Item 1. Financial Statements
Item 1. Financial Statements.
AZIYO BIOLOGICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except for Share and Per Share Data)
(UNAUDITED)
March 31,
December 31,
2022
2021
Assets
Current assets:
Cash
$
22,066
$
30,393
Restricted cash
109
35
Accounts receivable, net
6,010
5,996
Inventory
9,863
9,554
Prepaid expenses and other current assets
3,030
1,450
Total current assets
41,078
47,428
Property and equipment, net
1,155
1,200
Intangible assets, net
17,617
18,466
Other assets
76
76
Total assets
$
59,926
$
67,170
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
$
1,715
$
1,582
Accrued expenses
5,750
6,375
Payables to tissue suppliers
2,884
2,467
Current portion of long-term debt
8,059
8,059
Current portion of revenue interest obligation
2,750
2,750
Revolving line of credit
6,160
4,763
Other current liabilities
-
5
Total current liabilities
27,318
26,001
Long-term debt
8,758
10,410
Long-term revenue interest obligation
16,520
16,540
Other long-term liabilities
771
698
Total liabilities
53,367
53,649
Commitments and contingencies (Note 8)
Stockholders’ equity (deficit):
Class A Common stock, $ 0.001 par value, 200,000,000 shares authorized as of March 31, 2022 and December 31, 2021, and 9,306,738 and 9,245,146 shares issued and outstanding , as of March 31, 2022 and December 31, 2021, respectively
9
9
Class B Common stock, $ 0.001 par value, 20,000,000 shares authorized, as of March 31, 2022 and December 31, 2021 and 4,313,406 issued and outstanding as of March 31, 2022 and December 31, 2021
4
4
Additional paid-in capital
119,786
118,599
Accumulated deficit
( 113,240 )
( 105,091 )
Total stockholders’ equity
6,559
13,521
Total liabilities and stockholders' equity
$
59,926
$
67,170
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
March 31,
2022
2021
Net sales
$
11,495
$
12,884
Cost of goods sold
7,214
6,555
Gross profit
4,281
6,329
Sales and marketing
4,818
4,703
General and administrative
4,113
3,605
Research and development
2,272
1,720
Total operating expenses
11,203
10,028
Loss from operations
( 6,922 )
( 3,699 )
Interest expense
1,215
1,355
Loss before provision for income taxes
( 8,137 )
( 5,054 )
Income tax expense
12
13
Net loss
$
( 8,149 )
$
( 5,067 )
Net loss per share - basic and diluted
$
( 0.60 )
$
( 0.50 )
Weighted average common shares outstanding - basic and diluted
13,574,058
10,226,152
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 STOCKHOLDERS’ EQUITY (DEFICIT)
(In Thousands, Except Share Amounts)
(UNAUDITED)
Class A
Class B
Common Stock
Common Stock
Additional
Total
Number of
Number of
Paid-in
Accumulated
Stockholders'
Shares
Amount
Shares
Amount
Capital
Deficit
Equity
Balance, December 31, 2021
9,245,146
$
9
4,313,406
$
4
$
118,599
$
( 105,091 )
$
13,521
Additional issuance costs in connection with Private Placement
—
—
—
—
( 110 )
—
( 110 )
Proceeds from sale of common stock through Employee Stock Purchase Plan
42,345
—
—
—
192
—
192
Vesting of restricted stock units
19,247
—
—
—
—
—
—
Stock-based compensation
—
—
—
—
1,105
—
1,105
Net loss
—
—
—
—
—
( 8,149 )
( 8,149 )
Balance, March 31, 2022
9,306,738
$
9
4,313,406
$
4
$
119,786
$
( 113,240 )
$
6,559
Balance, December 31, 2020
7,091,960
$
7
3,134,162
$
3
$
101,080
$
( 80,259 )
$
20,831
Proceeds from stock option exercises
561
—
—
—
3
—
3
Stock-based compensation
—
—
—
—
677
—
677
Net loss
—
—
—
—
—
( 5,067 )
( 5,067 )
Balance, March 31, 2021
7,092,521
$
7
3,134,162
$
3
$
101,760
$
( 85,326 )
$
16,444
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)
Three Months Ended
March 31,
2022
2021
Net loss
$
( 8,149 )
$
( 5,067 )
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization
929
933
Amortization of deferred financing costs
15
30
Interest expense recorded as additional revenue interest obligation
660
663
Stock-based compensation
1,105
677
Changes in operating assets and liabilities:
Accounts receivable
( 14 )
( 1,596 )
Inventory
( 309 )
( 101 )
Prepaid expenses and other
( 1,580 )
465
Accounts payable and accrued expenses
( 492 )
( 1,387 )
Obligations to tissue suppliers
417
276
Deferred revenue and other liabilities
68
( 67 )
Net cash used in operating activities
( 7,350 )
( 5,174 )
INVESTING ACTIVITIES:
Expenditures for property, plant and equipment
( 34 )
( 131 )
Net cash used in investing activities
( 34 )
( 131 )
FINANCING ACTIVITIES:
Additional issuance costs in connection with Private Placement
( 110 )
—
Net borrowings (repayments) under revolving line of credit
1,397
( 3,064 )
Proceeds from stock option exercises
—
3
Repayments of long-term debt
( 1,667 )
—
Payments on revenue interest obligation
( 681 )
( 665 )
Proceeds from sales of common stock through Employee Stock Purchase Plan
192
—
Net cash used in financing activities
( 869 )
( 3,726 )
Net decrease in cash and restricted cash
( 8,253 )
( 9,031 )
Cash and restricted cash, beginning of period
30,428
39,532
Cash and restricted cash, end of period
$
22,175
$
30,501
Supplemental Cash Flow and Non-Cash Financing Activities Disclosures:
Cash paid for interest
$
1,162
$
1,243
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 spans 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.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation and Liquidity
