What changed in this filing

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Item 1. Financial Statements

2023-11-14 compared with 2023-08-14 · 292 added, 143 removed, 418 unchanged (51% of the section changed)

Financial Statements.

AZIYO BIOLOGICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

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

September 30,

Current assets:

2 unchanged sentences

Prepaid expenses and other current assets

Current assets of discontinued operations

Total current assets

2 unchanged sentences

Operating lease right-of-use assets and other

Noncurrent assets of discontinued operations

Liabilities and Stockholders’ Deficit

6 unchanged sentences

Current operating lease liabilities

Current liabilities of discontinued operations

Total current liabilities

1 unchanged sentence

Long-term revenue interest obligation

Long-term operating lease liabilities

Warrant liability

Other long-term liabilities

Noncurrent liabilities of discontinued operations

Total liabilities

1 unchanged sentence

Stockholders’ equity (deficit):

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

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

Class A Common stock, $ 0.001 par value, 200,000,000 shares authorized as of September 30, 2023 and December 31, 2022, and 18,852,930 and 11,823,445 shares issued and outstanding , as of September 30, 2023 and December 31, 2022, respectively

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

Additional paid-in capital

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

AZIYO BIOLOGICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Cost of goods sold

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Interest expense

Other income, net

Loss before provision for income taxes

Income tax expense

Net loss per share - basic and diluted

Net loss from continuing operations

Income (loss) from discontinued operations

Net loss from continuing operations per share - basic and diluted

Net income (loss) from discontinued operations per share - basic and diluted

Net loss - basic and diluted

Weighted average common shares outstanding - basic and diluted

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

AZIYO BIOLOGICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

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Equity (Deficit)

Balance, March 31, 2023

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

Stock-based compensation

Balance, June 30, 2023

Balance, March 31, 2022

Proceeds from sale of common stock in connection with private placement, net of issuance costs of $ 0.2 million

Proceeds from sale of common stock through Employee Stock Purchase Plan

Vesting of restricted stock units

Stock-based compensation

Balance, September 30, 2023

Balance, June 30, 2022

Proceeds from stock option exercises

Proceeds from sale of common stock through Employee Stock Purchase Plan

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

Issuance of warrants in connection with debt financing

Stock-based compensation

Balance, September 30, 2022

Stockholders'

1 unchanged sentence

Balance, December 31, 2022

Proceeds from sale of common stock in connection with private placement, net of issuance costs of $ 0.2 million

Proceeds from sale of common stock through Employee Stock Purchase Plan

1 unchanged sentence

Stock-based compensation

Balance, June 30, 2023

Balance, September 30, 2023

Balance, December 31, 2021

Proceeds from stock option exercises

Additional issuance costs in connection with private placement

Proceeds from sale of common stock through Employee Stock Purchase Plan

Vesting of restricted stock units

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

Issuance of warrants in connection with debt financing

Stock-based compensation

Balance, June 30, 2022

Balance, September 30, 2022

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

AZIYO BIOLOGICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

Six Months Ended

Nine Months Ended

September 30,

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

Depreciation and amortization

(Gain) loss on extinguishment of debt and revaluation of warrant liability

Amortization of deferred financing costs and debt discount

Interest expense recorded as additional revenue interest obligation or long-term debt

Interest expense recorded as additional revenue interest obligation and long-term debt

Stock-based compensation

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FINANCING ACTIVITIES:

Proceeds from private placement and warrants, net of offering costs of $ 0.2 million

Additional issuance costs in connection with private placement

Net borrowings (repayments) under revolving line of credit

Proceeds from stock option exercises

Proceeds from long-term debt

Deferred financing costs

Repayments of long-term debt

Costs related to the extinguishment of debt

Payments on revenue interest obligation

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Cash and restricted cash, beginning of period

Cash and restricted cash, end of period

Cash, end of period

Supplemental Cash Flow and Non-Cash Financing Activities Disclosures:

Cash paid for interest

Fair value of warrants issued

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

AZIYO BIOLOGICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

(formerly known as Aziyo Biologics, Inc., together with its consolidated subsidiaries, “Elutia” 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 products span the device protection, women’s health, orthobiologics and cardiovascular markets.

Elutia’s portfolio of products span the device protection, women’s health and cardiovascular markets.

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 with corporate customers.

On September 17, 2023, the Company executed an Asset Purchase Agreement (the “Purchase Agreement”) with Berkeley Biologics, LLC (“Berkeley”), a Delaware limited liability company and wholly owned subsidiary of GNI Group, Ltd.

