-downs of inventory
in certain categories.  Together the product yield and inventory writedowns
negatively impacted gross margins in the year ended December 31, 2021 by
approximately 4%. We do not expect these costs to continue at similar levels
going forward.

Operating Expenses

Sales and Marketing

Sales and marketing expenses increased $1.2 million, or 7.2%, to $18.8 million
in the year ended December 31, 2021 compared to $17.6 million in the year ended
December 31, 2020. The increase was primarily the result of higher stock-based
compensation after our IPO in October 2020 and increases in commissions paid to
independent sales agents  due to sales growth in our Core Products. As a
percentage of sales, sales and marketing expenses declined to 39.7% in the year
ended December 31, 2021 from 41.2% in the year ended December 31, 2020 primarily
due to the growth in our "business to business" Non-Core Product revenues, as
such revenues have limited associated selling costs.

General and administrative

G&A expenses increased $3.4 million, or 31.2%, to $14.0 million in the year
ended December 31, 2021 compared to $10.6 million in the year ended December 31,
2020. The increase was primarily due to costs of being a public company, most
notably increases in directors and officers insurance, legal fees and
stock-based compensation. As a percentage of net sales, G&A expenses rose to
29.5% in the year ended December 31, 2021 from 24.9% in the year ended December
31, 2020.

Research and Development

R&D expenses increased $3.3 million, or 55.6%, to $9.3 million in the year ended
December 31, 2021 compared to $6.0 million in the year ended December 31, 2020.
We continue to focus our R&D efforts on the development of our pipeline products
with the growth in R&D expenses in the year ended December 31, 2021 largely
attributable to the work performed on the development of our CanGaroo Envelope
with antibiotics. In 2021, we completed both the product design and
manufacturing validation for this next version of our CanGaroo Envelope.

Interest charges

Interest expense was approximately $5.3 million and $5.6 million in the year
ended December 31, 2021 and 2020, respectively. The decrease was due to lower
draws on our Revolving Credit Agreement during the year ended December 31, 2021
and lower outstanding principal on our Term Loan Credit Agreement due to the
commencement of principal payments in the third quarter of 2021. See "Credit
Facilities" below for further discussion of these debt agreements and

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Note 9 to the consolidated financial statements included elsewhere in this annual report for a description of our interest income obligation and related interest expense.

Other (income) Expenses, net

Other (income) expense, net was approximately $3.6 million of income in the year
ended December 31, 2021. Such other income relates to the forgiveness of our
promissory note with Silicon Valley Bank under the Paycheck Protection Program
of the CARES Act in the amount of approximately $3.0 million and our receipt of
$550,000 in satisfaction of a 2018 settlement with KeraLink. For further
discussion on these items, see Notes 8 and 17 to the consolidated financial
statements included elsewhere in this Annual Report.

Other (income) expense, net was an expense of approximately $2.6 million in the
year ended December 31, 2020 and was primarily attributable to the loss on early
extinguishment of debt of $2.3 million. See Note 12 to the consolidated
financial statements included elsewhere in this Annual Report for further
discussion.

Accretion of Series A Preferred Shares

Accretion of Series A Preferred Stock was $3.5 million in the year ended
December 31, 2020. The Accretion of Series A Preferred Stock relates to $3.5
million of deemed dividends related to the sale of the Convertible Preferred
Stock in September 2020 below its fair value. See Note 12 to the consolidated
financial statements included elsewhere in this Annual Report for additional
information.

Non-GAAP Financial Measures

This Annual Report presents our gross margin, excluding intangible asset
amortization, for the years ended December 31, 2021 and 2020. We calculate gross
margin, excluding intangible asset amortization, as gross profit, excluding
amortization expense relating to intangible assets we acquired in the CorMatrix
Acquisition, divided by net sales. Gross margin, excluding intangible asset
amortization, is a supplemental measure of our performance, is not defined by or
presented in accordance with U.S. generally accepted accounting principles
("GAAP"), has limitations as an analytical tool and should not be considered in
isolation or as an alternative to our GAAP gross margin, gross profit or any
other financial performance measure presented in accordance with GAAP. We
present gross margin, excluding intangible asset amortization, because we
believe that it provides meaningful supplemental information regarding our
operating performance by removing the impact of amortization expense, which is
not indicative of our overall operating performance. We believe this provides
our management and investors with useful information to facilitate
period-to-period comparisons of our operating results. Our management uses this
metric in assessing the health of our business and our operating performance,
and we believe investors' understanding of our operating performance is
similarly enhanced by our presentation of this metric.