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, 2021. The financial information as of March 31, 2022 and for the three months ended March 31, 2022 and 2021 is unaudited, but in the opinion of management, all adjustments considered necessary for a fair statement of the results for these interim periods have been included. The condensed consolidated balance sheet data as of December 31, 2021 was derived from audited financial statements but does not include all disclosures required by GAAP. 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 months ended March 31, 2022, the Company incurred a net loss of $ 8.1 million, and as of March 31, 2022, the Company had an accumulated deficit of $ 113.2 million. In addition, during the three months ended March 31, 2022, the Company used $ 7.4 million and $ 0.9 million of cash in operating and financing activities, respectively, and expects to continue to incur cash outflows for the remainder of the year. Because of the numerous risks and uncertainties associated with the Company’s commercialization and development efforts, the Company is unable to predict when it will become profitable, and it may never become profitable. The Company’s inability to achieve and then maintain profitability would negatively affect its business, financial condition, results of operations and cash flows.
In order to mitigate the current and potential future liquidity issues caused by the matters noted above, the Company may seek to raise capital through the issuance of common stock, either refinance or restructure its Term Loan Facility and Revolving Credit Facility (as such terms are defined, and further described, in Note 6), restructure its Revenue Interest Obligation (as such term is defined, and further described, in Note 7), or pursue asset sale transactions. However, such transactions may not be successful and the Company may not be able to raise additional equity, refinance or restructure its debt instruments, or sell assets on acceptable terms, or at all. As such, based on its current operating plans, the Company believes there is uncertainty as to whether its future cash flows along with its existing cash, availability under
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the Revolving Credit Facility and cash generated from expected future sales will be sufficient to meet the Company’s anticipated operating needs through twelve months from the financial statement issuance date. Due to these factors, there is substantial doubt about the Company’s ability to continue as a going concern within one year after the issuance of the financial statements.
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.
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 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 revenue interest obligation 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 intermittently decreased, 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 intermittently been postponed or cancelled, 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 may reduce the Company's net sales in the future and negatively impact its business, financial condition and results of operations while the pandemic continues.
Net Loss per Share Attributable to Common Stockholders
Our common stock has a dual class structure, consisting of Class A common stock and Class B common stock. Other than voting rights, the Class B common stock has the same rights as the Class A common stock, and therefore both are treated as the same class of stock for purposes of the earnings per share calculation. Basic net loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted-average shares outstanding during the period. For purposes of the diluted net income (loss) per share attributable to common stockholders calculation, stock options and restricted stock units are considered to be common stock equivalents. 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.
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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.
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).
March 31,
2022
2021
Cash
$
22,066
$
30,410
Restricted cash
109
91
Total cash and restricted cash shown in statements of cash flows
$
22,175
$
30,501
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, is 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
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that is too near its expiration for the Company to reasonably expect that it can sell those products prior to their expiration, the Company adjusts the carrying value to estimated net realizable value.
Property and Equipment
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 months ended March 31, 2022 or 2021.
Revenue Recognition
The Company’s revenue is generated from contracts with customers in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 606. 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.
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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 product sales, the Company retains control until the product has been used or implanted, at which time revenue is recognized.
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 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 March 31, 2022, the Company maintained $ 22.1 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.
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Significant Customers
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
March 31,
2022
2021
Percent of revenues derived from:
Medtronic Sofamor Danek USA
-
22 %
Surgalign Holdings
10 %
10 %
March 31,
December 31,
2022
2021
Percent of accounts receivable derived from:
Surgalign Holdings
11 %
12 %
Comprehensive Income (Loss)
Comprehensive income (loss) comprises net income (loss) and other changes in equity that are excluded from net income (loss). For the three months ended March 31, 2022 and 2021, 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, 2024. Borrowings under the Company’s term loan facility and
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revolving line of credit bear interest based on LIBOR or an alternate rate. Provisions currently provide the Company with the ability to replace LIBOR with a different reference rate in the event that LIBOR ceases to exist.