On November 8, 2023, at the closing (the “Closing”) of the transactions contemplated by the Purchase Agreement (the “Asset Purchase”), Berkeley purchased from the Company substantially all of the assets that are related to (i) the Company’s prior business of researching, developing, administering, insuring, operating, commercializing, manufacturing, selling and marketing the Company’s Orthobiologics products identified in the Purchase Agreement (the “Products”), and (ii) the business of contract manufacturing of particulate bone, precision milled bone, cellular bone matrix, acellular dermis, soft tissue and other products (but excluding the business of contract manufacturing of acellular dermis products for use in the field of breast reconstruction, other than as a supplier to Elutia).

The assets sold represent the entirety of the Company’s Orthobiologics segment (the “Orthobiologics Business”).

The Purchase Agreement provides for an aggregate purchase price, subject to certain adjustments pursuant to the terms of the Purchase Agreement, of up to $ 35 million in cash, with approximately $ 14.6 million, as adjusted, having been paid shortly after Closing and up to $ 20 million potentially payable after the Closing in the form of earn-out payments (“Earn-Out Payments”).

For each of the five years following the Closing, Berkeley would be required to pay to the Company an Earn-Out Payment equal to 10 % of the actual revenue earned by Berkeley in the applicable year that is derived from sales of those Products defined as “Earn-Out Products” under the Purchase Agreement, and from any improvements, modifications, derivatives and enhancements related to the Earn-Out Products, with the aggregate amount of Earn-Out Payments capped at $ 20 million.

The sale of the Orthobiologics Business represents a strategic shift that has a major effect on the Company’s operations and financial results.

Accordingly, this transaction is accounted for as Discontinued Operations for all periods presented in accordance with Accounting Standards Codification (“ASC”) 205-20, Discontinued Operations .

Unless indicated otherwise, the information in the notes to the Condensed Consolidated Financial Statements relates to continuing operations.

See Note 4 for further discussion of the divestiture of the Orthobiologics Business.

On May 4, 2023, the Company received a letter from the Listing Qualifications Department of the Nasdaq Stock Market (“Nasdaq”) notifying us that it did not meet the Market Value of Listed Securities (“MVLS”) requirement for continued listing on the Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(b)(2) (the “Market Value Standard”), and noting that the Company did not meet the requirements under Nasdaq Listing Rules 5550(b)(1) (Equity Standard) and 5550(b)(3) (Net Income Standard).

The Original Notice provided that, in accordance with Nasdaq Listing Rule 5810(c)(3)(C), the Company would have a period of 180 calendar days from the date of the Original Notice, or until October 31, 2023 (the “Compliance Date”), to regain compliance with the Market Value Standard by having the Company’s MVLS close at or above $35 million for a minimum of 10 consecutive business days prior to the Compliance Date.

On November 1, 2023, the Company received a delisting determination letter (the “Letter”) from the Staff advising the Company that the Staff had determined that the Company did not regain compliance with the Market Value Standard by the Compliance Date.

As a result, if not for the Company’s appeal of the Staff’s determination, trading of our common stock on the Nasdaq Capital Market would have been suspended at the opening of business on November 10, 2023, and Form 25-NSE would have been filed with the Securities and Exchange Commission to remove the Company’s securities from listing and registration on the Nasdaq Capital Market.

However, the Company timely submitted a hearing

request to Nasdaq's Hearings Panel (the “Panel”), which stayed the suspension of our common stock pending the panel's conclusion of the hearing process.

The Company’s hearing has been scheduled for February 15, 2024.

At the hearing, the Company intends to present a plan to regain compliance with the Market Value Standard, and in the interim, the Company’s common stock will continue to trade on the Nasdaq Capital Market under the symbol “ELUT” at least pending the ultimate conclusion of the hearing.

There can be no assurance that the the Company’s plan will be accepted by the Panel or that, if it is, the Company will be able to regain compliance with the applicable Nasdaq listing requirements.

If the Company cannot regain compliance with the Market Value Standard or under Nasdaq’s alternative continued listing requirements, and if the Company’s common stock is delisted by Nasdaq, it could lead to a number of negative implications, including an adverse effect on the price of our common stock, increased volatility in our common stock, reduced liquidity in our common stock, the loss of federal preemption of state securities laws and greater difficulty in obtaining financing.

In addition, delisting of our common stock could deter broker-dealers from making a market in or otherwise seeking or generating interest in our common stock, could result in a loss of current or future coverage by certain sell-side analysts and might deter certain institutions and persons from investing in our securities at all.

Delisting could also cause a loss of confidence of our collaborators, vendors, suppliers and employees, which could harm the Company’s business and future prospects.

Summary of Significant Accounting Policies

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Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the Company’s consolidated financial statements and accompanying notes included in the Company's annual report on Form 10-K (“Annual Report”) for the fiscal year ended December 31, 2022.