Although we use gross margin, excluding intangible asset amortization, as
described above, this metric has limitations as an analytical tool and should
not be considered in isolation or as a substitute for financial information
presented in accordance with GAAP. In addition, other companies, including
companies in our industry, may use other measures to evaluate their performance,
which could reduce the usefulness of this non-GAAP financial measure as a tool
for comparison.

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The following table presents a reconciliation of our gross margin, excluding
intangible asset amortization, for the years ended December 31, 2021 and 2020 to
the most directly comparable GAAP financial measure, which is our GAAP gross
margin (in thousands).

                                                              Year Ended
                                                            December 31,
                                                           2021        2020
Net sales                                                $ 47,390    $ 42,682
Cost of goods sold                                         28,368      22,121
Gross profit                                               19,022      20,561
Intangible asset amortization expense                       3,396       

3,396

Gross profit, excluding amortization of intangible assets $22,418 $23,957
Gross margin

                                                 40.1 %      

48.2% Gross margin, excluding amortization of intangible assets 47.3% 56.1%

Seasonality

Historically, we have experienced seasonality in our first and fourth quarters,
and we expect this trend to continue. We have experienced and may in the future
experience higher sales in the fourth quarter as a result of hospitals in the
United States increasing their purchases of our products to coincide with the
end of their budget cycles. Satisfaction of patient deductibles throughout the
course of the year also results in increased sales later in the year, once
patients have paid their annual insurance deductibles in full, which reduces
their out-of-pocket costs. Conversely, our first quarter generally has lower
sales than the preceding fourth quarter as patient deductibles are
re-established with the new year, which increases their out-of-pocket costs.

Cash and capital resources

As of December 31, 2021, we had cash and restricted cash of approximately $30.4
million and availability under our Revolving Credit Facility of $2.1 million.
Since inception, we have financed our operations primarily through private
placements of our convertible preferred stock, amounts borrowed under our credit
facilities, sales of our products and more recently, proceeds from our IPO and a
private placement of our common stock. Our historical cash outflows have
primarily been associated with acquisition and integration, manufacturing costs,
general and marketing, research and development, clinical activity, purchase of
property and equipment used in the production activities of our Richmond,
California facility and investing in our commercial infrastructure through our
direct sales force and our commercial partners in order to expand our presence
and to promote awareness and adoption of our products. As of December 31, 2021,
our accumulated deficit was $105.1 million.

On October 13, 2020, in connection with our IPO, we issued and sold 2,941,176
shares of common stock, consisting of 2,205,882 shares of Class A common stock
and 735,294 shares of Class B common stock, at a price to the public of $17.00
per share, resulting in net proceeds to us of approximately $43.0 million, after
deducting the underwriting discount of approximately $3.5 million and offering
expenses of approximately $3.5 million. Additionally, on December 8, 2021, we
closed on a private investment in public equity (PIPE) financing, thereby
receiving net proceeds of approximately $13.8 million, after deducting offering
costs. The PIPE investors purchased an aggregate of 2,122,637 shares of the
Company's Class A common stock and an aggregate of 1,179,244 shares of the
Company's Class B common stock (which are convertible on a one-for-one basis
into shares of Class A common stock), in each case, at a price of $4.24 per
share.

We expect our losses to continue for the foreseeable future and these losses
will continue to have an adverse effect on our financial position. Because of
the numerous risks and uncertainties associated with our commercialization and
development efforts, we are unable to predict when we will become profitable,
and we may never become profitable. Our inability to achieve and then maintain
profitability would negatively affect our business, financial condition, results
of operations and cash flows. Additionally, as discussed below under "--- Credit
Facilities," in August 2021, we commenced the principal repayment of our Term
Debt with such repayments totaling approximately $556,000 per month through

July
2024.