In November 2019, the FASB issued ASU 2019-10, “Financial Instruments - Credit Losses (Topic 326), Derivative and Hedging (Topic 815), and Leases (Topic 842), Effective Dates.” The FASB deferred the effective dates of the new credit losses standard for all entities except filers with the Securities and Exchange Commission (the “SEC”) that are not smaller reporting companies (“SRCs”) to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. 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 the fourth quarter of 2022 for the full 2022 year. The Company is evaluating this standard to determine if adoption will have a material impact on the Company’s consolidated financial statements.
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 initial public offering (“IPO”), the Company adopted the Aziyo Biologics, Inc. 2020 Incentive Award Plan (the “2020 Plan”), which authorizes the grant of incentive and non-qualified stock options, restricted stock, restricted stock units and stock appreciation rights to employees, directors and consultants. Shares of Class A common stock totaling 1,636,000 were initially reserved for issuance pursuant to the 2020 Plan. In addition, the shares reserved for issuance under the 2020 Plan will also include shares reserved but not issued under the 2015 Plan as well as an annual increase as set forth in the 2020 Plan. As of March 31, 2022, the Company had 481,195 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.
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A summary of stock option activity under the Company’s 2015 Plan and 2020 Plan for the three months ended March 31, 2022 is as follows:
Weighted-
Average
Weighted-
Remaining
Aggregate
Average
Contractual
Intrinsic
Exercise
Term
Value
Number of Shares
Price
(years)
(in thousands)
Outstanding, December 31, 2021
1,386,811
$
13.28
7.8
$
179
Granted
499,130
$
5.08
Exercised
—
$
—
Forfeited
( 28,850 )
$
12.26
Outstanding, March 31, 2022
1,857,091
$
11.10
8.2
$
524
Vested and exercisable, March 31, 2022
477,322
$
11.04
5.7
$
87
As of March 31, 2022, 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 2.9 years. The weighted average grant date fair value of options granted during the three months ended March 31, 2022 was $ 3.03 .
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 three months ended March 31, 2022 is as follows:
Number of
Weighted-
Shares
Average
Underlying
Grant Date
RSUs
Fair Value
Unvested, December 31, 2021
235,985
$
15.98
Granted
356,349
$
3.58
Vested
( 19,247 )
$
14.53
Forfeited
( 8,928 )
$
8.66
Unvested, March 31, 2022
564,159
$
8.31
The total fair value of the RSUs granted during the three months ended March 31, 2022 of $ 1.3 million, of which nearly all was based on the fair market value of the Company's Class A common stock on the date of grant and such fair value at the time of the grant is amortized to expense on a straight-line basis over the vesting period of three to four years . The Company granted RSUs totaling 199,388 during the three months ended March 31, 2022, pursuant to which such RSUs will only vest if or when the Company’s Class A common stock closing price is at or exceeds $ 10 per share for 30 consecutive days by March 8, 2024, subject to the grantee’s continued employment with the Company. Given the nature of this arrangement, an option pricing model, the Monte Carlo model, was used to determine the fair value of the RSUs granted and an expense recognition on a straight-line basis over two years . As of March 31, 2022, $ 3.3 million of unrecognized compensation costs related to RSUs is expected to be recognized over a weighted average period of 1.7 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,
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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 as set forth in the ESPP. As of March 31, 2022, the total shares of Class A common stock authorized for issuance under the ESPP was 380,997 , of which 311,408 remained available for future issuance. During the three months ended March 31, 2022, 42,345 shares of Class A common stock were issued under the ESPP.
Stock-Based Compensation Expense
Stock-based compensation expense recognized during the three months ended March 31, 2022 and 2021 was comprised of the following (in thousands):
Three Months Ended
March 31,
2022
2021
Sales and marketing
$
195
$
128
General and administrative
682
411
Research and development
178
109
Cost of goods sold
50
29
Total stock-based compensation expense
$
1,105
$
677
The Company uses the Black-Scholes model to value its stock option grants and expenses the related compensation cost using the straight-line method over the vesting period. 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 the Company’s IPO, the 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. The Company uses the simplified method for estimating the expected term used to determine the fair value of options. The expected volatility of the Class A common stock is primarily based on the historical volatility of comparable companies in the industry whose share prices are publicly available. The Company uses a zero -dividend yield assumption as the Company has not paid dividends since inception nor does it 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 determined based on the valuation of the options, and is recognized on a straight-line basis over the requisite service period for the entire award.