The financial information as of June 30, 2023 and for the three and six months ended June 30, 2023 and 2022 is unaudited, but in the opinion of management, all adjustments considered necessary for a fair statement of the results for these interim periods have been included.

The financial information as of September 30, 2023 and for the three and nine months ended September 30, 2023 and 2022 is unaudited, but in the opinion of management, all adjustments considered necessary for a fair statement of the results for these interim periods have been included.

The condensed consolidated balance sheet data as of December 31, 2022 was derived from audited financial statements but does not include all disclosures required by GAAP.

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

Intercompany accounts and transactions have been eliminated in consolidaton.

Intercompany accounts and transactions have been eliminated in consolidation.

T he financial position and operating results of the disposed-of Orthobiologics Business have been reported as discontinued operations in the condensed consolidated financial statements in the current as well as prior comparative periods.

In accordance with Accounting Standards Update (“ASU”) 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40) , the Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the consolidated financial statements are issued.

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

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

For the nine months ended September 30, 2023, the Company incurred a net loss of $ 28.3 million, and as of September 30, 2023, the Company had an accumulated deficit of $ 166.3 million.

In addition, during the nine months ended September 30, 2023, the Company used $ 12.7 million of cash in operating activities, and expects to continue to incur cash outflows during the remainder of 2023.

Because of the numerous risks and uncertainties associated with the Company’s commercialization and development efforts, the Company is unable to predict when it will become profitable, and it may never become profitable.

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

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

As such, based on its current operating plans, the Company believes there is uncertainty as to whether its future cash flows along with its existing cash, issuances of additional equity and cash generated from expected future sales will be sufficient to meet the Company’s anticipated operating needs through twelve months from the financial statement issuance date.

Due to these factors, there

is substantial doubt about the Company’s ability to continue as a going concern within one year after the issuance of the financial statements.

The Company’s inability to achieve and then maintain profitability would negatively affect its business, financial condition, results of operations and cash flow.

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, such as the private placement which we closed in September 2023 described in Note 9, pursue asset sale or other transactions, such as the completed sale of the Orthobiologics Business described in Note 4, or restructure our Revenue Interest Obligation.

However, such transactions may not be successful, and we may not be able to raise additional equity, refinance our debt instruments, or sell assets on acceptable terms, or at all.

As such, based on our current operating plans, the Company believes there is uncertainty as to whether our future cash flows along with our existing cash, issuances of additional equity and cash generated from expected future sales will be sufficient to meet our anticipated operating needs through twelve months from the financial statement issuance date.

Due to these factors, there is substantial doubt about our ability to continue as a going concern within one year after the issuance of the financial statements.

The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

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Reclassifications

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

The reclassifications relate to the separate presentation of prior year costs related to the FiberCel Litigation.

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

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

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

T he Company determined in its fourth quarter of 2022 that its operating and reportable segments are consistent with its major product groupings – Device Protection, Women’s Health, Cardiovascular and Orthobiologics prior to its divestiture.

Segment results for the three and nine months ended September 30, 2022, have been recasted to conform to the new segment presentation, which now excludes Orthobiologics due to its divestiture noted above.

Refer to the Segment Information in Note 12.

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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 inventories, receivables, long-lived assets, the valuation of stock-based awards, the valuation of the revenue interest obligation, the contingent liability for the FiberCel Litigation and deferred income taxes are made at the end of each financial reporting period by management.

Estimates and assumptions relating to inventories, receivables, long-lived assets, the valuation of stock-based awards and warrants, the valuation of the revenue interest obligation, the contingent liability for the FiberCel Litigation 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.

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Repairs and maintenance costs are expensed as incurred.

In February 2016, the FASB issued ASU No 2016-02 “Leases” to increase the transparency and comparability about leases among entities.

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

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

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No 2016-02, Leases to increase the transparency and comparability about leases among entities.

ASU 2016-02 and certain additional ASUs are now codified as ASC 842, Leases .

ASC 842 supersedes the lease accounting guidance in ASC 840 and requires lessees to recognize a lease liability and a corresponding lease asset for virtually all lease contracts.

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

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Changes in assumptions or market conditions could result in a change in estimated future cash flows and could result in a lower fair value and therefore an impairment, which could impact reported results.

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

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

Revenue Recognition

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(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 (i) sell and distribute products to healthcare providers or commercial partners, or (ii) produce and sell products under contract manufacturing arrangements with corporate customers, which are billed under ship and bill contract terms.

As noted above, the Company enters into contracts to primarily sell and distribute products to healthcare providers or commercial partners.

