Elutia(ELUT) - 2021 Q4 - Annual Report

Part I Business Aziyo Biologics is a commercial-stage regenerative medicine company specializing in products for implantable medical devices, navigating a major product recall and pandemic impacts - Aziyo is a commercial-stage regenerative medicine company focused on products for implantable medical devices, addressing a combined U.S. market opportunity of $3 billion in 2020[23] - The company utilizes a hybrid go-to-market strategy, including a direct sales force of 31 representatives, commercial partners like Boston Scientific and Biotronik, and independent sales agents[31] - In June 2021, the company issued a voluntary recall for a single donor lot of its FiberCel product after post-surgical infections, including tuberculosis, were reported in patients. This event has led to significant litigation and the termination of a distribution agreement with Medtronic[243][265][331] Key Financial Performance (FY 2021 vs. FY 2020) | Metric | FY 2021 (in millions) | FY 2020 (in millions) | Change | |---|---|---|---| | Total Net Sales | $47.4 | $42.7 | +11% | | Core Product Net Sales | $37.6 | $36.2 | +4% | | Gross Margin | 40% | 48% | -8 p.p. | | Net Loss | $24.8 | $21.8 | +13.8% | Our Core Products/Solutions The company's Core Products target three main markets: Implantable Electronic Devices/Cardiovascular, Orthopedic/Spinal Repair, and Soft Tissue Reconstruction, each supported by specific commercial strategies - The development pipeline includes a version of CanGaroo combined with antibiotics, for which a 510(k) submission was anticipated by the end of Q1 2022[62] Core Product Portfolio and Go-To-Market Strategy | Market | Product Brands | Description | Go-To-Market Strategy | |---|---|---|---| | Implantable Electronic Devices / Cardiovascular | CanGaroo®, ProxiCor®, Tyke®, VasCure® | Biological envelopes and extracellular matrices for device protection and tissue repair | Direct sales & commercial partners (Boston Scientific, Biotronik) | | Orthopedic and Spinal Repair | ViBone®, OsteGro V®, Fiber VBM | Viable bone matrices to enhance bone repair and fusion | Commercial partners (e.g., Surgalign Holdings) | | Soft Tissue Reconstruction | SimpliDerm® | Pre-hydrated human acellular dermal matrix for soft tissue repair | Independent sales agents | Regulatory Matters Aziyo's products are subject to extensive FDA and international regulations, including medical device and HCT/P classifications, with ongoing compliance for fraud, abuse, and data privacy laws - The company's products are regulated as medical devices (e.g., CanGaroo) under the FDCA or as HCT/Ps (e.g., ViBone, SimpliDerm) under the PHSA[150][151] - Aziyo believes its HCT/P products are regulated solely under Section 361 of the PHSA, which does not require premarket approval. However, it acknowledges the risk that the FDA could reclassify them as requiring more stringent review, such as a BLA or PMA[483][485] - The company is navigating new international regulations, including the EU's Medical Devices Regulation (MDR), which became effective in May 2021, and the UK's new UKCA marking requirements following Brexit[179][195][198] FiberCel Recall In June 2021, Aziyo issued a voluntary recall for FiberCel due to post-surgical infections, leading to patient deaths, enhanced safeguards, and numerous lawsuits - A voluntary recall was issued on June 2, 2021, for a single donor lot of FiberCel due to post-surgical infections, including tuberculosis[243] - Of the 136 units implanted in 113 patients, the CDC identified at least 75 patients with clinical findings of tuberculosis infection and has learned of eight patient deaths[247][248] - The company has implemented enhanced safeguards, including additional donor screening and a new methodology for testing tissue products for Mycobacterium tuberculosis[252] Risk Factors The company faces significant risks including operating losses, dependence on partners, product development challenges, the FiberCel recall's impact, complex regulatory pathways, intellectual property issues, and financial instability - The company has incurred operating losses since inception, with a net loss of $24.8 million in 2021, and expects to continue incurring losses. It may not be able to achieve or sustain profitability[284][285] - Significant litigation related to the FiberCel recall poses a major risk. As of February 17, 2022, 45 lawsuits had been filed, and the company is unable to estimate the potential loss, which could be material[361][377] - The company's HCT/P products (e.g., ViBone, SimpliDerm) are marketed without premarket approval under the belief they are Section 361 HCT/Ps. There is a risk the FDA could disagree and require a more stringent regulatory pathway (PMA or BLA), forcing a halt to marketing[483][485] - The company depends on a single supplier, Cook Biotech, for the SIS ECM biomaterial used in its CanGaroo and cardiovascular products, posing a significant supply chain risk[341] Properties Aziyo's principal facilities, including corporate headquarters, research lab, and manufacturing sites, are all leased in Maryland, Georgia, and California - The company leases its principal executive office in Silver Spring, MD, a manufacturing facility in Roswell, GA, and a manufacturing, lab, and office space in Richmond, CA[660] Legal Proceedings The company is involved in significant legal proceedings related to the June 2021 FiberCel product recall, with numerous lawsuits filed and an unestimable probable loss - The company is involved in significant litigation arising from the voluntary recall of a single donor lot of its FiberCel product. Further details are provided in Note 16 to the consolidated financial statements[661][1008] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Aziyo's Class A common stock trades on Nasdaq, with no anticipated cash dividends due to business expansion plans and credit agreement restrictions, and a recent $14.0 million private placement - The company's Class A common stock is traded on The Nasdaq Stock Market under the symbol 'AZYO'[665] - The company does not anticipate paying cash dividends in the foreseeable future and is currently restricted from doing so by its credit agreements[667] - On December 8, 2021, the company sold an aggregate of 3,301,881 shares of Class A and Class B common stock in a private placement for gross proceeds of approximately $14.0 million[670] Management's Discussion and Analysis of Financial Condition and Results of Operations In FY2021, net sales increased 11.0% to $47.4 million, but gross margin declined and net loss widened to $24.8 million, with the company maintaining sufficient liquidity through a recent PIPE financing Results of Operations (in thousands) | | Year Ended December 31, 2021 | Year Ended December 31, 2020 | % Change | |---|---|---|---| | Net sales | $47,390 | $42,682 | 11.0% | | Gross profit | $19,022 | $20,561 | (7.5)% | | Loss from operations | $(23,032) | $(13,599) | 69.4% | | Net loss | $(24,832) | $(21,825) | 13.8% | - The decline in net sales of bone repair products was attributed to Medtronic ceasing purchases of FiberCel following the June 2021 recall. Sales of FiberCel to Medtronic were $4.9 million in 2021, down from $6.9 million in 2020[707] - Gross margin, excluding intangible asset amortization, decreased to 47.3% in 2021 from 56.1% in 2020, primarily due to product mix, lower yields in orthopedic/spinal products, and inventory write-downs[710] - The company ended 2021 with $30.4 million in cash and restricted cash. Net cash used in operating activities was $15.4 million[726][732] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate exposure on variable-rate debt, with credit risk concentrated in one financial institution and a single customer, while foreign currency and inflation risks are immaterial - The company is exposed to interest rate risk through its variable-rate Term Loan and Revolving Credit Facility[788] - Credit risk is present as cash balances are held at one financial institution, potentially exceeding insured limits. One customer also accounted for 10% or more of accounts receivable as of December 31, 2021[789][790] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2021, with no material changes reported - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[800] - Based on the COSO framework, management concluded that internal control over financial reporting was effective as of December 31, 2021[801] Part III Part III of the report, covering directors, executive compensation, security ownership, and related party transactions, incorporates information by reference from the company's definitive proxy statement for its 2022 annual meeting of stockholders, which is to be filed separately Security Ownership of Certain Beneficial Owners and Management Related Stockholder Matters This section provides information on the company's equity compensation plans as of December 31, 2021, with remaining details incorporated by reference from the 2022 proxy statement Equity Compensation Plan Information (as of Dec 31, 2021) | Plan Category | Securities to be Issued Upon Exercise (a) | Weighted-Average Exercise Price (b) | Securities Remaining for Future Issuance (c) | |---|---|---|---| | Plans Approved by Stockholders | | | | | 2015 Plan | 283,275 | $6.41 | — | | 2020 Plan | 1,339,521 | $15.05 | 756,554 | | ESPP | — | — | 186,826 | | Total | 1,622,796 | $13.28 | 943,380 | Part IV Exhibits and Financial Statement Schedules This section lists exhibits filed with the Annual Report, including corporate governance documents and material contracts, while omitting financial statement schedules as they are not applicable or included elsewhere - The exhibits include key agreements such as the Amended and Restated Credit and Security Agreements with Midcap, the Royalty Agreement with Ligand Pharmaceuticals, and the License Agreement with Cook Biotech[829][833] Financial Statements Consolidated Financial Statements For FY2021, Aziyo Biologics reported net sales of $47.4 million, an 11% increase, but a widened net loss of $24.8 million, with $30.4 million in cash and restricted cash at year-end Consolidated Balance Sheet Data (in thousands) | | Dec 31, 2021 | Dec 31, 2020 | |---|---|---| | Assets | | | | Cash and restricted cash | $30,428 | $39,532 | | Total current assets | $47,428 | $59,707 | | Total assets | $67,170 | $82,810 | | Liabilities & Equity | | | | Total current liabilities | $26,001 | $26,779 | | Total liabilities | $53,649 | $61,979 | | Total stockholders' equity | $13,521 | $20,831 | Consolidated Statement of Operations Data (in thousands) | | Year Ended Dec 31, 2021 | Year Ended Dec 31, 2020 | |---|---|---| | Net sales | $47,390 | $42,682 | | Gross profit | $19,022 | $20,561 | | Loss from operations | $(23,032) | $(13,599) | | Net loss | $(24,832) | $(21,825) | | Net loss per share | $(2.38) | $(8.88) | Notes to Consolidated Financial Statements The notes detail accounting policies, going concern evaluation, 45 FiberCel recall lawsuits with unestimable probable loss, long-term debt, revenue interest obligation, stock-based compensation, and customer concentration - Management evaluated the company's ability to continue as a going concern due to recurring losses, but believes existing cash and financing will be sufficient for at least the next 12 months (Note 2)[882][884] - As of February 18, 2022, 45 lawsuits had been filed against the company related to the FiberCel recall. The company states it is not possible to estimate a range of probable loss, but it could be material (Note 16)[1009][1015] - The company has a Revenue Interest Obligation to Ligand Pharmaceuticals, requiring payment of 5% of future sales of certain acquired products, subject to a $2.75 million annual minimum (Note 9)[966] - As of Dec 31, 2021, the company had federal net operating loss carryforwards of approximately $65.5 million to offset future taxable income (Note 11)[982]