The following weighted-average assumptions were used to determine the fair value of options during the three months ended March 31, 2022 and 2021:
Three Months Ended
March 31,
2022
2021
Expected term (years)
6.2
6.1
Risk-free interest rate
1.8
%
1.0
%
Volatility factor
64
%
64
%
Dividend yield
—
—
Note 5. Inventory
Inventory was comprised of the following (in thousands):
March 31,
December 31,
2022
2021
Raw materials
$
1,872
$
1,880
Work in process
568
834
Finished goods
7,423
6,840
Total
$
9,863
$
9,554
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Note 6. Long-Term Debt
On May 31, 2017, in connection with the Company’s acquisition of CorMatrix described in Note 7, Aziyo entered into a $ 12 million term loan facility (the “Term Loan Facility”) and an $ 8.0 million asset-backed revolving line of credit (the “Revolving Credit Facility”), under which the Company’s borrowing capacity is limited by certain qualifying assets, with a financial institution (the “May 2017 Financing”). As of March 31, 2022 and 2021, the Company’s borrowing capacity under its Revolving Credit Facility was $ 7.0 million and $ 8.0 million, respectively. The Term Loan Facility was amended in December 2017, February 2018 and July 2019 (all amendments being considered modifications) such that an additional $ 1.5 million, $ 3.0 million, and $ 3.5 million, respectively were received by the Company bringing the total aggregate principal amount outstanding under the Term Loan Facility to $ 20 million. Borrowings under the Term Loan Facility, as amended, bear interest at a rate per annum equal to the sum of (x) the greater of (i) 2.25 % and (ii) the applicable London Interbank Offered Rate for U.S. dollar deposits divided by 1.00 minus the maximum effective reserve percentage for Eurocurrency funding (“LIBOR”) plus (y) 7.25 %. The weighted average interest rate on Term Loan Facility borrowings was 9.5 % for both the three months ended March 31, 2022 and 2021. The agreement governing the Term Loan Facility provides for interest only payments through January 2021 and interest and equal monthly principal payments from February 2021 through maturity in July 2024. However, the Term Loan Facility also provides that if certain conditions were satisfied prior to December 1, 2020 (including the completion of a qualified initial public offering and no continuing default or event of default), interest only payments may, upon the Company’s request, be extended to August 1, 2021. Accordingly, based on the Company’s successful completion of its IPO, Aziyo exercised this interest-only period extension right and as such, interest and equal principal payments commenced on August 1, 2021 and will continue through maturity in July 2024.
The agreement that governs the Term Loan Facility, as amended, requires certain mandatory prepayments, subject to certain exceptions, with: (1) 100 % of any net casualty proceeds in excess of $ 250,000 with respect to assets upon which the agent maintains a lien and (2) 100 % of the net cash proceeds of non-ordinary course asset sales or sales pertaining to collateral upon which the borrowing base of the Revolving Credit Facility is calculated. In addition, the Company is required to prepay all outstanding obligations under the Term Loan Facility upon the termination of all commitments under the Revolving Credit Facility and the repayment of the outstanding borrowings thereunder. No such mandatory prepayments were required during the three months ended March 31, 2022 and 2021.
The agreement governing the Term Loan Facility also includes an exit fee of 6.5 % of the aggregate principal amount and prepayment penalties which, based on an amendment to the Term Loan Facility executed in January 2022, shall be equal to the amount prepaid multiplied by 3.0 % until January 21, 2023 and 2.0 % thereafter.
Borrowings under the Revolving Credit Facility bear interest at a rate per annum equal to the sum of (x) the greater of (i) 2.25 % and (ii) LIBOR plus (y) 4.95 %. The agreement governing the Revolving Credit Facility includes an unused line fee in an amount equal to 0.5 % per annum of the unused borrowing capacity and based on an amendment to the Revolving Credit Facility executed in January 2022, prepayment penalties equal to $ 8.0 million multiplied by 3.0 % until January 21, 2023 and 2.0 % thereafter. The weighted average interest rate on Revolving Credit Facility borrowings was 7.2 % for the three months ended March 31, 2022 and 2021. Both debt instruments contain events of default, including, most significantly, a failure to timely pay interest or principal, insolvency, or an action by the United States Food and Drug Administration or such other material adverse event impacting the operations of Aziyo.
The debt instruments also include a financial covenant based on cumulative minimum net product revenue, as defined, restrictions as to payment of dividends, and are secured by all assets of the Company. As of March 31, 2022, Aziyo was in compliance with this financial covenant.
During 2017, the Company restructured certain of its liabilities with a tissue supplier and entered into an unsecured promissory note totaling $ 2.1 million. The note bears interest at 5 % and includes quarterly interest-only payments in 2017 and quarterly interest and principal payments from March 31, 2018 through August 31, 2021. The notes are subordinated in payment to the Term Loan Facility and Revolving Credit Facility and in both 2022 and 2021, the Company’s senior lender restricted payment of the amounts due.