Revenue is recognized when the Company has met its performance obligations pursuant to its contracts with its customers in an amount that the Company expects to be entitled to in exchange for the transfer of control of the products to the Company’s customers.

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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.

The Company accounts for its stock-based compensation plans in accordance with ASC 718, Accounting for Stock Compensation .

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.

Warrant Liability

The Company accounts for its warrants in accordance with ASC 815, Derivatives and Hedging – Contracts in Entity's Own Equity , as either liabilities or as equity instruments depending on the specific terms of the warrant agreement.

Our Offering Warrants are classified as liabilities and are recorded at fair value.

The warrants are subject to re-measurement at each settlement date and at each balance sheet date and any change in fair value is recognized in Other Income, net in the statements of operations.The Company estimates the fair value of the warrant liability using a Black-Scholes pricing model.

We are required to make assumptions and estimates in determining an appropriate term, risk-free interest rate, volatility factor, dividend yield, and the fair value of common stock.

Any significant adjustments to the unobservable inputs would have a direct impact on the fair value of the warrant liability.

Research and Development Costs

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

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

Market conditions can impact the viability of these institutions.

In the event of failure of any of the financial institutions where we maintain our cash, the Company could lose its deposits in excess of the federally insured or protected amounts and there can be no assurance that we will be able to access uninsured funds in a timely manner or at all.

The Company has not experienced any losses in such accounts.

The Company’s cash balances with the individual institutions may at times exceed the federally insured limits.

On June 19, 2023, Surgalign Holdings, Inc.

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

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

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

As of September 30, 2023, the Company’s gross accounts receivable from Surgalign totaled $ 0.6 million which has fully been reserved at September 30, 2023 due to the uncertainty of collection.

Comprehensive Income (Loss)

Comprehensive income (loss) comprises net income (loss) and other changes in equity that are excluded from net income (loss).

For the three and six months ended June 30, 2023 and 2022, the Company’s net loss equaled its comprehensive loss and accordingly, no additional disclosure is presented.

For the three and nine months ended September 30, 2023 and 2022, the Company’s net loss equaled its comprehensive loss and accordingly, no additional disclosure is presented.

The Company uses the asset and liability method of accounting for income taxes.

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Recently Issued Accounting Standards

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326):

In 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326):

Disclosure Framework – Measurement of Credit Losses on Financial Instruments , which requires financial assets measured at amortized cost, including trade receivables, be presented net of the amount expected to be collected.

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Results for reporting periods beginning after January 1, 2023 are presented under Topic 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP.

Divestiture of Orthobiologics Business

As described in Note 1, o n September 17, 2023, the Company executed the Purchase Agreement for the sale of its Orthobiologics Business.

Accordingly, the Orthobiologics Business is reported as discontinued operations in accordance with ASC 205-20 - Discontinued Operations .

The related assets and liabilities of the Orthobiologics Business are classified as assets and liabilities of discontinued operations as of September 30, 2023 and December 31, 2022 in the condensed consolidated balance sheets and the results of operations from the Orthobiologics Business are reported as discontinued operations in the condensed consolidated statements of operations for the three and nine months ended September 30, 2023 and 2022.

Applicable amounts in the prior year have been recast to conform to this discontinued operations presentation.

The following tables shows the assets and liabilities of the discontinued operations:

September 30,

Carrying amounts of the major classes of assets included in discontinued operations:

Accounts receivable, net of credit loss reserve of $ 62 and $ 62 , respectively

Prepaid expenses and other current assets

Total current assets

Property and equipment, net

Operating lease right-of-use assets and other

Total non-current assets

Total assets of discontinued operations

Carrying amounts of the major classes of liabilities included in discontinued operations:

Accounts payable

Accrued expenses and other current liabilities

Payables to tissue suppliers

Current operating lease liabilities

Total current liabilities

Long-term operating lease liabilities

Total liabilities of discontinued operations

In accordance with ASC 205-20, only expenses specifically identifiable and related to a business to be disposed may be presented in discontinued operations.

The following table shows the financial results of the discontinued operations:

Three Months Ended

Nine Months Ended

September 30,

Cost of goods sold

Sales and marketing

General and administrative

Research and development

Total operating expenses

Interest expense

Net income (loss)

Total operating and investing cash flows of discontinued operations for the nine months ended September 30, 2023 and 2022 are comprised of the following:

Nine Months Ended

September 30,

Significant operating non-cash reconciliation items

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, the Company adopted the Aziyo Biologics, Inc.