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In order to mitigate the current and potential future liquidity issues caused by
the matters noted above, we may seek to raise capital through the issuance of
common stock, either refinance or restructure our Term Debt and Revolver or
pursue asset sale transactions.  However, such transactions may not be
successful and we may not be able to raise additional equity or refinance our
Term Debt and Revolver on acceptable terms, or at all. We believe that the net
proceeds from our IPO, together with our existing cash, availability under our
Revolving Credit Facility and cash generated from expected future commercial
sales as well as the December 2021 PIPE financing will be sufficient to fund our
operating expenses, debt service requirements and capital expenditure needs
through at least twelve months from the issuance date of the consolidated
financial statements included elsewhere in this Annual Report. We have based
this estimate on assumptions that may prove to be wrong, and we could exhaust
our available capital resources sooner than we expect.

Cash flow for the years ended December 31, 2021 and 2020

                                     Year Ended December 31,
                                       2021             2020

                                          (in thousands)
Net cash (used in) provided by:
Operating activities               $    (15,446)     $ (13,626)
Investing activities                       (369)          (640)
Financing activities                       6,711         51,208
Net decrease in cash               $     (9,104)     $   36,942

Net cash used in operating activities

Net cash used in operating activities for the year ended December 31 2021 was
$15.4 million compared to $13.6 million for the year ended December 31, 2020.
The year-over-year change was primarily due to a higher net loss (after
adjustment for non-cash charges and gains) offset by improved working capital
performance, particularly as it relates to our management of inventory levels
and collection of receivables.

Net cash used in investment activities

Net cash used in investing activities for the year ended December 31, 2021 was
$0.4 million and approximately $0.6 million for the year ended December 31,
2020. In both periods, the use of cash related to the purchase of property and
equipment, the majority of which are used in the production activities of our
Richmond, California facility.

Net cash provided by financing activities

Net cash provided by financing activities for the year ended December 31, 2021
totaled $6.7 million compared to $51.2 million of cash provided by financing
activities for the year ended December 31, 2020. The year-over-year net decrease
of $44.5 million was primarily due to capital raises in the 2020 period of $51.9
million (including $43.0 million in net proceeds from the IPO) versus capital
raises in the 2021 period of $14.0 million (including $13.8 million in net
proceeds from our PIPE financing). Also contributing to this decrease were net
repayments of $1.8 million on our Revolving Credit Facility in 2021 (versus net
borrowings of $2.3 million in 2020) and principal payments of $2.8 million on
our Term Loan Credit Agreement during the 2021 period.

Credit facilities

General

On July 15, 2019, Aziyo and Aziyo Med, LLC, which we refer to collectively as
the Borrowers, entered into an amended and restated term loan credit agreement
(the "Term Loan Credit Agreement"), with Midcap Financial Trust, as agent and
lender, and the other lenders party thereto, which provided for the conversion
of our existing term loans into borrowing under the Term Loan Credit Agreement
(consisting of a $8.5 million tranche (Term Loan Tranche 1), a $5.0 million
tranche (Term Loan Tranche 2) and a $3.0 million tranche (Term Loan Tranche 3)),
and established a new $3.5 million tranche (Term Loan Tranche 4) and a new $5.0
million tranche (Term Loan Tranche 5). Commitments in respect

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of Term Loan Tranche 5 terminated without being borrowed on June 30, 2020. We
refer to Term Loan Tranche 1, Term Loan Tranche 2, Term Loan Tranche 3 and Term
Loan Tranche 4 collectively as the Term Loan Facility.

At July 15, 2019the Borrowers have also entered into an amended and restated revolving credit agreement (the “Revolving Credit Agreement”), with Midcap Funding IV Trustas agent and lender, and the other lenders parties thereto, which provided for a $8.0 million asset-based revolving credit facility (the “Revolving Credit Facility”).