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Long-term debt was comprised of the following (in thousands):
March 31,
December 31,
2022
2021
Term Loan Facility, net of unamortized discount and deferred financing costs
$
15,425
$
17,077
Note to Tissue Supplier
1,392
1,392
Total
16,817
18,469
Current Portion
( 8,059 )
( 8,059 )
Long-Term Debt
$
8,758
$
10,410
The fair value of all debt instruments, which is based on inputs considered to be Level 2 under the fair value hierarchy, approximates the respective carrying values as of March 31, 2022 and December 31, 2021.
Note 7. Revenue Interest Obligation
On May 31, 2017, the Company completed an asset purchase agreement with CorMatrix Cardiovascular, Inc. ("CorMatrix") and acquired all CorMatrix commercial assets and related intellectual property (the "CorMatrix Acquisition"). As part of the CorMatrix Acquisition, the Company assumed a restructured, long-term obligation (the “Revenue Interest Obligation”) to Ligand Pharmaceuticals (“Ligand”) with an estimated present value on the acquisition date of $ 27.7 million. Subject to annual minimum payments of $ 2.75 million per year, the terms of the Revenue Interest Obligation require Aziyo to pay Ligand, 5 % of future sales of the products Aziyo acquired from CorMatrix, including CanGaroo, ProxiCor, Tyke and VasCure, as well as products substantially similar to those products, such as the version of CanGaroo Aziyo is currently developing that is designed to include antibiotics.
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.
The Company recorded the present value of the estimated total future payments under the Revenue Interest Obligation as a long-term obligation, with the annual minimum payments serving to establish the short-term portion. At each reporting period, the value of the Revenue Interest Obligation is re-measured based on current estimates of future payments, with changes to be recorded in the condensed consolidated statements of operations using the catch-up method. There was no change to estimated future payments during the three months ended March 31, 2022 and 2021, and thus, no re-measurement gain or loss was recognized. Interest expense related to the Revenue Interest Obligation of approximately $ 0.7 million was recorded for both the three months ended March 31, 2022 and 2021.
Note 8. Commitments and Contingencies
Operating Leases
The Company leases two production facilities and one administrative and research facility under non-cancelable operating lease arrangements that expire through November 2025. All leases contain renewal options and escalation clauses based upon increases in the lessors’ operating expenses and other charges.
The Company records rent expense on a straight-line basis over the life of the lease and the difference between the average rent expense and cash payments for rent is recorded as deferred rent and is included in other current and long-term liabilities on the balance sheet. Rent expense was approximately $ 0.3 million for both the three months ended March 31, 2022 and 2021, and is included as a component of either cost of goods sold or general and administrative expenses.
Cook Biotech License and Supply Agreements
Aziyo has entered into a license agreement with Cook Biotech (“Cook”) for an exclusive, worldwide license to the porcine tissue for use in the Company’s Cardiac Patch and CanGaroo products, subject to certain co-exclusive rights retained by Cook. The term of such license is through the date of the last to expire of the licensed Cook patents, which is
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anticipated to be July 2031. Along with this license agreement, Aziyo entered into a supply agreement whereby Cook would be the exclusive supplier to Aziyo of the licensed porcine tissue. Under certain limited circumstances, Aziyo has the right to manufacture the licensed product and pay Cook a royalty of 3 % of sales of the Aziyo-manufactured tissue. The supply agreement expires on the same date as the related license agreement. No royalties were paid to Cook during the three months ended March 31, 2022 or 2021. Aziyo has also entered into an amendment to the Cook license agreement (the “Cook Amendment”) in order to add fields of exclusive use. Specifically, the Cook Amendment provides for a worldwide exclusive license to the porcine tissue for use with neuromodulation devices in addition to cardiovascular devices. The Cook Amendment includes license fee payments of $ 0.1 million per year in each of the years 2021 through 2026. Such license payments would accelerate if a change in control, as defined, occurs within Aziyo. The Company, in its sole discretion, can terminate the license agreement at any time.
Legal Proceedings
From time to time, the Company may be involved in claims and proceedings arising in the course of the Company’s business. The outcome of any such claims or proceedings, regardless of the merits, is inherently uncertain. The Company records accruals for contingencies when it is probable that a liability has been incurred and the amount can be reasonably estimated. These accruals are adjusted periodically as assessments change or additional information becomes available.