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

Changes in operating assets and liabilities:

Accounts receivable

Prepaid expenses and other

Accounts payable and accrued expenses and other current liabilities

Obligations to tissue suppliers

Significant investing items

Expenditures for property, plant and equipment

The Company’s Women’s Health product, SimpliDerm, has historically been processed by Elutia at our Richmond, California facility;

however, with the divestiture of the Orthobiologics Business, which includes such facility, SimpliDerm will be provided to us on a go forward basis through a long-term supply agreement with the purchaser, Berkeley.

Stock-Based Compensation

In 2015, the Company established its 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, the Company adopted its 2020 Incentive Award Plan, which was amended and restated on June 8, 2023 (the “2020 Plan”).

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

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

As of June 30, 2023, the Company had 3,308,997 shares of Class A common stock available for issuance under the 2020 Plan.

As of September 30, 2023, the Company had 3,370,201 shares of Class A common stock available for issuance under the 2020 Plan.

On June 21, 2022, C.

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

three-fifths of such Option Grant is subject to time-based vesting (the

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

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

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

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

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

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

Number of Shares

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Outstanding, December 31, 2022

Outstanding, June 30, 2023

Vested and exercisable, June 30, 2023

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

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

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

Outstanding, September 30, 2023

Vested and exercisable, September 30, 2023

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

As of September 30, 2023, there was approximately $ 2.4 million of total unrecognized compensation expense related to unvested stock options.

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

The Company uses the Black-Scholes model to value its time-based stock option grants and expenses the related compensation cost using the straight-line method over the vesting period.

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The period expense is then determined based on the valuation of the options and is recognized on a straight-line basis over the requisite service period for the entire award.

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

Six Months Ended

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

Nine Months Ended

September 30,

Expected term (years)

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

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

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

Number of Shares

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Unvested, December 31, 2022

Unvested, June 30, 2023

Unvested, September 30, 2023

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

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

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

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

Employee Stock Purchase Plan

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 Company makes shares of its Class A common stock available for purchase under its 2020 Employee Stock Purchase Plan (the “ESPP”).

The ESPP provides for separate six-month offering periods that begin in March and September of each year.

Under the ESPP, employees may purchase a limited number of shares of Aziyo Class A common stock at 85 % of the fair market value on either the first day of the offering period or the purchase date, whichever is lower.

Under the ESPP, employees may purchase a limited number of shares of Elutia Class A common stock at 85 % of the fair market value on either the first day of the offering period or the purchase date, whichever is lower.

The ESPP is considered compensatory for purposes of stock-based compensation expense.

The number of shares reserved under the ESPP will automatically increase on the first day of each fiscal year through January 1, 2030, in an amount as set forth in the ESPP.

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

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

As of September 30, 2023, the total shares of Class A common stock authorized for issuance under the ESPP was 542,365 , of which 335,808 remained available for future issuance.

During the three and nine months ended September 30, 2023, 63,628 and 104,905 shares, respectively, of Class A common stock were issued under the ESPP.

Stock-Based Compensation Expense

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

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

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Sales and marketing

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Total stock-based compensation expense

Stock-based compensation expense included within Discontinued Operations totaled $ 0.1 million for both the three and nine months ended September 30, 2023 and 2022.

Inventory was comprised of the following (in thousands):

September 30,

Raw materials

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Finished goods

See Note 4 for inventory attributable to the divested Orthobiologics Business.

The VBM recall and market withdrawal, as described in Note 10, necessitated the establishment of a product returns reserve and reversal of revenue totaling $ 3.0 million during the three months ended June 30, 2023.

Based on the timing of the market withdrawal and additional information received from our customers, the Company recorded an additional reversal of revenue totaling $ 0.3 million during the three months ended September 30, 2023.

As of September 30, 2023, the remaining product returns reserve was $ 2.7 million, which is included in accrued expenses and other current liabilities in the condensed consolidated balance sheet as of September 30, 2023.

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

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

Long-Term Debt

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

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

The SWK Loan Facility also allows for the establishment of a separate, new asset-based revolving loan facility of up to $ 8 million, which had not been entered into as of June 30, 2023.

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

The SWK Loan Facility also allows for the establishment of a separate, new asset-based revolving loan facility of up to $ 8 million, which had not been entered into as of September 30, 2023.

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

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

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

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

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

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

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

As of June 30, 2023, Aziyo was in compliance with its financial covenants under the agreement governing the SWK Loan Facility (the “SWK Loan Facility Agreement”).

After such date, a minimum liquidity of at least the greater of (i) $ 5.0 million, and (ii) the sum of the operating cash burn (as defined in the SWK Loan Facility Agreement) for the two prior consecutive fiscal quarters then ended.

As of September 30, 2023, Elutia was in compliance with its financial covenants under the agreement governing the SWK Loan Facility (the “SWK Loan Facility Agreement”).