As of December 31, 2021, we had $17.1 million of indebtedness outstanding under
our Term Loan Facility (net of  $0.1 million of unamortized deferred financing
costs) and $4.8 million outstanding under our Revolving Credit Facility (with
$2.1 million of additional borrowings available thereunder).

Interest Rates and Fees

Borrowings under the Term Loan Facility accrue interest at a rate per year equal
to the LIBOR Rate (as defined elsewhere in this Annual Report on Form 10-K) plus
a margin of 7.25%. Borrowings under the Revolving Credit Facility bear interest
at the per annum rate equal to the LIBOR Rate plus a margin of 4.95%. The LIBOR
Rate is defined as the greater of 2.25% and the applicable London Interbank
Offered Rate for U.S. dollar deposits divided by 1.00 minus the maximum
effective reserve percentage for Eurocurrency funding.

Under the terms of the Revolving Credit Facility, we can borrow up to an amount
(the "Borrowing Base"), equal to (1) 85.0% of the aggregate net amount at such
time of the Eligible Accounts (as defined in the Revolving Credit Agreement),
plus (2) 50% of the value of the Eligible Inventory (as defined in the Revolving
Credit Agreement), valued at the lower of first-in-first-out cost or market
cost, and after factoring in all rebates, discounts and other incentives or
rewards associated with the purchase of the applicable Eligible Inventory
(provided that the Borrowing Base will be automatically adjusted down, if
necessary, such that the aggregate availability from Eligible Inventory shall
never exceed the lesser of  (x) an amount equal to 40.0% of the Borrowing Base
and (y) $2,000,000).

In addition to paying interest on principal amounts outstanding under the Revolving Credit Facility, we are obligated to pay unused line fees to lenders under the Revolving Credit Facility in respect of unused commitments under thereof equal to 0.50% multiplied by the lesser of (1) the unused commitments and (2) $8,000,000 minus 40% of the borrowing base.

Compulsory prepayments

The Term Loan Credit Agreement requires the Borrowers to prepay amounts
outstanding under the Term Loan Facility, subject to certain exceptions, with:
(1) 100% of any net casualty proceeds in excess of $250,000 with respect to
assets upon which the agent maintains a lien and (2) 100% of the net cash
proceeds of non-ordinary course asset sales or sales pertaining to collateral
upon which the Borrowing Base is calculated. In addition, the Borrowers are
required to prepay all outstanding obligations under the Term Loan Facility upon
the termination of all commitments under the Revolving Credit Facility and the
repayment of the outstanding borrowings thereunder. No such mandatory
prepayments were required during the years ended December 31, 2021 and 2020.

The Revolving Credit Agreement requires the Borrowers to prepay amounts
outstanding under the Revolving Credit Facility (or provide cash collateral up
to the amount of any outstanding letter of credit obligations) to the extent
outstanding borrowings under the Revolving Credit Facility exceed the lesser of
(1) $8,000,000 and (2) the Borrowing Base.

Optional prepayment

The Borrowers may prepay the Term Loan Facility in whole but not in part at any
time with at least 10 business days' prior written notice, provided, however,
that such prepayment shall be accompanied by a portion of the Exit Fee (as
defined below) equal to the amount prepaid divided by the then-outstanding
principal amount of borrowings outstanding under the Term Loan Facility, and a
prepayment fee which, based on the amendment to the Term Loan Credit Agreement
executed in January 2022, shall be equal to the amount prepaid multiplied by
3.0% until January 21, 2023 and 2.0%

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thereafter. The "Exit Fee" is defined as an amount equal to 6.50% multiplied by
the aggregate principal amount of all borrowings advanced to the Borrowers under
the Term Loan Facility.

The Borrowers may prepay the Revolving Credit Facility in whole or in part at
any time, provided, however, that any such partial prepayment shall be in an
amount equal to $100,000 or a higher integral multiple of $25,000. Should the
Revolving Credit Facility be terminated prior to its final maturity (see below),
based on the amendment to the Revolving Credit Agreement executed in January
2022, the Borrowers must pay a fee equal to an amount determined by multiplying
the amount of the Revolving Credit Facility so terminated by 3.0% until January
21, 2023 and 2.0% thereafter.

Amortization and final maturity

The Borrowers are required to make interest-only payments prior to the principal
amortization start date. The Term Loan Facility provided that if certain
conditions were satisfied prior to December 1, 2020 (including our completion of
a qualified initial public offering and no continuing default or event of
default), the principal amortization start date may, upon our request, be
extended to August 1, 2021 (from the previous principal amortization start date
of February 1, 2021). Based on the completion of our IPO, in January 2021, we
exercised this interest-only period extension right and, as such, the principal
payments in respect of borrowings under the Term Loan Facility commenced on
August 1, 2021. Such principal payments shall be in an amount equal to the total
principal amount of borrowings under the Term Loan Facility divided by 36, for a
36-month straight-line amortization of equal monthly principal payments. The
remaining unpaid balance on the Term Loan Facility, together with all accrued
and unpaid interest thereon and any remaining unpaid amount of the Exit Fee, is
due and payable on July 15, 2024.

Borrowings outstanding under the Revolving Credit Facility are non-amortizing and are due and payable on July 15, 2024.

Security

All obligations under the Term Loan Facility and the Revolving Credit Facility
are, and any future guarantees of those obligations will be, secured by, among
other things, and in each case subject to certain exceptions, a first priority
lien on and security interest in, upon, and to all of each Borrower's assets,
including all goods, equipment, inventory, contract rights or rights to payment
of money, leases, license agreements, franchise agreements, general intangibles,
commercial tort claims, documents, instruments (including any promissory notes),
chattel paper (whether tangible or electronic), cash, deposit accounts,
securities accounts, fixtures, letter of credit rights (whether or not the
letter of credit is evidenced by a writing), securities, and all other
investment property, supporting obligations, and financial assets, whether now
owned or hereafter acquired, wherever located.

Undertakings and other matters

The Term Loan Credit Agreement and the Revolving Credit Agreement each contain a
number of covenants that, among other things and subject to certain exceptions,
restrict the ability of the Borrowers to:

? incur additional debt;

? contract certain privileges;

? pay dividends or make other distributions on holdings;

? enter into agreements restricting the ability of their subsidiaries to pay dividends;

? repay, redeem or refinance subordinated debt;

? consolidate, merge or sell or otherwise dispose of their assets;

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? make investments, loans, advances, guarantees and acquisitions;

? enter into transactions with affiliates;

? amend or modify their constitutive documents;

? amend or modify certain material agreements;

? modify the activities carried out by them and their subsidiaries; and

? enter into sale-leaseback transactions.

In addition, the Term Loan Credit Agreement and the Revolving Credit Agreement
contain a financial covenant, which is tested on a monthly basis, and requires
us to achieve a specified Minimum Net Product Revenue (as defined in the
applicable credit agreement) for the preceding 12-month period. In January 2022,
the Term Loan Credit Agreement and Revolving Credit Agreement were amended and
all future Minimum Net Product Revenue covenant amounts were reset.

The Term Credit Agreement and the Revolving Credit Agreement each contain events of default, including, most importantly, failure to timely pay interest or principal, insolvency or action by the FDA or any other material adverse event affecting Aziyo’s operations.

The Term Loan Credit Agreement and the Revolving Credit Agreement also contain
certain customary representations and warranties and affirmative covenants, and
certain reporting obligations. In addition, the lenders will be permitted to
accelerate all outstanding borrowings and other obligations, terminate
outstanding commitments and exercise other specified remedies upon the
occurrence of certain events of default (subject to certain grace periods and
exceptions), which include, among other things, payment defaults, breaches of
representations and warranties, covenant defaults, certain cross-defaults and
cross-accelerations to other indebtedness, certain events of bankruptcy and
insolvency, certain judgments and changes of control.

supplier promissory note

During 2017, we restructured certain of our liabilities with a tissue supplier
and entered into an unsecured promissory note. As of December 31, 2021, the
balance of this promissory note totaled $1.4 million plus accrued interest. The
note bears interest at 5% and is currently due in full; however, the notes are
subordinated in payment to the Term Loan Facility and Revolving Credit Facility
and in both 2021 and 2020, the Company's senior lender restricted payment of the
amounts due.

PPP Loan

In May 2020, we entered into a promissory note with Silicon Valley Bank under
the Paycheck Protection Program of the CARES Act pursuant to which SVB agreed to
make a loan to us in the amount of approximately $3.0 million. The PPP Loan
bears interest at a rate of 1.0% per annum with monthly principal and interest
payments beginning in March 2021 and ending on the maturity date of May 7, 2022;
however such repayment commencement was deferred by the U.S. Small Business
Administration while they evaluated our forgiveness application. In June 2021,
we were notified by the U.S. Small Business Administration that the entire
balance of our PPP Loan and all related accrued interest was forgiven. Such
forgiveness resulted in a gain to us of approximately $3.0 million which has
been recorded as other income in the accompanying Consolidated Statements of
Operations for the year ended December 31, 2021.

Bridge tickets 2020

In April 2020, we entered into a bridge note purchase agreement pursuant to
which we issued approximately $2.0 million in aggregate principal amount of
convertible promissory notes (the "2020 Bridge Notes"), to HighCape Partners QP,
HighCape Partners and Deerfield. The 2020 Bridge Notes had a maturity date of
April 1, 2025 and accrued interest at

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a rate of 5.0% per year. The aggregate principal amount of, and accrued interest
on, the 2020 Bridge Notes automatically converted into an aggregate of 2,039,427
shares of our Series A convertible preferred stock upon the closing of our
Series A convertible preferred stock financing in September 2020.

Financing needs

We expect to continue to incur significant operating expenses and losses for the foreseeable future as we grow our commercial organization and expand our product development, clinical and research activities. In addition, we expect to incur additional costs and expenses associated with operating as a public company.

As of December 31, 2021, we had $23.3 million of indebtedness outstanding,
consisting of  $17.1 million outstanding under our Term Loan Facility (net of
$0.1 million of unamortized deferred financing costs), $4.8 million outstanding
under our Revolving Credit Facility (with $2.1 million of additional borrowings
available thereunder), and a $1.4 million promissory note payable to one of our
suppliers. In addition, as further described in Note 9 to the  consolidated
financial statements included elsewhere in this Annual Report, we are party to a
royalty agreement with Ligand Pharmaceuticals Incorporated ("Ligand") pursuant
to which we assumed a restructured, long-term obligation to Ligand (the "Revenue
Interest Obligation"), that requires us to pay Ligand 5.0% of future sales of
the products we acquired from CorMatrix (as well as products substantially
similar to those products), subject to annual minimum payments of  $2.75
million. Furthermore, a $5.0 million payment will be due to Ligand if cumulative
sales of these products exceed $100 million and a second $5.0 million will be
due if cumulative sales exceed $300 million during the ten-year term of the
agreement which expires on May 31, 2027. We are currently forecasting that the
initial $5.0 million milestone payment will become payable in mid-2023.

Based on our current and planned business operations, we believe that the net
proceeds from our IPO, together with our existing cash, availability under our
Revolving Credit Facility and cash generated from expected future commercial
sales as well as the December 2021 PIPE financing will be sufficient to fund our
operating expenses, debt service requirements and capital expenditure needs
through at least twelve months from the issuance date of the consolidated
financial statement included elsewhere in this Annual Report. We have based this
estimate on assumptions that may prove to be wrong, and we could exhaust our
available capital resources sooner than we expect. If our available cash
balances and cash flow from operations, if any, are insufficient to satisfy our
liquidity requirements, we may seek to raise additional capital through equity
offerings, debt financings,  or asset sale transactions. We may also consider
raising additional capital in the future to expand our business, pursue
strategic investments or take advantage of financing opportunities. Our present
and future funding requirements will depend on many factors, including, among
other things:

? continued acceptance of our products by patients, physicians and the market;

? the scope, rate of progress and cost of our preclinical projects and

Clinical studies;

? the cost of our research and development activities and the cost and schedule of

commercialize new products or technologies;

? the cost and timing of expanding our sales and marketing capabilities;

? the costs of filing and pursuing patent and maintenance applications,

defend and enforce our patent or other intellectual property rights;

the cost of defending, in litigation or otherwise, any claim that we breach,

? misappropriate or otherwise violate third party patents or other intellectual property rights

property rights;

defense costs or damages to be paid (to the extent beyond the

? applicable insurance cover), for example, in the context of claims

involving the recall of FiberCel;

? the cost and timing of additional regulatory approvals;

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? the costs associated with any product recalls that may occur;

? the effect of competing technological and business developments;

? the expenses we incur in the manufacture and sale of our products;

the extent to which we acquire or invest in products, technologies and

? businesses, although we currently have no commitments or agreements relating to

any of these types of transactions;

? operating costs as a public company;

? unforeseen general, legal and administrative expenses; and

? the effects on any of the above of the current COVID-19 pandemic or any other

pandemic, epidemic or outbreak of infectious disease.

In addition, our operating plans may change as a result of any number of
factors, including those set forth above and other factors currently unknown to
us, and we may need additional funds sooner than anticipated. To the extent that
we raise additional capital through the sale of equity or convertible debt
securities, your ownership interest may be materially diluted, and the terms of
such securities could include liquidation or other preferences that adversely
affect your rights as a common stockholder. Debt financing and preferred equity
financing, if available, may involve agreements that include restrictive
covenants that limit our ability to take specific actions, such as incurring
additional debt, making capital expenditures, creating liens, redeeming shares
of our common stock and/or declaring dividends. If we raise funds through
collaborations, licensing agreements or other strategic alliances, we may have
to relinquish valuable rights to our technologies, future revenue streams,
research programs or product candidates, or grant licenses on terms that may not
be favorable to us. If we are unable to raise additional funds through equity or
debt financings or other arrangements when needed, we may be required to delay
the development or commercialization of our products, license to third parties
the rights to commercialize products or technologies that we would otherwise
seek to commercialize and reduce marketing, customer support or other resources
devoted to our products or cease operations. See Part I, Item 1A. "Risk
Factors - Risks Related to our Business - Our future capital needs are uncertain
and we may need to raise funds in the future, and such funds may not be
available on acceptable terms or at all."

Off-balance sheet arrangements

From December 31, 2021we had no off-balance sheet arrangements, as defined in SEC SK Item 303(a)(4)(ii).

Critical Accounting Policies and Significant Judgments and Estimates

The preparation of financial statements in conformity with U.S. GAAP requires
that management make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the amounts of revenues and expenses
reported during the period. On an ongoing basis, management evaluates these
estimates and judgments, including those related to revenue, inventory
valuation, valuation of intangibles, revenue interest obligation and stock-based
compensation. Actual results may differ from those estimates. We have identified
the following critical accounting policies:

Revenue recognition

We enter into contracts to 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 we have met our performance
obligations pursuant to our contracts with our customers in an amount that we
expect to be entitled to in exchange for the transfer of control of the products
and services to our customers. For all net sales, we have no further performance
obligations and revenue is recognized when

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transfers of control that occur 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 our product revenue is generated from consigned inventory
maintained at hospitals, and from inventory physically held by our direct sales
representatives. For these types of products sales, we retain control until the
product has been used or implanted, at which time revenue is recognized.

We have 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 us 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 our contracts vary; however, as a common business practice,
payment terms are typically due in full within 30 to 60 days of delivery. We, at
times, extend volume discounts to customers. We permit returns of our products
in accordance with the terms of contractual agreements with customers.

Inventory valuation

Inventories, consisting of purchased materials, direct labor and manufacturing
overhead, are stated at the lower of cost or net realizable value, with cost
determined 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, we also evaluate inventories for excess
quantities, obsolescence or shelf life expiration. This evaluation includes
analysis of our 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 us to reasonably expect that we can sell those
products prior to their expiration, we adjust the carrying value of the
inventory to its estimated net realizable value.

Due to the judgmental nature of inventory valuation, we may from time to time be
required to adjust our assumptions as processes change and as we gain better
information. Although we continue to refine the assumptions, described above, on
which we base our estimates, we cannot be sure that our estimates are accurate
indicators of future events. Accordingly, future adjustments may result from
refining these estimates. Such adjustments may be significant.

Valuation of purchased intangible 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. We periodically evaluate the
period of amortization for purchased intangible assets to determine whether
current circumstances warrant revised estimates of useful lives. We review our
purchased intangible assets for impairment whenever events or changes in
circumstances indicate the carrying value of an asset may not be recoverable.
Recoverability is measured by a comparison of the carrying amount to the net
undiscounted cash flows expected to be generated by the asset. Impairment exists
when the carrying value of our 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. An impairment loss would be recorded for
the excess of net carrying value over the fair value of the asset impaired. 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.

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Revenue Interest Obligation

In 2017, we completed an asset purchase agreement with CorMatrix and acquired
all of the CorMatrix commercial assets and related intellectual property. As
part of this acquisition, we entered into a royalty agreement with Ligand
pursuant to which we assumed the Revenue Interest Obligation, to Ligand, with an
estimated present value on the acquisition date of  $27.7 million. The terms of
the Revenue Interest Obligation require us to pay Ligand 5% of future sales of
the products we acquired in the CorMatrix acquisition, subject to certain annual
minimum payments. Furthermore, a $5.0 million payment will be due to Ligand if
cumulative sales of the acquired products exceed $100.0 million and a second
$5.0 million will be due if cumulative sales exceed $300.0 million during the
ten-year term of the agreement which expires on May 31, 2027.

We have estimated the fair value of the Revenue Interest Obligation, including
contingent milestone payments and estimated sales-based payments, based on
assumptions related to future sales of the acquired products. At each reporting
period, the value of the Revenue Interest Obligation is re-measured based on
current estimates of the net present value of future payments, with changes to
be recorded in the Consolidated Statements of Operations. There was no change to
estimated future payments during the years ended December 31, 2021 and 2020, and
thus, no re-measurement gain or loss was recognized. The estimation of future
sales and the possible attainment of sales milestones is subject to significant
judgment. Different judgments would yield different valuations of the Revenue
Interest Obligation and these differences could be significant.

Stock-based compensation

Compensation costs associated with stock option awards and other forms of equity
compensation are measured at the grant-date fair value of the awards and
recognized over the requisite vesting period of the awards on a straight-line
basis.

Our policy is to grant stock options at an exercise price equal to 100.0% of the
market value of a share of common stock at closing on the date of the grant. Our
stock options generally have seven to ten year contractual terms and vest over a
four-year period from the date of grant. We use the Black-Scholes model to value
our stock option grants. The fair value of stock options is determined on the
grant date using assumptions for the estimated fair value of the underlying
common stock, expected term, expected volatility, dividend yield and the
risk-free interest rate. Before the completion of our IPO, our board of
directors determined the fair value of common stock considering the state of the
business, input from management, third party valuations and other
considerations. We use the simplified method for estimating the expected term
used to determine the fair value of options. Until our IPO in October 2020,
there had been no public market for our common stock and thus, we lacked
company-specific historical and implied volatility information. As a result, we
estimate the expected volatility primarily based on the historical volatility of
comparable companies in the industry whose share prices are publicly available
and expect to continue to do so until such time as we have adequate historical
data regarding the volatility of our own traded share price. We use a
zero-dividend yield assumption as we have not paid dividends since inception nor
do we anticipate paying dividends in the future. The risk-free interest rate
approximates recent U.S. Treasury note auction results with a similar life to
that of the option. The period expense is then recognized on a straight-line
basis over the requisite service period for the entire award.

Recently issued accounting pronouncements

See Note 3, "Recently Issued Accounting Standards," to our audited consolidated
financial statements included elsewhere in this Annual Report for information
regarding recently issued accounting pronouncements.

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