In June 2021, the Company announced a voluntary recall of a single lot of FiberCel. Between June 21, 2021 and May 9, 2022, forty-seven lawsuits in Indiana, Delaware, Florida, Maryland, Colorado, Michigan, Ohio, Kentucky, Oregon, and North Carolina have been filed against Aziyo Biologics Inc., certain Medtronic entities, and others alleging that the plaintiffs contracted tuberculosis and/or suffered substantial symptoms and complications following the implantation of FiberCel during spinal fusion operations. Twenty lawsuits were filed in Indiana state court, captioned, respectively: (1) John Dukes and Kimberly Smith v. Aziyo Biologics, Inc., et al., Case No. 49D02-2109-CT-032234 (case dismissed without prejudice on 09/16/2021 and re-filed on 09/24/2021); (2) Tamara and Richard Marksberry v. Aziyo Biologics, Inc., et al., Case No. 49D04-2106-CT-021649 (consolidated); (3) Ramon Cabello v. Aziyo Biologics, Inc., et al., Case No. 49D13-2106-CT-021650 (consolidated); (4) Luis Caban v. Aziyo Biologics, Inc., Case No. 49D13-2107-CT-022413 (consolidated); (5) Machell and Samuel Hargrave v. Aziyo Biologics, Inc., et al., Case No. 49D01-2106-CT-021275 (consolidated); (6) Georgia Flinn as Personal Representative of the Estate of Gregory Flinn v. Aziyo Biologics, Inc., et al., Case No. 49D12-2107-CT-024051 (consolidated); (7) Ruth and William Flynn v. v. Aziyo Biologics, Inc., et al., Case No. 49D12-2107-CT-024624 (consolidated); (8) Tracy Warner and Kristin Foate v. v. Aziyo Biologics, Inc., et al., Case No. 49D04-2107-CT-024631 (consolidated); (9) Donna Schilling v. v. Aziyo Biologics, Inc., et al., Case No. 49D04-2107-CT-024443 (consolidated); (10) Robby and Stephanie Anderson v. v. Aziyo Biologics, Inc., et al., Case No. 49D13-2107-CT-025221 (consolidated); (11) Max Shepard v. v. Aziyo Biologics, Inc., et al., Case No. 49D11-2108-CT-025984 (consolidated); (12) Leon Chew v. Aziyo Biologics, Inc., et al., Case No. 49D12-2108-CT-025967 (consolidated); (13) Candace Kozor, Kenneth Largin and Anthony Young v. Aziyo Biologics, Inc., et al., Case No. 49D04-2107-CT-024626 (consolidated); (14) James and Lauri Ann Jackson v. v. Aziyo Biologics, Inc., et al., Case No. 49D02-2108-CT-028321 (re-filed in state court and consolidated); (15) James and Kathy Shaw v. Aziyo Biologics, Inc., et al, Case No. 49D11-2108-CT-028669 (consolidated); (16) Larry Szynski v. Aziyo Biologics, Inc., et al., Case No. 49D05-2108-CT-029225 (consolidated); (17) Jerrold Jenkins v. Aziyo Biologics, Inc., et al., Case No. 49D03-2108-CT-029367 (consolidated; (18) Hon Vien v. Aziyo Biologics, Inc., et al., Case No. 49D01-2202-CT-004812; (19) Jayson Hartman v. Aziyo Biologics, et al., Case No. 49D12-2202-CT-004835; and (20) Randy Smith v. Aziyo Biologics, Inc., et al., Case No. 49D01-2202-CT-005184 (collectively, the “Indiana State Complaints”). Fifteen lawsuits were filed in the Superior Court of the State of Delaware, captioned respectively: (1) Richard Williams v. Aziyo, Biologics Inc., et al., C.A. No. N21C-06-166 EMD; (2) Jean and Shante Georges v. Aziyo, Biologics Inc., et al., C.A. No. N21C-06-256-DJB; (3) Marjorie Hitchens v. Aziyo, Biologics Inc., et al., C.A. No. N21C-06-214-DJB; (4) Larry and Joanne Fortner v. Aziyo, Biologics Inc., et al., C.A. No. N21C-06-215-DJB; (5) Nancy and John Smith v. Aziyo, Biologics Inc., et al., C.A. No. N21C-06-219-DJB; (6) Joan Trincia v. Aziyo, Biologics Inc., et al., C.A. No. N21C-06-220-DJB; (7) Bernadette Burgess v. Aziyo, Biologics Inc., et al., C.A. No. N21C-06-264-DJB; (8) Summer Fitzhugh v. Aziyo, Biologics Inc., et al., C.A. No. N21C-06-221-DJB; (9) Linda Shields v. Aziyo, Biologics Inc., et al., C.A. No. N21C-06-166-DJB; and (10) Sharon Riddick v. Aziyo, Biologics Inc., et al., C.A. No. N21C-07-005-EMD; (11) Carl Stevens v. Aziyo, Biologics Inc., et al., C.A. No. N21C-08-149-DJB; (12) Joel and Melissa Stanton v. Aziyo, Biologics Inc., et al., C.A. No. N21C-08-212-AML; (13) Bruce and Beverly Carroll v. Aziyo, Biologics Inc., et al., C.A. No. N21C-08-130-DJB; (14) Margaret Cook v. Aziyo, Biologics Inc., et al.,
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C.A. No. N21C-08-131-DJB; (15) Robert Jr. and Kelly Aspinall v. Aziyo, Biologics Inc., et al., C.A. No. N21C-09-065-DJB (collectively, the “Delaware State Complaints”). One lawsuit has been re-filed in the Circuit Court of Maryland (previously filed on 07/21/2021 and dismissed without prejudice on 08/12/2021 in the U.S. District Court of Maryland), captioned: Diana and James Hanson v. Aziyo Biologics, Inc., et al., Case No. C-02-CV-21-001094 (“Maryland State Complaint”). One lawsuit has been filed in the Court of Common Pleas of Ohio, captioned: Michelle and Charles Weethee v. Aziyo, Biologics Inc., et al., Case No. 2021 CV 03621 (“Ohio State Complaint”). One lawsuit was filed in the Northern District of Ohio, captioned: Heath Raker and Neal Raker v. Aziyo Biologics, Inc., et al., Case No. 1:22-cv-54 (“Ohio Federal Complaint”). One lawsuit filed in the Superior Court of North Carolina, captioned: Aurelia and Belvin Sherrill v. Aziyo Biologics, Inc., et al., Case No. 21-cvs-2797 has since been removed to the U.S. District Court for the Western District of North Carolina (“North Carolina Federal Complaint”). One lawsuit has been filed in the U.S. District Court for the Northern District of Florida, captioned Deborah Rice v. Aziyo Biologics, Inc., et al., Case No. 5:21-cv-00135-MW-MJF (“Florida Federal Complaint”). Two lawsuits were filed in the U.S. District Court for the Eastern District of Michigan, captioned: (1) Karrold Dudley v. Aziyo, Biologics Inc., et al., Case No. 2:21-cv-11813-GAD-EAS and (2) Diane Parron v. Aziyo Biologics Inc., et al., Case No. 2:22-cv-10522-NGE-EAS. A third lawsuit originally filed in the Circuit Court of Michigan, captioned: (3) Ilona and Christian Hildebrandt v. Aziyo Biologics, Inc., Case No. 2021-003804-NP has since been removed to the Eastern District of Michigan (collectively “Michigan Federal Complaints.”) One lawsuit has been filed in the U.S. District Court for the District of Colorado, captioned Christopher and Julie Buri v. Aziyo Biologics, Inc., et al., Case No. 1:21-cv-02789-SKC (“Colorado Federal Complaint”). One lawsuit has been filed in the U.S. District Court for the District of Oregon, captioned Christy Bryant v. Aziyo Biologics, Inc., et al., Case No. 1:21-cv-01759-AA (“Oregon Federal Complaint”). Two lawsuits have been filed in Fayette, Kentucky Circuit Court, captioned: (1) Earl Wesley Robinson and Joyce Ann Robinson v. Aziyo Biologics, Inc., Case No. 21-CI-03842 and (2) Horace B. Nelson, Sr. v. Aziyo Biologics, Inc., et al., Case No. 22-CI-00895 (collectively “Kentucky State Complaints”). Lastly, two lawsuits have been dismissed: (1) in the state court of Maryland, captioned Tracey and Stan Gearhart v. Aziyo Biologics, Inc., et al., Case No. C-02-CV-21-000997(dismissed without prejudice on 09/14/2021), and (2) in the U.S. District Court for the Northern District of Indiana, captioned: David Hahn v. Aziyo Biologics, Inc., et al., Case No. 2:21-cv-00265-PPS-JEM (dismissed without prejudice on 09/30/2021).
Plaintiffs in the Indiana State Complaints allege a cause of action under Indiana’s Product Liability Act, citing manufacturing defects, defective design and failure to properly warn and instruct, and several of the complaints allege loss of consortium. Plaintiffs in these actions assert that the defendants are strictly liable or have breached the duty of care owed to plaintiffs by failing to exercise reasonable care in designing, manufacturing, marketing and labeling FiberCel and are seeking various types of damages, including economic damages, non-economic damages and loss of consortium. Plaintiffs in one of the Indiana State Complaints allege causes of action for product liability, negligence, breach of express and implied warranties, and punitive damages. Each of the plaintiffs in the Delaware State Complaints allege negligence, breach of implied warranty, breach of express warranty, medical monitoring and punitive damages, and two also allege loss of consortium. Plaintiffs in the Delaware State Complaints are seeking economic, consequential, and punitive damages. The Maryland Complaint asserts claims of negligence, breach of implied warranty, breach of express warranty, medical monitoring, and loss of consortium. The Florida Federal Complaint contains three strict liability claims for defective design, defective manufacture, and failure to warn. A claim for punitive damages is also pled. The Ohio State Complaint alleges causes of action for product liability and negligence, and seeks compensatory damages. The Colorado Federal Complaint asserts causes of action for strict product liability, misrepresentation, negligence, breach of express warranty, and breach of implied warranty of merchantability. The Michigan Federal Complaints assert causes of action for negligence, gross negligence breach of implied warranty, breach of express warranty, intentional infliction of emotional distress, and liability under the res ipsa loquitur doctrine. The Michigan Federal Complaints seek compensatory damages and punitive damages. The North Carolina Federal Complaint alleges causes of action for negligence, defective design, breach of implied warranty, breach of express warranty, and loss of consortium, and seeks both compensatory and punitive damages. The Oregon Federal Complaint asserts strict liability claims for defective design, defective manufacture, and failure to warn, and seeks compensatory damages. The Ohio Federal Complaint asserts strict liability claims for defective manufacturing, inadequate warning, nonconformance with representations, and also alleges loss of consortium and seeks compensatory damages. The Kentucky State Complaints assert strict liability claims based on manufacturing defect, design defect, failure to warn, negligence, breach of implied warranty, breach of express warranty, and seek recovery for medical monitoring, loss of consortium, compensatory damages, and punitive damages. In addition to the above, there have been forty-four claims related to the FiberCel recall, which have not yet resulted in a lawsuit. The Company refers to all of the aforementioned litigation, or claim notices, collectively as the “FiberCel Litigation.”
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In order to reasonably estimate a loss or range of loss for the FiberCel Litigation, the Company must assess a variety of factors, including, (i) what claims, if any, will survive dispositive motion practice, (ii) the extent of the claims, particularly when damages are not specified or are indeterminate, (iii) how the discovery process will affect the litigation, (iv) the settlement posture of the other parties to the litigation and (v) any other factors that may have a material effect on the litigation. At present, it is not possible for Aziyo to estimate a range of probable loss in the FiberCel Litigation; however, while unknown, the probable loss could have a material effect on the Company’s financial position and results of operations.
Should Aziyo be required to pay claims related to the FiberCel Litigation, the Company believes that certain settlements and judgments, as well as legal defense costs, may be covered in whole or in part under the Company’s insurance policies. In certain circumstances, insurance carriers reserve their rights to contest or deny coverage. The Company intends to contest vigorously any disputes with its insurance carriers and to enforce its rights under the terms of its insurance policies. Accordingly, the Company will record receivables with respect to amounts due under these policies only when the realization of the potential claim for recovery is considered probable. Amounts recovered under the Company’s insurance policies could be materially less than stated coverage limits and may not be adequate to cover damages, other relief and/or costs relating to claims. In addition, there is no guarantee that insurers will pay claims or that coverage will otherwise be available.
As of both March 31, 2022 and December 31, 2021, the Company was not a party to, or aware of, any material legal matters or claims except for the FiberCel Litigation.
Note 9. Net Loss Per Share Attributable to Common Stockholders
Three Months Ended
(in thousands, except share and per share data)
March 31,
2022
2021
Numerator:
Net loss attributable to common stockholders
$
( 8,149 )
$
( 5,067 )
Denominator:
Weighted average number of common shares, basic and diluted
13,574,058
10,226,152
Net loss per common share attributable to common stockholders, basic and diluted
$
( 0.60 )
$
( 0.50 )
The Company’s potential dilutive securities have been excluded from the computation of diluted net loss per share as the effect would be anti-dilutive. Therefore, the weighted average number of common shares outstanding used to calculate both basic and diluted net loss per share attributable to common stockholders is the same. The Company excluded the following potential common shares, presented based on amounts outstanding at period end, from the computation of diluted net loss per share attributable to common stockholders:
March 31,
2022
2021
Options to purchase common stock
1,857,091
1,238,548
Restricted stock units
564,159
232,098
Total
2,421,250
1,470,646
Note 10. Related Party Transactions
As part of the contribution of assets transacted from Tissue Banks International, now KeraLink International (“KeraLink”), to Aziyo upon formation of the Company, a provision existed which guaranteed a certain level of working capital, as defined, on the opening balance sheet of Aziyo. Such guarantee was largely finalized in 2016; however, an additional $ 0.4 million was received by the Company in connection with a settlement reached in 2018. Furthermore, as part of the 2018 settlement, it was agreed that when KeraLink sells its Aziyo common shares for net proceeds greater than $ 550,000 , KeraLink is obligated to pay Aziyo $ 550,000 within three days of such cash being received. In May 2021,
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KeraLink sold Aziyo common shares for proceeds in excess of $ 550,000 , and as such, remitted $ 550,000 to Aziyo in full satisfaction of the 2018 settlement.
Note 11. Segment Information
The Company operates as one segment, regenerative medicines. The segment is based on financial information that is utilized by the Company’s Chief Operating Decision Maker (“CODM”), who is the Company’s Chief Executive Officer, to assess performance and allocate resources.
For the three months ended March 31, 2022 and 2021, the Company’s net sales disaggregated by the major sources - Core Products and Non-Core Products (see Note 1) - were as follows (in thousands):
Three Months Ended
March 31,
2022
2021
Sales by product
Core Products
$
8,140
$
10,664
Non-Core Products
3,355
2,220
Total Net Sales
$
11,495
$
12,884
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.