All of the SWK Loan Facility borrowings take the form of Secured Overnight Financing Rate (“SOFR”) loans and bear interest at a rate per annum equal to the sum of an applicable margin of (i) 7.75 % and the “Term SOFR Rate” (based upon an interest period of 3 months), or (ii) if the Company has elected the PIK Interest option (as defined below), 3.75 % and the “Term SOFR Rate.” The Company may elect a portion of the interest due, to be paid in-kind at a rate per annum of 4.5 % (“PIK Interest”), and such election may be made (x) until November 15, 2024 if the conditions to draw the Additional Term Loan have not been met, or (y) if such conditions to draw the Additional Term Loan have been satisfied, until November 17, 2025.

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

The agreement, as amended, governing

the SWK Loan Facility also includes an exit fee equal to 6.5 % of the aggregate principal amount funded prior to termination plus $ 62,500 and prepayment penalties equal to:

The agreement, as amended, governing the SWK Loan Facility also includes an exit fee equal to 6.5 % of the aggregate principal amount

funded prior to termination plus $ 62,500 and prepayment penalties equal to:

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

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

The weighted average interest rate on the SWK Loan Facility was 13.5 % and 13.1 % for the three and nine months ended September 30, 2023, respectively.

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

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

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

No such mandatory prepayments were required during the three and nine months ended September 30, 2023;

however, the closing of the divestiture of the Orthobiologics Business triggered the mandatory prepayment of $ 4.0 million.

Of such amount, $ 2.0 million wa s paid shortly after closing of the divestiture of the Orthobiologics Business and the remainder is to be paid by the earlier of (i) February 15, 2024 and (ii) two business days following written request by SWK based on mutual agreement between the parties.

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

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dollar deposits divided by 1.00 minus the maximum effective reserve percentage for Eurocurrency funding (“LIBOR”) plus (y) 7.25 % .

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

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

Borrowings under the MidCap Credit Facility bore interest at a rate per annum equal to the sum of (x) the greater of (i) 2.25 % and (ii) LIBOR plus (y) 4.95 % .

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

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

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

September 30,

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

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Long-Term Debt

The fair value of all debt instruments, which is based on inputs considered to be Level 2 under the fair value hierarchy, approximates the respective carrying values as of June 30, 2023 and December 31, 2022.

The fair value of all debt instruments, which is based on inputs considered to be Level 2 under the fair value hierarchy, approximates the respective carrying values as of September 30, 2023 and December 31, 2022.

Revenue Interest Obligation

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

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

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

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.

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 Elutia to pay Ligand, 5 % of future sales of the products Elutia acquired from CorMatrix, including CanGaroo, ProxiCor, Tyke and VasCure, as well as products substantially similar to those products, such as the version of CanGaroo Elutia is currently developing that is designed to include antibiotics.

Furthermore, a $ 5.0 million payment is 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 initial $ 5.0 million milestone payment became due in the second quarter of 2023.

The Company recorded the present value of the estimated total future payments under the Revenue Interest Obligation as a long-term obligation, with the annual minimum payments, along with the expected payment timing of the first $ 5.0 million sales milestone payment noted above, serving to establish the short-term portion.

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

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

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

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

Interest expense related to the Revenue Interest Obligation of approximately $ 0.6 million and $ 0.7 million was recorded for the three months ended September 30, 2023 and 2022, respectively and approximately $ 1.6 million and $ 2.0 million was recorded for the nine months ended September 30, 2023 and 2022, respectively.

Common Stock and Warrants

Private Placement of Common Stock and Warrants

On September 21, 2023, the Company sold, in a private offering exempt from the registration provisions of the Securities Act of 1933, as amended, an aggregate of (i) 6,852,811 units (the “Common Units”) to certain purchasers, each comprised of (a) one share of the Company’s Class A common stock, par value $ 0.001 per share (“Class A Common Stock”) and (b) a warrant (a “Common Warrant”) to purchase one and one half shares of Class A Common Stock, and (ii) 503,058 units (the “Prefunded Units”) to certain purchasers, each comprised of (a) a prefunded warrant (a “Prefunded Warrant”) to purchase one share of Class A Common Stock, and (b) a Common Warrant.

The Common Units were sold at a purchase price of $ 1.4275 per unit, and the Prefunded Units were sold at a purchase price of $ 1.4265 per unit, for aggregate gross proceeds of approximately $ 10.5 million, before deducting offering expenses (the “Offering”).

Each Common Warrant is exercisable at any time until the earlier of (a) 30 trading days after the clearance by the U.S.

Food & Drug Administration of the Company’s CanGarooRM antibiotic-eluting biologic envelope or (b) five years from the date of the Offering, at an exercise price per share of $ 1.4275 .

Each Prefunded Warrant is exercisable at any time at a nominal exercise price per share of $ 0.001 (with the remainder of the exercise price per share of Class A Common Stock having been prefunded to the Company).

The Company incurred transaction fees, including commissions and legal fees, of approximately $ 0.9 million in connection with the private placement, of which $ 0.2 million were allocated to the issuance of the common stock.

See below for discussion of the accounting for warrants and the allocation of the remainder of the transaction fees.

Warrant Liabilities

The Company has concluded that the Common Warrants and the Prefunded Warrants (collectively, the “Offering Warrants”) do not meet the equity contract scope exception under ASC 815-40 as in the event of a (i) fundamental transaction such as a merger and (ii) failure to timely delivery warrant shares upon exercise, certain provisions may require

the Company to adjust the settlement value that is not consistent with a fixed-for-fixed option pricing model.

As a result, as of the September 21, 2023 issuance date, the Company allocated $ 8.6 million of the gross proceeds from the offering to the Offering Warrants based on their fair value, and the remaining $ 1.9 million was allocated to the common shares and recorded as permanent equity.

The warrant liability is included within Warrants and other long-term liabilities in the accompanying condensed consolidated balance sheet as of September 30, 2023.

The valuation of the Offering Warrants is adjusted to fair value (Level 3) at each subsequent balance sheet date until the warrants are settled.

To this end, due primarily to fluctuations in the Company’s underlying common stock price between the issuance date of the Offering Warrants and September 30, 2023, the warrant liability was revalued to $ 7.6 million as of September 30, 2023.

The change in fair value of $ 1.1 million has been recorded as other income, net in the accompanying condensed consolidated statements of operations for the three and nine months ended September 30, 2023.

The Company also allocated a portion of the transaction fees noted above to the Offering Warrants and expensed within other expense, net, approximately $ 0.7 million of these fees.

The Company calculated the fair value of the Common Warrants and Prefunded Warrants using the Black-Scholes option pricing model with the following inputs:

Common Warrants

Prefunded Warrants

September 21, 2023

September 30, 2023

September 21, 2023

September 30, 2023

Common stock price

Expected term (years)

Risk-free interest rate

Volatility factor

Dividend yield

The expected term of the Common Warrants and Prefunded Warrants is based on a significant unobservable input, the Company’s probability-weighted expectations relative to the timing of the clearance by the U.S.

Food & Drug Administration of the Company’s CanGarooRM antibiotic-eluting biologic envelope.

Commitments and Contingencies

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 “Cook License Agreement”).

Elutia 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 “Cook License Agreement”).

The term of such license is through the date of the last to expire of the licensed Cook patents, which is anticipated to be July 2031.

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.

Along with this license agreement, Elutia entered into a supply agreement whereby Cook would be the exclusive supplier to Elutia of licensed porcine tissue.

Under certain limited circumstances, Elutia has the right to manufacture the licensed product and pay Cook a royalty of 3 % of sales of the Elutia-manufactured tissue.

The supply agreement expires on the same date as the related license agreement.

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

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

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

Elutia 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 in the Cook Amendment, occurs within Aziyo.

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

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

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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.

The Company records accruals for contingencies when it is probable that a liability has been incurred and the amount can

be reasonably estimated.

Where the available information is only sufficient to establish a range of probable liability, and no point within the range is more likely than any other, the lower end of the range has been used.

When a material loss contingency is reasonably possible, but not probable, the Company does not record a liability, but instead discloses the nature of the matter and an estimate of the loss or range of loss, to the extent such estimate can be made.

Accruals recorded are adjusted periodically as assessments change or additional information becomes available, and management's judgments may be materially different than the actual outcomes.

FiberCel Litigation

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

Since September 2021, 76 lawsuits ( 78 plaintiffs) in Indiana, Delaware, Florida, Maryland, Colorado, Michigan, Ohio, Kentucky, Oregon, North Carolina, Louisiana, Illinois, Virginia, California, Pennsylvania, and Arizona have been filed against Aziyo Biologics Inc., certain Medtronic entities, and others alleging that the plaintiffs were exposed to and/or contracted tuberculosis and/or suffered substantial symptoms and complications following the implantation of FiberCel during spinal fusion operations.

Since September 2021, 76 lawsuits ( 78 plaintiffs) in Indiana, Delaware, Florida, Maryland, Colorado, Michigan, Ohio, Kentucky, Oregon, North Carolina, Louisiana, Illinois, Virginia, California, Pennsylvania, and Arizona have been filed against Elutia Inc., certain Medtronic entities, and others alleging that the plaintiffs were exposed to and/or contracted tuberculosis and/or suffered substantial symptoms and complications following the implantation of FiberCel during orthopedic fusion operations.

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

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

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

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

District Court for the Western District of Louisiana (“Louisiana Federal Complaint”) the Illinois Circuit Court (collectively, the “Illinois State Complaints”);

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

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Plaintiffs in one of the Indiana State Complaints allege causes of action for product liability, negligence, breach of express and implied warranties, and punitive damages.

Each of the plaintiffs in the Delaware State Complaints alleges negligence, breach of implied warranty, breach of express warranty, and medical monitoring and punitive damages, and two also allege loss of consortium.

Each of the plaintiffs in the Delaware State Complaints alleges negligence, breach of implied warranty, breach of express warranty, 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 State Complaints assert claims of negligence, breach of implied warranty, breach of express warranty, medical monitoring, and loss of consortium.

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

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 Florida Federal Complaints contain three strict liability claims for defective design, defective manufacture, and failure to warn.

A claim for punitive damages is also pleaded.

The Ohio State Complaints allege 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.

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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 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.

medical monitoring, loss of consortium, compensatory damages, and punitive damages.

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

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

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

The California Federal Complaint advances claims of strict liability

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

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

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

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

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

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

Plaintiff in the Tennessee Federal Complaint asserts claims for indemnity and breach of contract.

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

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Since August 2022, the Company has engaged in a process to negotiate and attempt to resolve many of the cases in the FiberCel Litigation.

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

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

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

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

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

In total, Elutia’s liability in 27 of the cases was settled and paid for a total of approximately $ 7.5 million as of September 30, 2023.

For the remaining 82 cases for which settlements have not been reached, the Company estimated a probable loss related to each case and has recorded a liability at an estimated amount of $ 15.7 million, which is recorded as Contingent Liability for FiberCel Litigation in the accompanying consolidated balance sheets.

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

While the Company believes its estimated liability to be reasonable, the actual loss amounts are highly variable and turn on a case-by-case analysis of the relevant facts.

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

Management believes that it is reasonably possible that the Company could incur liabilities in excess of amounts accrued and the ultimate liability could be material to the results of operations and the cash flows in the period recognized.

The Company, however, is unable to estimate the possible loss or range of loss in excess of the amount recognized at this time.

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

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

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

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

At June 30, 2023, the Company continues to pursue up to $ 3.8 million or more in additional amounts in respect of such indemnity and contribution claims and as such, has not been reflected as part of this receivable.

These receivables at September 30, 2023 totaled $ 7.5 million and are recorded as Receivables of FiberCel Litigation Costs in the accompanying consolidated balance sheets.

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

At September 30, 2023, the Company continues to pursue up to $ 3.8 million or more in additional amounts in respect of such indemnity and contribution claims and as such, has not been reflected as part of this receivable.

The Company will vigorously pursue its position with respect to this amount.

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

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

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

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

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

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

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

At present, one lawsuit has been filed, and twelve claims have been asserted as a result of the VBM Matter.

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

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

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

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

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

Net Loss Per Share Attributable to Common Stockholders

Liabilities recognized for the FiberCel Litigation and potential liabilities in connection with the VBM Matter are excluded from the liabilities assumed by Berkeley in connection with their purchase of the Orthobiologics Business described in Note 4.

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

Net Loss Per Share

Three Months Ended

Six Months Ended

Nine Months Ended

(in thousands, except share and per share data)

September 30,

Net loss from continuing operations

Income (loss) from discontinued operations

Weighted average number of common shares - basic and diluted

Net loss from continuing operations per share - basic and diluted

Net income (loss) from discontinued operations per share - basic and diluted

Net loss per share - basic and diluted

2 unchanged sentences

The Company excluded the following potential common shares, presented based on amounts outstanding at period end, from the computation of diluted net loss per share attributable to common stockholders:

September 30,

Options to purchase common stock

1 unchanged sentence

Class A common stock warrants

Common Warrants

Prefunded Warrants

Segment Information

The Company operates in four segments.

These segments are based on financial information that is utilized by the Company’s CODM to assess performance and allocate resources.

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

With the divestiture of the Orthobiologics Business, the Company now operates in three segments.

These segments are based on financial information that is utilized by the Company’s chief operating decision maker to assess performance and allocate resources.

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

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

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Device protection

Women's health

Orthobiologics

Cardiovascular

2 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Gross profit:

1 unchanged sentence

Women's health

Orthobiologics

Cardiovascular

3 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Gross profit, excluding intangible asset amortization

6 unchanged sentences

Interest expense

Other income, net

Loss before provision for income taxes

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements