Large accelerated filer ☐
Non-accelerated filer ☐
Accelerated filer x Smaller reporting company ☐ Emerging growth company ☐ | | |
Large accelerated filer ⌧
|
| Accelerated filer ◻
|
|
|
|
Non-accelerated filer ◻
|
| Smaller reporting company ☐
|
|
|
|
|
| Emerging growth company ☐
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
◻
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ⌧☒
As of June 30,
2019,2021, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant was approximately
$539,757,783$641,907,222 based upon the last reported sale price of our common stock on the Nasdaq Capital Market.
The number of shares outstanding of the Registrant’s common stock as of February
21, 202022, 2022 was
39,731,07841,795,240 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive proxy statement to be filed pursuant to Regulation 14A within 120 days after the end of the Registrant’s fiscal year are incorporated by reference into Part III of this Form 10-K.
FORWARD-LOOKING STATEMENTS
From time to time, in reports filed with the U.S. Securities and Exchange Commission (the “SEC”) (including this Annual Report on Form 10-K), in press releases, and in other communications to shareholders or the investment community, Axogen, Inc. (including Axogen, Inc.’s wholly owned subsidiaries, Axogen Corporation, Axogen Processing Corporation and Axogen Europe GmbH, the “Company”, “Axogen”, “we”, “our”,“Company,” “Axogen,” “we,” “our,” or “us”) may provide forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, concerning possible or anticipated future results of operations or business developments. These statements are based on management's current expectations or predictions of future conditions, events, or results based on various assumptions and management's estimates of trends and economic factors in the markets in which the Company is active, as well as its business plans. Words such as "expects", "anticipates", "intends", "plans", "believes", "seeks", "estimates", "projects", "forecasts", "continue", "may", "should", "will",“expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “projects,” “forecasts,” “continue,” “may,” “should,” “will,” “goals,” and variations of such words and similar expressions are intended to identify such forward-looking statements. The forward-looking statements may include, without limitation, statements regarding our assessment of our internal controls over financial reporting,reporting; statements related to the impact of the 2019 novel coronavirus and any and all variants thereof ("COVID-19") on our business; hospital staffing challenges and its impact on our business; statements regarding our growth, our 2020financial guidance and performance; product development,development; product potential, financial performance,potential; Axogen Processing Center renovation timing and expense; sales growth,growth; product adoption,adoption; market awareness of our products,products; anticipated capital requirements, including the potential of future financings; data validation,validation; expected clinical study enrollment, timing and outcomes; our visibility at and sponsorship of conferences and our educational events.events; regulatory process and approvals; and other factors, including legislative, regulatory, political and economic developments not within our control. The forward-looking statements are and will be subject to risks and uncertainties, which may cause actual results to differ materially from those expressed or implied in such forward-looking statements. Forward-looking statements contained in this Form 10-K should be evaluated together with the many uncertainties that affect the Company’s business and its market, particularly those discussed in the risk factors and cautionary statements set forth in the Company’s filings with the U.S. Securities and Exchange Commission,SEC, including as described in “Risk Factors” included in Item 1A of this Form 10-K and “Risk Factor Summary” included in this Form 10-K. Forward-looking statements are not guarantees of future performance, and actual results may differ materially from those projected. The forward-looking statements are representative only as of the date they are made and, except as required by applicable law, the Company assumes no responsibility to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or otherwise.
RISK FACTOR SUMMARY
Below is a summary of our risk factors. Additional discussion of the risks summarized in this risk factor summary, and other risks that we face, can be found below under the heading “Risk Factors” and should be carefully considered, together with other information in this Form 10-K and our other filings with the SEC before making an investment decision regarding our common stock.
Risks Related to the Company
•Our revenue growth depends on our ability to increase distribution and sales to existing customers and develop new customers, domestically and abroad, and there can be no assurance that these efforts will result in significant increases in sales.
•Our revenue depends primarily on four products.
•The COVID-19 pandemic could continue to have a material adverse effect on our ability to operate, results of operations, financial condition, liquidity, and capital investments.
•Our success will be dependent on continued acceptance of our products by the medical community.
•We have not consistently experienced positive cash flow from our operations, and the ability to achieve consistent, positive cash flow from operations will depend on increasing revenue from distribution of our products, which may not be achievable.
•We are highly dependent on the continued availability of our facilities and could be harmed if the facilities are unavailable for any prolonged period of time.
•Delays, interruptions, or the cessation of production by our third-party suppliers of important materials may prevent or delay our ability to manufacture or process the final products.
•Technological change and competition for newly developed products could reduce demand for our products.
•We must maintain high quality processing of our products.
•Our revenue depends upon prompt and adequate reimbursement from public and private insurers and national health systems.
•Negative publicity concerning methods of donating human tissue and screening of donated tissue may reduce demand for our products and negatively impact the supply of available donor tissue.
•The failure of third parties to perform many necessary services for the commercialization of our products, including services related to recovery/acquisition, distribution and transportation, would impair our ability to meet commercial demand.
•We are dependent on our relationships with independent agencies to generate a material portion of our revenue.
•If we do not manage product inventory in an effective and efficient manner, it could adversely affect profitability resulting in significant fluctuations in our operating results.
•Our operating results could be adversely impacted if we are unable to effectively manage and sustain our future growth or scale our operations.
•There may be significant fluctuations in our operating results.
•We may be unsuccessful in commercializing our products outside the U.S.
•We incur costs as a result of operating as a public company, and our management is required to devote substantial time to compliance initiatives.
•Changes in the tax code could have a material adverse effect on our results of operations, financial condition, liquidity, and capital investments.
Risks Related to the Regulatory Environment in which the CompanyOperates
•Our business is subject to continuing regulatory compliance by the FDA and other authorities, which is costly and could result in negative effects on our business.
•We have suspended market availability of our Avive Soft Tissue Membrane and there is no guarantee it will be placed back on the market.
•The use, misuse or off-label use of our products may harm our reputation, the image of our products, result in injuries leading to product liability suits, which could be costly to our business, or result in FDA sanctions.
•Our Avance Nerve Graft product is currently allowed to be distributed pursuant to a transition plan with the FDA and a change in position by the FDA regarding its use of enforcement discretion to permit the sale of Avance Nerve Graft would have a material adverse effect on us.
•Our business is subject to continuing compliance to standards by various accreditation and registration bodies which is costly, and loss of accreditation or registration could result in negative effects on our business.
•Our Axoguard products are subject to FDA and international regulatory requirements.
•Defective products could lead to recall or other negative business conditions.
•Our operations must comply with FDA and other governmental requirements.
•Clinical trials can be long, expensive and results are ultimately uncertain which could jeopardize our ability to obtain regulatory approval and continue to market our Avance Nerve Graft product.
•We rely on third parties to conduct our clinical trials and they may not perform as contractually required or expected.
•U.S. governmental regulation could restrict the use of our Avance Nerve Graft and Avive Soft Tissue Membrane product, restrict our procurement of tissue or increase costs.
•Our Axotouch product is subject to FDA and other regulatory requirements.
•Healthcare law and policy changes may have a material adverse effect on us.
•We could be subject to civil or criminal penalties if we are found to have violated laws protecting the confidentiality of health information, which could increase our liabilities and harm our reputation or our business.
Risks Related to Our Intellectual Property
•Failure to protect our intellectual property rights could result in costly and time-consuming litigation and our loss of any potential competitive advantage.
•Future protection for our proprietary rights is uncertain and may impact our ability to successfully compete in our industry.
•The patent protection for our products may expire before we are able to maximize their commercial value which may subject us to increased competition and reduce or eliminate our opportunity to generate product revenue.
•Others may claim an ownership interest in our intellectual property which could expose us to litigation and have a significant adverse effect on our prospects.
•We depend on the maintenance of exclusive licenses.
•Our trademarks are valuable, and our business may be adversely affected if trademarks are not adequately protected.
Risks Related to Our Common Stock
•An active trading market in our common stock may not be maintained.
•The price of our common stock could be highly volatile due to a number of factors, which could lead to losses by investors and costly securities litigation.
•We do not anticipate paying any cash dividends in the foreseeable future.
•Anti-takeover provisions in Minnesota law may deter acquisition bids for us that you might consider favorable.
Risks Related to Financing Our Business
•Our credit facility and payment obligations under the Revenue Participation Agreement with TPC Investments II LP and Argo SA LLC, each affiliates of Oberland Capital (collectively, “Oberland Capital”), contains operating and financial covenants that restrict our business and financing activities, require cash payments over an extended period of time and are subject to acceleration in specified circumstances, which may result in Oberland Capital taking possession and disposing of any collateral.
•We may need to raise additional funds to finance our future capital or operating needs, which could have adverse impacts on our business, results of operations, and the interests of our shareholders.
General Risk Factors
•Legal proceedings that we become involved in from time to time could adversely affect our business operations or financial condition.
•We may be subject to future product liability litigation which could be expensive, and our insurance coverage may not be adequate.
•Loss of key members of management, who we need to succeed, could adversely affect our business.
•Our business and financial performance could be adversely affected, directly or indirectly, by natural or man-made disasters or other similar events.
•Changes in U.S. trade policy, threats of international tariffs, and changes to the U.S. political landscape may adversely affect our business, results of operations, financial condition, and prospects.
•Our results of operations could be negatively affected by potential fluctuations in foreign currency exchange rates.
•Our failure to protect our technology systems and comply with data protection laws and regulations could lead to government enforcement actions and significant penalties against us, and adversely impact our business, results of operations, financial condition, and prospects.
•We are dependent on internal information and telecommunications systems, and any failure of these systems, including system security breaches, data protection breaches or other cybersecurity attacks, may negatively impact our business and results of operations.
•Our management has broad discretion in the use of our cash and cash equivalents and, despite management’s efforts, cash and cash equivalents may be used in a manner that does not increase the value of shareholders’ investments.
•Our business and stock price may be adversely affected if our internal controls are not effective.
•Our business, results of operations, financial condition, and prospects could be adversely affected, directly or indirectly, by the effects of an increased focus on environmental, social and governance issues.
General
Axogen is the leading company focused specifically on the science, development, and commercialization of technologies for peripheral nerve regeneration and repair. We are passionate about
helpingproviding the opportunity to restore
peripheral nerve function and quality of life
tofor patients with
physical damage or transection to peripheral
nerves by providingnerve injuries. We provide innovative, clinically proven, and economically effective repair solutions for surgeons and
health carehealthcare providers. Peripheral nerves provide the pathways for both motor and sensory signals throughout the body. Every day, people suffer traumatic injuries or undergo surgical procedures that impact the function of their peripheral nerves. Physical damage to a peripheral nerve or the inability to properly reconnect peripheral nerves can result in the loss of muscle or organ function, the loss of sensory feeling, or the initiation of pain.
Axogen’s platform for peripheral nerve repair features a comprehensive portfolio of products, including including:
•Avance® Nerve Graft, a biologically active off-the-shelf processed human nerve allograft for bridging severed peripheral nerves without the comorbidities associated with a second surgical site;
•Axoguard® Nerve Connector®, a porcine (pig) submucosa extracellular matrix (“ECM”) coaptation aid for tensionless repair of severed peripheral nerves;
•Axoguard® Nerve Protector®, a porcine submucosa ECM product used to wrap and protect damaged peripheral nerves and reinforce the nerve reconstruction while preventing soft tissue attachments;
•Axoguard® Nerve Cap®, a porcine submucosa ECM product used to protect a peripheral nerve end and separate the nerve from the surrounding environment to reduce the development of symptomatic or painful neuroma; and
•Avive® Soft Tissue Membrane, a processed human umbilical cord intended for surgical use as a resorbable soft tissue barrier. Along with these core surgical products, Axogen also offers conduit; and
•Axotouch® Two-Point Discriminator, used to measure the innervation density of any surface area of the skin.
We suspended the market availability of Avive Soft Tissue Membrane ("Avive") effective June 1, 2021 and we continue discussions with the U.S. Food and Drug Administration (the “FDA”) to determine the appropriate regulatory classification and requirements for Avive. The suspension was not based on any safety or product issues or concerns with Avive. We seek to return Avive to the market, although we are unable to estimate the timeframe or provide any assurances that a return to the market will be achievable.
The Axogen portfolio of products is available in the
United States,U.S., Canada,
theGermany, United Kingdom
("UK"), Spain, South Korea, and several other
European and international countries.
Nerves can be damaged in several ways. When a nerve is cut due to a traumatic injury or inadvertently during a surgical procedure, functionality of the nerve may be compromised, causing the nerve to no longer carry the signals to and from the brain to the muscles and skin thereby reducing or eliminating functionality. The loss of function can impact a person’s ability to work and perform daily tasks, to properly be aware and respond to their environment (e.g., heat, cold or other dangers), and could negatively impact their ability to experience and enjoy life.
Nerve damage or transection of thisthe type described above generally requires a surgical repair. Traditionally, the standard has been to either suture the nerve ends together directly without tension or to bridge the gap between the nerve ends with a less important nerve surgically removed from elsewhere in the patient’s own body, referred to as nerve autograft. More recently, synthetic or collagen conduits have been used for the repair of short gaps. Nerves that are not repaired or heal abnormally may result in a permanent loss of function and/or sensation. Additionally, abnormal healing can form a neuroma whichthat may send altered signals to the brain resulting in the sensation of pain. This abnormal section of the nerve can, under certain circumstances, be surgically cut out and the resulting gap repaired.
In addition, compression on a nerve, blunt force trauma or other physical irritations to a nerve can cause nerve damage that may alter the signal conduction of the nerve, result in pain, and may, in some instances, require surgical intervention to address the resulting nerve compression and inflammation.compression. Finally, when a womanpatient undergoes a mastectomy due to breast cancer or prophylactically due to a genetic predisposition for breast cancer, the nerves are cut to allow the removal of the breast tissue. This can result in a loss of sensation, and the potential risk of a symptomatic neuroma.neuroma, and could negatively impact the patient’s quality of life. When a womanpatient chooses an autologous breast reconstruction after a mastectomy, sensation and quality of life can, in certain cases, be returned through surgical intervention.nerve repair.
To improve the options available for the surgical repair and regeneration of peripheral nerves, Axogen has developed and licensed regenerative medicine technologies. Axogen’s innovative approach to regenerative medicine has resulted in first-in-class products that it believes are redefining the peripheral nerve repair market. Axogen’s products are used by surgeons during surgical interventions to repair a wide variety of physical nerve damage or transection throughout the body, which can range from a simple laceration of a finger to a complex brachial plexus injury (an injury to the network of nerves that control the movement and sensation of the shoulder, arm, and hand) as well as nerve injuries caused by dental, orthopedic, and other surgical procedures. Avance Nerve Graft provides surgeons an implant with the micro-architecture of a human nerve. This structure is essential and allows for bridging nerve gaps or transections up to 70mm in length. Additionally, Avance Nerve Graft has product and distribution synergies with Axoguard Nerve Protector, Axoguard Nerve Connector, Axoguard Nerve Cap and Avive Soft Tissue Membrane. Axoguard products provide the
these painful neuroma and better address nerve pain than other methods, including pharmacotherapy and chemical injections, among others.
Axoguard Nerve Cap can be used to:
to reduce the development of symptomatic or painful neuroma formation.
| ● | Reduce painful neuroma formation; and |
Axoguard Nerve Cap has the following advantages:
| ● | •Separates the nerve end from surrounding tissue, neurotrophic factors and mechanical stimulation; |
| ● | Reduces painful neuroma formation; |
| ● | Can be sutured to surrounding soft tissue to anchor the nerve end; |
| ● | Material gradually remodels into the patient’s own tissue to protect the nerve end; and |
| ● | Semi-translucent to allow for easy visualization of the nerve end during entubulation. |
Acroval Neurosensory and Motor Testing Systemmechanical stimulation;
•To pursue our mission most effectively, we have madeReduces painful neuroma formation;
•Allows for anchoring of a strategic decisionnerve end or stump to place our full focus on innovations within our surgical solutions portfolio. Effective November 2019, Axogen discontinued all salesnearby tissue structure;
•Material gradually remodels into the patient’s own tissue to protect the nerve end; and
•Semi-translucence allows for visualization of the Acroval Neurosensorynerve ends or stumps and Motor Testing System. We will continue to provide service and supporteasy visualization for the existing systems in the market place.suture placement.
Axotouch Two PointTwo-Point Discriminator
The Axotouch Two-Point Discriminator tool can be used to measure the innervation density of any surface area of the skin. The discs are useful for determining sensation after damage to a peripheral nerve, following the progression of a repaired peripheral nerve, and during the evaluation of a person with possible peripheral nerve damage, such as compression.
The Axotouch Two-Point Discriminator is a Class 1 510(k) exempt medical device.
The Axotouch Two-Point Discriminator tool is a set of two aluminum discs each containing a series of prongs spaced between two to 15 millimeters apart. Additionally, 20 and 25 millimeter spacing is provided. A circular depression on either side of the disc allows ease of rotation. The discs can be rotated between a single prong for testing one-point and any of the other spaced prongs for testing two-point intervals.
Axotouch Two-Point Discriminator has the following advantages:
| ● | Capable of measuring the innervation density of any skin surface; |
| ● | Portable and easy to use; |
| ● | Strong aluminum design is resistant to bending; |
| ● | Bright colors allow for clear discrimination between discs; |
| ● | Clear numbering allows users to interpret results; and |
| ● | Reusable carry case protects discs. |
•Capable of measuring the innervation density of any skin surface;
•Portable and easy to use;
•Strong aluminum design is resistant to bending;
•Bright colors allow for clear discrimination between discs;
•Clear numbering allows users to interpret results; and
•Reusable carry case protects discs.
Acroval Neurosensory and Motor Testing System
To pursue our mission most effectively, we have made a strategic decision to place our full focus on innovations within our surgical solutions portfolio. Effective November 2019, Axogen discontinued all sales of the Acroval Neurosensory and Motor Testing System. We continue to provide service and support for the existing systems in the marketplace.
Tissue Recovery and Processing for Avance Nerve Graft and Avive Soft Tissue Membrane
Avance Nerve Graft Processing Overview
Axogen has developed the Avance Process,Method, an advanced and proprietary technique to process Avance Nerve Graft from donated human peripheral nerve tissue.The Avance ProcessMethod requires special training over several months for each manufacturing associate who processes Avance Nerve Grafts.The processing and manufacturing system for Avance Nerve
Nerve Graft has required significant capital investment, and we seek to continually improve our manufacturing and quality assurance processes and systems.Axogen’s Avance ProcessMethod is depicted as follows:
Avance Nerve Graft and Avive Soft Tissue Membrane Processing
Axogen’s Avance
processMethod and processing of Avive Soft Tissue Membrane consists of several steps, including peripheral nerve tissue, in the case of Avance, and umbilical cord, in
the case of Avive, recovery/acquisition and testing, donor medical review and release, processing, packaging, and sterilization to meet or exceed all applicable
U.S. Food and Drug Administration (the “FDA”),FDA, state, and international regulations and American Association of Tissue Banks (“AATB”) standards. We have a number of contracts with recovery and acquisition agencies to supply peripheral nerve tissue and umbilical cord and believe these contracts, and the ability to enter into additional contracts, will provide us with the tissues we require for our Avance and Avive implants. As an FDA registered tissue establishment, Axogen utilizes both its own personnel and a variety of subcontractors for recovery/acquisition, storage, testing, processing and sterilization of the donated peripheral nerve and umbilical cord tissue. Additionally, independent
GMPGood Manufacturing Practice ("GMP") and
GLP complaintGood Laboratory Practice ("GLP") compliant laboratories have been contracted by Axogen and its subcontractors to perform testing from donor eligibility through release. The safety of Avance Nerve Graft and Avive Soft Tissue Membrane is supported by donor screening, process validation, process controls, and validated terminal sterilization methods. The Axogen Quality System has built in redundancies that are meant to control the release of each product for implantation only after such product meets our stringent quality control and product requirements.
Avance Nerve Graft and Avive Soft Tissue Membrane Tissue Recovery/Acquisition and Processing Facility
Axogen partners with other FDA registered tissue establishments and AATB accredited recovery/acquisition agencies or recovery/acquisition agencies in compliance with
FDA, state and international regulations and AATB standards for human tissue recovery. After consent for donation is obtained, donations are screened and tested in detail for safety in compliance with
the federalFDA, state and international regulations and AATB standards on communicable disease transmission.
Axogen processes and packages Avance Nerve Graft and Avive Soft Tissue Membrane using its employees and equipment pursuant to a License and Services Agreement, as amended (the “CTS Agreement”) with Community Blood Center (d/b/a(doing business as Community Tissue Services) (“CTS”), in Dayton, Ohio. CTS is an FDA registered tissue establishment.
establishment and an AATB accredited organization. Axogen voluntarily suspended the market availability of Avive Soft Tissue Membrane on June 1, 2021.
The current CTS Agreement terminates December 31, 2021,2023, subject to earlier termination by either party at any time for cause (subject to the non-terminating party’s right to cure, in certain circumstances), or without cause upon 6 months prior notice whereby notice cannot be provided prior to March 1, 2021.notice. Under the CTS Agreement, Axogen pays CTS a facility fee for clean room/manufacturing, storage, and office space. CTS also provides services in support of Axogen’s manufacturing such as routine sterilization of daily supplies, providing disposable supplies and microbial services,
and office support. The service fee is based on a per donor batch rate. The CTS facility provides a cost effective, quality controlled and licensed facility. Axogen’s processing methods and process controls have been developed and validated to ensure product uniformity and quality. Pursuant to the CTS Agreement, Axogen pays license fees on a monthly basis to CTS. See – Item"Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements - Footnote 14.Note 14 - Commitments and Contingencies - Service Agreements."
Axogen is renovating a property
it acquired which is located near the CTS facility,
andthe Axogen Processing Center facility (the "APC Facility") comprised of a
70,000107,000 square foot building on approximately 8.6 acres of land. It is expected that
renovationsrenovation and validation will be completed
bybefore the termination date of the CTS Agreement to provide a new processing facility that can be included in our Biologics License Application (“BLA”) for Avance Nerve Graft. The capacity of the property once operational, along with the ability for expansion, is expected to provide processing capabilities that will meet our intended sales growth. Axogen
believes it can obtainhas obtained certain economic
incentivesdevelopment grants from state and local authorities
associated withtotaling $2,685 including $1,250 of cash grants to offset costs to acquire and develop the
renovationsAPC Facility. The economic development grants are subject to certain job creation milestones by 2023 and
additional employment at the facility, however, such incentives arerelated contingencies. Axogen has received approximately $1,188 from these grants through December 31, 2021. These grants have claw back clauses if Axogen does not
expected to be a material offset to the cost of the project as a whole.meet these job creation milestones by 2023. See
– Item"Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements -
Footnote 14.Note 14 - Commitments and Contingencies - Service Agreements.
"
Avance Nerve Graft and Avive Soft Tissue Membrane Packaging
After processing, the packaging operation is performed in a controlled environment at
CTS.the CTS facility. Each Avance Nerve Graft and Avive Soft Tissue Membrane is visually inspected and organized by size into finished product codes. The tissue implant is then packaged in primary packaging. The outer pouch acts as the primary sterility and moisture barrier.
Avance Nerve Graft and Avive Soft Tissue Membrane Sterilization and Labeling
After being processed and packaged, Avance Nerve Graft and Avive Soft Tissue Membrane are then terminally sterilized and shipped to Axogen’s Burleson, Texas distribution facility (the “Distribution Facility”). There the products receive their final labels and are released following a final stringent technical and quality review. Orders for Avance Nerve Graft and Avive Soft Tissue Membrane are placed with Axogen’s customer care team and the products are packaged and shipped from the Distribution Facility.
Avance Nerve Graft and Avive Soft Tissue Membrane Product Release
Axogen has established quality procedures for review of tissue recovery, relevant donor medical record review and release to processing that meet or exceed FDA requirements as defined in
the Code of Federal Regulations ("CFR") 21 CFR Part 1271, state regulations, international regulations and AATB standards. The Axogen Quality System meets the requirements set forth under 21 CFR Part 1271 for Human Cells, Tissues and Cellular and Tissue-Based Products, including Good Tissue Practices (“GTP”) and is compliant with the 21 CFR Part 820 Quality System Regulations (“QSR”). Furthermore, Axogen utilizes validated processes for the handling of raw material components, environmental control, processing, packaging, and terminal sterilization. In addition to ongoing monitoring activities for product conformity to specifications and sterility, shipping methods have been validated in accordance with applicable industry standards.
Manufacturing of Axogen Products Other Than Avance Nerve Graft and Avive Soft Tissue Membrane
Manufacturing for the Axoguard Product Line
The Axoguard product line is manufactured by Cook Biotech Incorporated,
in West Lafayette, Indiana (“Cook Biotech”), which was established in 1995 to develop and manufacture implants utilizing porcine
extracellular matrix technology (“ECM”).ECM. Axogen decided to expand its portfolio of products and felt that the unique ECM material offered by Cook Biotech provided the combination of properties needed in nerve reconstruction. Cook Biotech’s ECM material is pliable, capable of being sutured, translucent and allows the patient’s own cells to incorporate into the
extracellular matrixECM to remodel and form a tissue similar to the nerve’s epineurium. Cook Biotech has its own source of the raw material for the ECM material and manufactures Axoguard products from such sources.
In August 2008, Cook BiotechAxogen entered into an agreement with Cook Biotech, amended in MarchFebruary 2012 and February 26, 2018 (the “Distribution Agreement”), with Axogen to distribute its ECM technology in the form of the Surgisis® Nerve Cuff, the form of a nerve wrap or patch, or the form of any other mutually agreed to configuration. The Surgisis products were rebranded under Axogen’s Axoguard name and consist of the Axoguard Nerve Connector and Axoguard Nerve Protector. Axogen’s distribution rights are worldwide in the field of the peripheral and central nervous system but excluding use of the products in the oral cavity for endodontic and periodontal applications and OMF surgery solely as they relate to dental, soft or hard tissue repair, or reconstruction. We believe the exclusion does not limit our identified OMF market, but expansion into certain additional OMF market areas could be limited to other Axogen products not subject to the Avance Nerve Graft.Distribution Agreement.
We
Axogen developed, patented, and obtained regulatory approval on the Axoguard Nerve Cap, which in its current configuration is made with Cook Biotech’s ECM material. Pursuant to the Nerve End Cap Supply Agreement dated June 27, 2017 (the “Supply Agreement”), Cook Biotech is the exclusive contract manufacturer of the Axoguard Nerve Cap and both
parties have provided the other party the
necessarilynecessary licenses to their technologies for operation of the Supply Agreement. With respect to the license from Cook Biotech,
we areAxogen is able to sell the Axoguard Nerve Cap worldwide in the field of the peripheral and central nervous system, but subject to the same exclusions as Axoguard Nerve Connector and
Axoguard Nerve Protector.
The Distribution Agreement terminates on June 30, 2027. Although the agreement requires certain minimum purchases, through mutual agreement, the parties have not established such minimums and to date have not enforced such provision, and also establishes a formula for the transfer cost of the Axoguard Nerve Connector and Axoguard Nerve Protector. The Supply Agreement has a term through August 27,
2027, provided, however, that after June 27, 2022, either party may terminate the Supply Agreement upon 90 days written notice. Under both the Distribution and Supply Agreements, Axogen provides purchase orders to Cook Biotech, and Cook Biotech fulfills the purchase orders.
2027.
Manufacturing for the AxotouchTwo Point Two-Point Discriminator
The Axotouch Two Two-Point Discriminator iswas contract manufactured by Viron Technologies, doing business asCybernetics Research Laboratories (“CRL”), in Tucson, Arizona. Viron suppliesCRL supplied the Axotouch unpackaged, and they are packaged at Axogen’s distribution facility in Burleson, Texas. We believe CRL has capacitywe have enough inventory on hand to support any future volumes of Axotouch.sales through 2024. Axogen is focused on
the developing
market ofthe peripheral nerve repair and regeneration
ismarket, committed to improving awareness of new surgical peripheral nerve repair options and is building additional scientific and clinical data to assist surgeons and patients in making informed choices with respect to the repair of peripheral nerve injuries. Axogen believes that there is an opportunity to improve current approaches to peripheral nerve repair and that its approach will solidify its position as a leader in the field of peripheral nerve repair products. The following provides the key elements of Axogen’s sales and marketing strategy.
Increase Awareness of Axogen’s Products
Prior to the introduction of Axogen’s portfolio of peripheral nerve repair products, surgeons had a limited number of options available to surgically repair damaged or transected peripheral nerves. Axogen entered the market to improve the standard of care for nerve injury patients. Axogen intends to increase market penetration and share by increasing awareness of the impact of nerve damage on quality of life and improving the adoption of nerve repair techniques and Axogen’s products through the continued use of educational conferences and presentations, surgical resident and fellow training, scientific publications, digital communication, and a knowledgeable and professional sales team. Axogen works to increase the use of its products within active accounts as well as expand the overall customer base by adding new active accounts. Axogen defines an “active account”active account as an account that has typically gone through the committee approval process, has at least one surgeon who has converted a portion of his or her treatment algorithms for peripheral nerve repair to the Axogen portfolio and has ordered Axogen products at least six times in the last 12 months.months. As Axogen's business continues to grow, Axogen has transitioned to reporting a new account metric that it believes demonstrates the strength of adoption and potential revenue growth in accounts that have developed a more consistent use of Axogen's products in their nerve repair algorithm. Axogen refers to these as core accounts which it defines as accounts that have purchased at least $100,000 in the past 12 months. Axogen is focused on plastic
reconstructive surgeons and orthopedic and plastic hand surgeons who perform surgeries on patients suffering traumatic nerve damage or transection, on oral and maxillofacial surgeons who repair damaged oral nerves, and certainon plastic reconstructive surgeons who perform autologous flap breast neurotization.
Expand Clinical and Scientific Data Regarding the Performance of Axogen Products
Generating clinical data is an important component of Axogen’s marketing strategy. As of December 31, 2019, Axogen had2021, there have been over one hundred and eighty-one peer reviewed clinical papers.publications related to Axogen products. Certain of these publications contain data on multiple products. Axogen will continue to accept patients,subjects, for which there are more than 2,0002,500 Avance nerve repairs enrolled to date, in its RANGER® clinical study (defined below in “Government Regulations”), a utilization registry of Avance Nerve Graft. An additional arm of the RANGER study has been initiated, tracking neurotization outcomes in breast reconstruction (Sensation-NOW®). SixEleven of the above mentionedabove-mentioned publications and more than 6570 scientific conference presentations have been generated to date from the registry. ReThink Pain™, a multicenter observational registry in the area of nerve pain and the surgical treatment of pain, has been initiated and enrollment is underway. A multicenter, prospective, randomized, comparative pilot study of hollow tube conduitsconduit and Avance Nerve Graft has completed subject enrollment and outcome follow-up and has been published (Means et al).published. Case series in digital nerve repair have been published from the Mayo Clinic, Georgetown University Medical Center and Philadelphia Hand Center, and a case series in OMF have been published from UT Southwestern and University of Illinois-Chicago. A number of additional investigator initiatedinvestigator-initiated case reports,
studies, and publications have been completed, including breast neurotization, mandible reconstruction, compressive neuropathies, and the surgical treatment of pain. Case series in brachial plexus, neurotization of breast reconstruction, and the surgical treatment of pain are also being developed. Axogen also supports outside research and will continue to work with investigators working on grants with a translational focus.
RECON, a phase 3 pivotal, multicenter, prospective, randomized, comparative study of hollow tube conduits and Avance Nerve Graft to support the transition of Avance to a biological product has completed enrollment and follow-up of all subjects and is in data analysis and interpretation. See “Government Regulations – Clinical Trials.” A multicenter, prospective, randomized, and subject blinded study of Axoguard Nerve Cap as compared to neurectomy alone for the treatment of symptomatic neuroma (REPOSE) is currently enrolling. ASSIST, a registry study of Avive Soft Tissue Membrane in acute trauma has completed follow-up of all enrolled subjects. Sensation-NOW (defined below in "Axogen Clinical Trials"), a RANGER (defined below in "Government Regulations") study arm for breast neurotization continues to enroll, as does the additional expansion arm Matched Autograft and Tube Conduit Case Control Cohort Arm of RANGER ("MATCHSM"
), a contemporary cohort control which provides reference controls for nerve autograft and manufactured conduits from participating clinical study centers.
Commitment to the Education of Best Practices in Peripheral Nerve Repair
Axogen has established educational conferences and presentations and surgical resident and fellow training that we believe has positioned us as a leader in providing peripheral nerve repair best practices. In 2019,2021, we trained more than three-quarters of hand and microsurgery surgeon fellows in the U.S. through such courses and training.training, including the use of virtual education programs necessitated by the COVID-19 pandemic. The Company provideshas historically provided education on peripheral nerve repair through in-person national programs, including its “Advances and Best Practices in Nerve Repair” national programs (“National Programs”) as well as local and regional educational events. Due to the COVID-19 pandemic, we transitioned in April 2020 largely to a virtual platform for surgeon education offering multiple educational webinars. In calendar years 2017, 20182021, we continued to utilize and 2019, we conducted 15, 18,expand hybrid and 26 National Programs, respectively,virtual education events and also returned to in-person educational events in the last half of 2021. In 2022, we expect to again offer a similar range of programs in 2020. Thesemultiple educational webinars including in-person surgeon education programs. Our education efforts are supported by on-linealso continue to include online tools and discussion forums such as Nerve Matters, an on-lineonline community of peripheral nerve surgeons where the surgeons can ask questions, present cases, and share findings in the area of peripheral nerve repair.
Focused on developing deeper penetration with our existing surgeon customers through development of long-term users of the Sales Process and Expand the Axogen Sales TeamAvance Nerve Graft in our largest market opportunity of extremity trauma
Axogen provides full sales and distribution services through both a direct sales force and independent sales agencies. As of December 31, 2019,2021, Axogen had 109115 direct sales professionals in the U.S. and 19approximately 28 independent sales agencies in the U.S. Approximately 10%In 2021, approximately 88% of global product revenue came from the direct channel. By the endWe believe that near-term growth can be supported first through expanded productivity of 2020, Axogen anticipatesour existing sales force as they go deeper with existing surgeons and accounts and then by adding additional surgeons and accounts. We expect the number of direct sales professionals to increase over time. Additionally, we have successfully utilized a hybrid commercial approach that includes the use of independent agencies in more remote geographies to provide appropriate local support for surgeons, without the U.S.travel time required of a direct sales representative. We anticipate that we will increasecontinue to between approximately 126add to 131. Axogen’s product portfolio isthe number of independent sales agencies as we continue to drive higher productivity and efficiency with our direct sales force.
Our products are available
and sold in
1317 countries outside the U.S. through a number of independent
in countryin-country distributors.
Axogen providesWe provide support and resources for independent agencies and distributors both within and outside the
United States. Axogen provides itsU.S. We provide our products to hospitals, surgery centers and military hospitals, calling on surgeons, including plastic reconstructive surgeons, orthopedic and plastic hand surgeons, and certain oral and maxillofacial surgeons to review the benefits of
the Axogenour products. While surgeons make the decision to implant
Axogen’sour products in appropriate patients, hospitals make the decision to purchase the products from
Axogen.us. In today’s budget constrained environment, hospital committees review new technologies for cost effectiveness as well as quality.
Axogen believesWe believe that
it haswe have been successful in meeting the needs of these hospital committees by demonstrating the cost/benefit of
itsour products and providing a fair value to the hospital.
Expand the Product Pipeline and Applications in Peripheral Nerve Repair
Axogen has developed and continues to develop new and next generation products to support surgeons in their needs for repairing damaged or transected peripheral nerves. Axogen believes additional opportunities exist to develop
or acquire complementary products in peripheral nerve repair. In addition, there existsare opportunities to expand the existing portfolio of products in new applications of peripheral nerve repair in lower extremity surgery, head and neck surgery, urology, and the surgical treatment of pain.
Axogen Strengths
Axogen believes that it has the following strengths in the fieldTable of peripheral nerve repair and regeneration:
Contents
Established Peripheral Nerve Repair Expertise
Axogen has made a significant investment in understanding peripheral nerve anatomy and surgical peripheral nerve repair and regeneration. This has been accomplished through interaction with leading academic centers throughout the United States and by striving to build an outstanding internal team of technical and clinical experts.
Commitment to the Promotion and Education of Best Practices in Peripheral Nerve Repair
Axogen has established educational conferences, presentations, webinars and surgical resident and fellow training that we believe is positioning us as a leader in providing peripheral nerve repair best practices. Axogen has developed the programs and speakers to train surgeons currently in practice as well as surgical fellows.
Clinical Data
Axogen is developing a body of clinical evidence of its implants in real world situations surgeons face when treating their patients with peripheral nerve injuries. This data provides support for surgeons in their clinical decision making and providing treatment options to their patients.
A pivotal multicenter prospective randomized comparative study (RECONSM) of hollow tube conduits and Avance Nerve Graft to support the transition to a biological product is in process See “Government Regulations – Clinical Trials”. A multicenter, prospective, randomized and subject blinded study of Axoguard Nerve Cap as compared to neurectomy for the treatment of symptomatic neuroma (REPOSESM) is currently enrolling. A registry study of Avive Soft Tissue Membrane in acute trauma have been initiated and subjects are being monitored for follow-up. Finally, the Company has expanded RANGER to include an additional study arm called Sensation-NOW for breast neurotization and a contemporary cohort control for RANGER (MATCHSM) which provides reference controls for nerve autograft and manufactured conduits from participating registry centers.
Surgical Implant Commercialization Experience
The Axogen commercialization team consists of sales, marketing, and customer care professionals with backgrounds in the medical device and biotechnology industries. The team has strong experience in the introduction of technologies and has been instrumental in beginning to establish Avance Nerve Graft, Avive Soft Tissue Membrane and the Axoguard product lines as a new standard of care for the surgical treatment of peripheral nerve damage or transections in our core markets. Axogen believes it can leverage these capabilities in expanding the commercial success of the current Axogen products, future peripheral nerve products and opportunities in new peripheral nerve surgical applications.
Avance Nerve Graft Performance
Axogen has worked with leading institutions, researchers, and surgeons to support innovation in the field of surgical peripheral nerve repair. We believe Axogen’s RANGER study (defined below in the section entitled “Government Regulations”) is the largest multi-center clinical study conducted in peripheral nerve gap repair. Axogen is also conducting a Multicenter, Prospective, Randomized, Subject and Evaluator Blinded Comparative Study of Nerve Cuffs and Avance Nerve Graft Evaluating Recovery Outcomes for the Repair of Nerve Discontinuities (“RECON”RECON study (defined below in "Axogen Clinical Trials"). This study is thea phase 3 trial to support its BLA for the Avance Nerve Graft. See “Government Regulations”Regulations - Clinical Trials - Axogen Clinical Trials”. The January 2012 edition of Microsurgery and November 2012 edition of The Journal of Hand Surgery, June 2015 edition of Journal
of Reconstructive Microsurgery and January 2017 edition of HAND each contain an article summarizing the RANGER study results. The Brooks et al. publication reported on 55 Avance Nerve Graft nerve repairs and resulted in meaningful motor and sensory recovery in 87% of nerve transections between 5 and 50 mm. Additionally, no implant related adverse events were reported. (Brooks, D. N., Weber, R. V., Chao, J. D., Rinker, B. D., Zoldos, J., Robichaux, M. R., Ruggeri, S. B., Anderson, K. A., Bonatz, E. E., Wisotsky, S. M., Cho, M. S., Wilson, C., Cooper, E. O., Ingari, J. V., Safa, B., Parrett, B. M. and Buncke, G. M. (2012), Processed nerve allografts for peripheral nerve reconstruction: A multicenter study of utilization and outcomes in sensory, mixed, and motor nerve reconstructions. Microsurgery, 32: 1—14. doi: 10.1002/micr.20975 and Cho, et al. 2012, J Hand Surg Am 37(11):2340-9). In the March 2019 the Journal, Plastic and Reconstructive Surgery Global Open, Safa et al reported on a cohort of the RANGER Registry focused functional motor recovery after repair with Avance Nerve Graft. In the 22 repairs, the authors found that meaningful motor recovery was observed in 73% of the repairs and no safety concerns were identified. (Safa, Bauback MD; Shores, Jaimie T. MD; Ingari, John V. M; Weber, Renata V. MD; Cho, Mickey MD; Zoldos, Jozef MD; Niacaras, Timothy R. MD, PhD; Nesti, Leon J. MD, PhD; Thayer, Wesley P. MD, PhD; Buncke, Gregory M. MD. (2019)), Recovery of Motor Function after Mixed and Motor Nerve Repair with Processed Nerve Allograft. Plastic and Reconstructive Surgery – Global Open: March 2019 - Volume 7 - Issue 3 - p e2163 doi: 10.1097/GOX.000000000000216. At the 2019 American Society for Surgery of the Hand Annual Conference, the RANGER Investigator Team presented on the updated RANGER Registry findings. The team reported overall meaningful recovery ranging from 82-84% and no safety concerns. A meta-analysis of available clinical outcomes data from published papers on the leading synthetic collagen conduit showed meaningful improvement in only 40-74% of cases bridging a gap in the nerve. This data was further verified in a review of autograft alternative in the 2016 edition of Hand Clinics. A similar meta-analysis for nerve autograft reported meaningful improvement in 60-88% of nerve repairs.
International Opportunity for Revenue
Axogen currently focuses
primarily on the U.S. market, with additional foreign distribution and sales in Canada,
United Kingdom,Germany, UK, Spain, South Korea, and certain other countries. The need for the surgical repair of damaged or transected nerves is a global
issue.opportunity. Through its
ex-U.S. revenue
outside the U.S., Axogen has demonstrated the capability to take its current peripheral nerve repair surgical portfolio into new geographical markets. Axogen
does not currently
havehas European Union (“E.U.”)
wide approval-wide registration only for Axoguard Nerve Connector and Axoguard Nerve Protector as approval/registration for Avance Nerve Graft as human tissue is
approvedrequired in each individual country.
Cook Biotech is currently renewing the Axoguard Nerve Connector and Nerve Protector CE Mark and although we believe such renewal is imminent, it has taken longer than anticipated and could experience continued delays. Until such renewal Axogen is able to sell only those products that are currently in inventory in the E.U., which inventory has not been sufficient to satisfy all product sales, and will no longer be available after February 2020. Although Axoguard product revenue in Europe is not material, the inability to supply physicians who wish to use Axoguard could have a negative effect on Axogen’s planned expansion in the E.U. Avance Nerve Graft has been granted marketing authorization in Germany and direct commercial operations will beginbegan in 2020. 2022. Currently,
Avive Soft Tissue Membrane, Axoguard Nerve Cap and Axotouch
Two PointTwo-Point Discriminator
areis available only available in the United States, but Axogen is taking action to introduce Avive Soft Tissue Membrane internationally, whichU.S. Such introduction is subject to meeting the appropriate regulatory standards of a particular countrycountries and any appropriate E.U. wideE.U.-wide regulation or directive. In addition to regulatory approval, reimbursement approval is necessary to achieve material commercial useproduct adoption in most countries. Avance Nerve graft has achieved NICE approval in the UK for digital nerve repair and reimbursement approval in South Korea for repairs up to 50mm in length. To date, revenue from international distribution and sales have not been material, there are no material risks associated with foreign operations and we do not have dependencies as to international revenue. See Risk"Risk Factors - Axogen’s– Our operations must comply with FDA and other governmental requirements."
Research and Development
Axogen believes it provides the most extensive product portfolio for peripheral nerve injuries available. Our current development focus is to expand clinical data in both traumatic peripheral nerve repair and other surgical applications and to develop product line extensions of the Avance and Axoguard products. Other peripheral nerve repair technologies may also be developed.
In this regard, Axogen introduced: (1) an Axoguard Connector line extension in winter 2014 by providing a new longer 15mm product; (2) Axotouch in the fall of 2014; (3) Avive Soft Tissue Membrane launched in November 2016; and (4) Axoguard Nerve Cap fully released in the U.S. in February 2020.
Axogen works with academic institutions in the expansion of treatments for peripheral nerve and is involved in a number of grants from government agencies related to nerve repair or use of our products and/or technologies. For the yearsyear ended December 31, 2019, 2018, and 2017, Axogen recognized grant revenue of approximately $301,000, $195,000 and $56,000, respectively. For the years ended December 31, 2019, 2018 and 2017,2021, Axogen spent approximately $17.5$24.2 million $11.8 million, and $6.7 million, respectively, on total research and development expenses for product and clinical development.
The medical device and biotechnology industries are characterized by rapidly advancing technologies, intense competition, and a strong emphasis on proprietary products. As such, Axogen cannot predict what products may be offered in the future that may compete with Axogen’s products. In the peripheral nerve repair market, Axogen competes primarily against all transected and non-transected peripheral nerve repair approaches, including direct suture repair, autograft, and hollow-tube nerve conduits and materials used to wrap and protect damaged peripheral nerve tissue. Finally, there are numerous companies that offer amnion products in a variety of formats, primarily in the area of wound care, which could be competitive with Axogen’s Avive product.
Because the requirements of the biomaterials used in peripheral nerve repair can vary based on the severity and location of the damaged nerve, the size and function of the nerve, surgical technique, and patient preference, Axogen’s peripheral nerve repair products compete against both autograft materials (nerve in the case of a bridging repair and vein or fat in the case of a nerve protection repair), and a limited number of off-the-shelf alternatives for grafting and protecting. Competitive aspects of our products focus on
thetheir overall value proposition
of our products and
their suitability for specific applications and can include composition and structure of the material, ease of use, clinical evidence, handling, and price. Axogen’s major competitors for off-the-shelf repair options in hollow-tube conduits and bio-absorbable wraps
are:
| ● | Integra LifeSciences Holding Corporation (Nasdaq: IART) (“Integra”). Integra offers NeuraGen®are Integra LifeSciences Holding Corporation, Baxter International, Inc., a hollow tube product made from reconstituted bovine collagen and NeuraWrapTM, a reconstituted bovine collagen biomaterial used for nerve wrapping and has announced they will launch NeuraGen 3D Nerve Guide Matrix which we believe is the NeuraGen hollow tube collagen conduit filled with a porous inner matrix comprised of collagen and glycosaminoglycan (chondroitin-6-sulfate); |
| ● | Baxter International, Inc. (NYSE: BAX) (“Baxter”). Baxter acquired Synovis which offers Neurotube, a hollow tube made of polyglycolic acid and announced distribution of Nerbridge, a hollow tube filled with porous collagen that according to “A Clinical Multi-Center Registry Study On Digital Nerve Repair Using A Biodegradable Nerve Conduit Of PGA With External And Internal Collagen Scaffolding Hirohisa Kusuhara, Md, Phd; Yu Sueyoshi, Md; Noritaka Isogai, Md, Phd Kindai University, Osaka-Sayama, Japan” the conduit and inner collagen had the greater ability to regenerate after peripheral nerve injury than hollow Nerbridge®”. In 2018, Synovis licensed Neurocap Nerve Capping Device and Vivosorb Polymer Film from Polyganics; and |
| ● | Stryker Corporation (NYSE: SYK) (“Stryker”). Stryker offers the NeuroMatrix and Neuroflex products, both of which are hollow tubes derived from reconstituted bovine collagen and NeuroMend, a reconstituted bovine collagen biomaterial used for nerve wrapping. All of these products are manufactured by Collagen Matrix Inc. |
Axogen believes that surgeons use Avance Nerve Graft because it provides them with the natural three-dimensional structure and familiar handling characteristics of a typical peripheral nerve for bridgingperipheral nerve transections (severed peripheral nerves) without the comorbidities and additional surgical site of an autograft as well as confidence in the performance of the product as a result of the growing body of clinical literature. Axoguard Nerve Protector and Axoguard Nerve Connector provide the unique features of pliability, suturability and translucence for visualization of the underlying nerve while also allowing the patient’s own cells to incorporate into the extracellular matrix to remodel. Axogen believes its Avive Soft Tissue Membrane, a resorbable soft tissue covering to separate tissues has favorable handling and absorption properties and Axoguard Nerve Cap, is a uniquely designed nerve termination device which provides a protective environment for the nerve ends to reduce the development of painful neuroma.
Stryker Corporation.Axogen believes any current or future competitors face the following important barriers to market entry as it relates to its peripheral nerve repair products. Axogen’s intellectual property (“IP”), and that of its partners, including patents, patents-pending, trade secrets, and know how, is believed to be an important barrier for its Avance Nerve Graft and Axoguardproducts. Axogen has developed knowledge and experience in understanding and meeting FDA regulatory requirements for Avance Nerve Graft, including having made a substantial investment in conducting the preclinicalpre-clinical and clinical testing necessary to support a submission for an FDA BLA. Additionally, Axogen believes theits ability to offer a portfolio of products focused on
peripheral nerve repair provides a unique competitive position versus other entities that do not have this breadth of product offering. However, due to its limited resources, its smaller size, and its relatively early stage, Axogen believes it may face competitive challenges from larger entities and market factors that could negatively impact Axogen’s growth, including competitors’ introduction of new products and competitors’ bundling of products to achieve pricing benefits.
Axogen protects its IP through a combination of patents, trademarks, trade secrets, and copyrights. In addition, Axogen safeguards its trade secrets and other confidential know-how, and carefully protects these and other IP rights when engaging with third parties. For example, Axogen requires vendors, contract organizations, consultants, advisors, and employees to execute confidentiality and nondisclosure agreements, and to appropriately protect any information disclosed to them by Axogen so as to preserve its confidential and/or trade secret status. Axogen also requires consultants, advisors, and employees to assign
to Axogen their rights to any IP arising out of their relationship with
Axogen to Axogen.
Axogen has entered into license agreements with University of Florida Research Foundation (the “UFRF”) and the University of Texas at Austin (“UTA”). Under the terms of these license agreements, Axogen holds exclusive worldwide licenses to underlying technologies used by Axogen in its Avance Nerve Graft. The license agreements include both the right to issued patents and patents pending in the U.S. and international markets. The effective term of the license agreements extends through the term of the related patents.
In the event of default, licensors may also terminate an agreement (after written notice) if Axogen fails to cure a breach. The license agreements contain the following key terms:
| ● | Payment of annual license maintenance fees, some of which may be credited against future royalty payments; |
| ● | Payment of royalty fees of 1%-3% based on net revenue of the licensed products, the level depending on the agreement, which may include a minimum quarterly royalty payment with discounts off royalty rates when royalty stacking applies; |
| ● | Payment of a percentage of sublicense fees received; |
| ● | Reimbursement of certain legal expenses incurred for patent prosecution and defense; and |
| ● | Other payments of various amounts based on achieving certain milestones. |
Currently, Axogen pays royalties to UFRF and UTA specific to the licensed technologies related to the Avance Nerve Graft.
As of the date of this Form 10-K, Axogen owns or is the exclusive licensee of nineteenabout thirty issued U.S. patents, about fifteenmore than thirty-five pending U.S. patent applications (including those for which Axogen has received a notice of allowance) and on the order of seventymore than one hundred and forty international patents and patent applications with regard to its peripheral nerve products and other related technologies. The following table identifies the issued U.S. patents owned or licensed by Axogen with regard to
its peripheral nerve products and other related technologies, including the patent number, the title of each patent, and the estimated expiration date of each patent.
| | | | |
Patent No.
|
| Title
|
| Estimated expiration date
|
|
|
|
|
|
US 6,972,168
|
| Materials and Methods for Nerve Grafting, Selection of Nerve Grafts, and in vitro Nerve Tissue Culture
|
| August 2022
|
|
|
|
|
|
US 7,402,319
|
| Cell Free Tissue Replacement for Tissue Engineering
|
| September 2023
|
|
|
|
|
|
US 7,732,200
|
| Materials and Methods for Nerve Grafting, Selection of Nerve Grafts, and in vitro Nerve Tissue Culture
|
| December 2023
|
|
|
|
|
|
US 6,696,575
|
| Biodegradable, electrically conducting polymer for tissue engineering applications
|
| March 2022
|
|
|
|
|
|
US 7,851,447
|
| Materials and Methods for Nerve Repair
|
| November 2023
|
|
|
|
|
|
US 8,545,485
|
| Nerve Elevator and Method of Use
|
| May 2032
|
|
|
|
|
|
US 8,758,794
|
| Cell Free Tissue Replacement for Tissue Engineering
|
| September 2023
|
|
|
|
|
|
US 8,986,733
|
| Materials and Methods for Nerve Repair
|
| August 2022
|
|
|
|
|
|
US D777,917
|
| Two Point Discriminator Sensory Measurement Device
|
| January 2032
|
|
|
|
|
|
US 9,690,975
|
| Quantitative Structural Assay of a Nerve Graft
|
| July 2035
|
|
|
|
|
|
US 9,572,911
|
| Method for Decellularization of Tissue Grafts
|
| March 2034
|
|
|
|
|
|
US 9,629,997
|
| Materials and Methods for Protecting Against Neuromas
|
| December 2033
|
|
|
|
|
|
US 9,996,729
|
| Quantitative Structural Assay of a Nerve Graft
|
| May 2035
|
|
|
|
|
|
US 9,597,429
|
| Cell-Free Tissue Replacement for Tissue Engineering
|
| September 2023
|
|
|
|
|
|
US 9,402,868
|
| Materials and Methods for Nerve Grafting
|
| August 2022
|
|
|
|
|
|
US 10,311,281
|
| Quantitative Structural Assay of a Nerve Graft
|
| May 2035
|
|
|
|
|
|
US 10,342,562
|
| Capture-Tool for Manipulating and Entubulating Nerves
|
| May 2037
|
|
|
|
|
|
US 10.441,304
|
| Surgical Tool for Tissue Sizing and Transection
|
| September 2037
|
|
|
|
|
|
US 10,441,681
|
| Materials and Methods for Nerve Grafting
|
| February 2023
|
With respect to our Avance Nerve Graft, we have patent protection in the U.S. through at least September 2023 in the United States.2023. In addition, we also expect Avance Nerve Graft will receive Biosimilar Protection that would providehave a period of 12 years of data exclusivity. total exclusivity in the U.S. for reference product- meaning protection from biosimilars for 12 years. Finally, Axogen has Enforcement Discretion from the FDA allowing continued distribution under controls applicable to Human Cellular and Tissue-based Products (“HCT/P”) with an agreed transition plan to a Biologic Product under a BLA. We believe a competitive processed peripheral nerve allograft would need to successfully complete BLA
Phase I, II and III clinical studies prior to clinical release, the completion of which we believe would take at least 8eight years.
Additionally, Axogen entered into the Cook Biotech Distribution Agreement and Supply Agreement for the Axoguard products. Cook Biotech believes it has know-how and trade secrets with respect to its ECM technology that provides certain competitive obstacles.
Because of the length of time and expense associated with bringing new products through development and the governmental approval process, medical technology companies have traditionally placed considerable importance on obtaining and maintaining patent protection for significant new technologies, products and processes.
Axogen’s policy is to seek patent protection for, or where strategically preferable, maintain as trade secret, the inventions that it considers important to its products and the development of its business. Axogen has sought, and will continue to seek, patent protection for select proprietary technologies and other inventions emanating from its
research and development ("R
&D,&D"), including with respect to uses, methods, and compositions, in an effort to further fortify its IP stronghold in areas of
importimportance to the company and its growing product portfolio. In instances that patent protection is not possible, product value to Axogen’s portfolio can still be derived.
Trademarks, Trade Secrets and Copyrights
Axogen holds
more than one hundreda significant portfolio of hundreds of registered
and applied-for trademarks
in the U.S. and
has filed more than two hundred additional trademark applications worldwide to protect its trade names. We believe these registrations allowworldwide. Protection of our trademarks allows Axogen to prevent competitors from, for example, using the same or a confusingly similar company name, or the same or confusingly similar product names within identified classes of goods
whichthat could otherwise wrongfully allow such competitors to capitalize on the Axogen brand, reputation, and goodwill, and thereby improperly bolster their sales or reputations through, for example, consumer confusion, a false indication of Axogen’s endorsement, or of a false indication of corporate or contractual relationship with Axogen. Axogen polices and enforces its marks.
Axogen possesses trade secrets and material know-how in the following general subject matters: nerve and tissue processing, nerve repair, product testing methods, and pre-clinical and clinical expertise. Axogen has registered copyrights for training tools and artistic renderings. Additionally, Axogen entered into the Distribution Agreement and Supply Agreement with Cook Biotech for the Axoguard products. Cook Biotech believes it has know-how and trade secrets with respect to its ECM technology that provides certain competitive obstacles to protect Axogen's IP.
U.S. Government Regulation Overview
Axogen’s products are subject to regulation by the FDA, as well as other federal and state regulatory bodies in the U.S. and comparable authorities in other countries. In addition, its Avance Nerve Graft and Avive Soft Tissue Membrane must comply with the standards of the tissue bank industry’s accrediting organization, the AATB.
Axogen distributes for Cook Biotech the Axoguard Nerve Connector and Axoguard Nerve Protector products for Cook Biotech, and Cook Biotech is responsible for the regulatory compliance of these products. Cook Biotech is the contract manufacturer for our Axoguard Nerve Cap. Cook Biotech is responsible for the regulatory compliance of the Axoguard Nerve Connector and Axoguard Nerve ProtectorCap product and Axogen is responsible for the regulatory compliance of Axoguard Nerve Cap.this product. Axoguard products are regulated as medical devices and subject to premarketpre-market notification requirements under section 510(k) of the Federal Food, Drug, and Cosmetic Act (the “FD&C Act”), 21 CFR Part 820 (“Quality System Regulation”), and related laws and regulations. Cook Biotech has obtained a 510(k) premarketpre-market clearance for Axoguard Nerve Connector from the FDA for the use of porcine (pig) small intestine submucosa for the repair of peripheral nerve transections where gap closure can be achieved by flexion of the extremity. Cook Biotech has also obtained a 510(k) premarketpre-market clearance for Axoguard Nerve Protector for the repair of peripheral nerve damage in which there is no gap or where a gap closure is achieved by flexion of the extremity. We sell the 510(k) cleared devicedevices under the trade namenames Axoguard Nerve Protector and Axoguard Nerve Connector.
Axogen also sells the Axoguard Nerve Cap. This device, manufactured for AxogenCap product, which is classified by Cook Biotech and distributed from our Burleson facility, isthe FDA as a Class II device. The Axoguard Nerve Cap was cleared for market under 510(k) K163446. It is classified by FDA under 21 CFR 882.5275 (Nerve Cuff, product code: JXI).
Axogen is responsible for the regulatory compliance of Avive Soft Tissue Membrane. Avive Soft Tissue Membrane,is processed and distributed in accordance which Axogen suspended the market availability of effective June 1, 2021. We continue discussions with the FDA to determine the appropriate regulatory classification and requirements for Human Cellular and Tissue-based Products (361 HCT/P) under 21 CFR Part 1271 regulations, US State regulations and the guidelines of the AATB.
Avive. The suspension was not based on any safety or product concerns with Avive. Axogen also distributes the Axotouch Two-Point Discriminator. This device is manufactured for Axogen and distributed from the Burleson FacilityFacility. It is a Class I device (general controls) that is exempt from premarketpre-market notification and the Quality System Regulation requirements except for the Recordkeeping and Complaint file requirements. It is classified by FDA under 21 CFR 882.1200 (Two-point discriminator, product code: GWI).
In 2007, Axogen began to process and distribute its Avance Nerve Graft pursuant to Section 361 of the PHS Act and 21 CFR Part 1271 Human Cells, Tissues, and Cellular and Tissue Based Products controls. Such action was based on Axogen’s good faith belief that Avance Nerve Graft product was an HCT/P tissue product regulated solely under Section 361. From October 2008 through early 2010, Axogen was in communication with the FDA concerning the regulatory status of the Avance Nerve Graft product. In April 2010, in response to a Request For Designation filed by Axogen, the FDA determined that Avance Nerve Graft was a biological product that would be reviewed and regulated by the U.S. FDA Center for Biologics Evaluation and Research (“CBER”) under the requirements of Section 351 of the PHS Act. Section 351 requires, among other things, an approved license to market a biological product.
Axogen met with CBER in July 2010 and, between July 2010 and November 2010, provided information to CBER that resulted in the FDA issuing a letter stating the agency’s intent to exercise enforcement discretion with respect to the continued introduction or delivery for introduction into interstate commerce of Avance Nerve Graft assuming that certain conditions are met relating to the transition of Avance Nerve Graft from regulation as an HCT/P under Section 361 to a biological product under section 351 of the PHS Act. Specifically, the FDA is permitting Avance Nerve Graft to be distributed, subject to FDA enforcement discretion, provided that:
| ● | Axogen transitions to compliance with Section 501(a)(2)(B) of the FD&C Act, the current Good Manufacturing Practice, or cGMP, regulations in 21 CFR Parts 210 and 211 and the applicable regulations and standards in 21 CFR Parts 600-610 prior to initiation of a phase 3 clinical trial designed to demonstrate the safety, purity, and potency of AvanceNerve Graft. |
| o | Axogen has performed several gap analyses of its quality system for compliance with 21 CFR Parts 210/211 and 600-610 regulations. The gap analyses have identified areas in which our quality system could improve with respect to compliance to the regulations. The transition is in process and we periodically review the 21 CFR Parts 210/211 and 600-610 regulations to ensure that we create and implement appropriate changes, including new quality procedures. Through our internal auditing process, we periodically assess our compliance to the regulations. As Axogen completes the phase 3 clinical trial and eventual BLA submission, we will retain an external audit firm with experience in auditing to 21 CFR Parts 210/211 and 600-610 regulations to verify quality system compliance to the regulations. |
| ● | Axogen conducts a phase 3 clinical trial to demonstrate safety, purity and potency of Avance Nerve Graft under a Special Protocol Assessment (“SPA”). |
| o | Axogen and the FDA agreed to the SPA in August 2011 and in accordance with FDA regulations in 21 CFR § Part 312, Axogen submitted an Investigational New Drug Application (“IND”) to the FDA in April 2013. The IND was approved and became effective in March 2015 and the phase 3 clinical trial was initiated in the second quarter of 2015. The study completed initial enrollment in January 2019. As required by the SPA and agreed to by FDA and Axogen, an independent statistical analysis was conducted to determine if greater study enrollment is appropriate to maintain the planned statistical power of the trial. As part of that review, the targeted enrollment was increased to 220 subjects, and the number of participating centers was increased to up to 25. Enrollment of the additional subjects is underway and enrollment is expected to be completed by no later than the end of the second quarter 2020. |
| ● | Axogen continues to comply with the regulations and standards under 21 CFR Part 1271. |
| o | Axogen was audited by the FDA at its processing facility in March 2013, March 2015 and October 2016 and its Distribution Facility in October 2015. The quality system was found to be in compliance with 21 CFR Part 1271 and no FDA Form 483 observations were issued. |
| o | In February 2018. Axogen was audited by the FDA with respect to its Medical Device Quality System under 21 CFR Part 820 and its Human Tissue Quality System under 21 CFR Part 1271. Such audit resulted in two Form 483 observations on general procedures on the Medical Device regulations and no Form 483 observations as to the Human Tissue Quality System. Axogen has taken corrective action to correct these observations and the FDA has accepted the corrective action plan. |
| o
| In November 2018, Axogen was audited by the FDA with respect to its Human Tissue Quality System under 21 CFR Part 1271. Such audit resulted in one Form 483 observation on tissue tracking. Axogen has taken corrective action to correct this observation and the FDA has accepted the corrective action plan.
|
| ● | Axogen continues to exercise due diligence in executing its requirements under the transition program. |
Axogen is working to ensure compliance with the applicable regulations through ongoing discussions with the FDA regarding the transition of the quality system to 21 CFR Parts 210/211 and 600-610 compliance with the FDA and through audits for compliance to 21 CFR Part 1271 and amendments to the IND providing updates to the phase III clinical trial. The final determination of regulatory compliance will be made by the FDA during the pre-license inspection as part of the BLA review. If the FDA does not find Axogen to be in compliance, or if Axogen is unable to meet the required standards for preclinical studies, clinical studies and Chemistry, Manufacturing, and Controls (“CMC”), the approval of the BLA would be delayed or denied.
The FDA will end the period of enforcement discretion upon a final determination of Axogen’s future BLA submission or if prior to the BLA submission, the FDA finds that Axogen does not meet the conditions for the transition plan, or is not exercising due diligence in executing the transition (e.g., study completion, or BLA submission is neither timely nor adequate). If final action on the BLA is negative or Axogen is found to not meet the conditions for the transition plan or its execution, Axogen will not be able to continue to distribute the Avance Nerve Graft. Axogen continues to work diligently to execute the transition plan, including maintaining regular communication with the FDA, and, in this context, continues to distribute Avance Nerve Graft.
The BLA application of Avance Nerve Graft, if approved, will require a potentially substantial user fee payment to the FDA, although certain exemptions, waivers and discounts of the user fees may apply, including certain waivers or discounts for small businesses.
The Food and Drug Administration Safety and Innovation Act, referred to herein as FDASIA (Public Law 112-144), which was signed into law on July 9, 2012, amended the FD&C Act. FDASIA includes the Prescription Drug User Fee Amendments of 2012 which authorizes the FDA to continue to collect the following user fees from applicants who submit certain new drug and biological product applications and supplements:
| ● | Application Fee: Each new BLA has a fee required upon submission. For Axogen fiscal year 2020, this fee for a BLA requiring clinical data is $2.9 million. The fee is adjusted each year so we cannot provide an accurate estimate of what our fee will be upon submission of our BLA. For small companies (fewer than 500 employees and no other approved biologic product on the market) submitting its first application, a waiver of the application fee is available. |
| ● | Axogen Program Fee: A program fee is assessed for each strength or potency in which the approved (non-revoked, non-suspended) product is manufactured in final dosage form. The program fee is based on an estimate of the number of products that would be subject to, and for which the companies would pay, program fees. The program fee is determined by dividing the adjusted total fee revenue from program fees |
| | by the number of estimated products (based on previous year’s program fees) subject to the program fee (excluding program fee waivers and reductions granted by the FDA). For Axogen fiscal year 2020, the program fee has been established at $325,000. Axogen may have to pay a program fee after BLA approval. |
The current version of PDUFA expires October 1, 2022. New user fee amounts could be negotiated during the reauthorization process expected to take place starting in 2020.
In September 2018 the FDA granted a Regenerative Medicine Advanced Therapy (RMAT) designation for Avance Nerve Graft. A regenerative medicine therapy is eligible for the designation if it is intended to treat, modify, reverse or cure a serious or life-threatening disease or condition, and preliminary clinical evidence indicates that the product has the potential to address unmet medical needs for such a disease or condition. The RMAT designation provides access to a streamlined approval process for regenerative medicine technologies and ensures continued informal meetings with the FDA in support of the BLA for Avance Nerve Graft.
The Company believes that any future, competitive peripheral nerve allograft would be required to follow the standard pathway for biologic licensing, which typically entails multiple clinical trials and takes many years. The FDA provided updated guidance in December 2017 which made clear that any processing that alters the biological characteristics of peripheral nerve tissue would be considered more than minimal manipulation, and therefore require a BLA prior to marketing.
The Company has maintained a collaborative dialogue with the FDA and will continue to work closely with the FDA as it progresses towards its BLA submission. Upon BLA approval, Avance Nerve Graft we believe we will have 12 years of data exclusivity with regard to potential biosimilars.
FDA — General
FDA regulations govern nearly all the activities that Axogen performs, or that are performed on its behalf, to ensure that medical products distributed domestically or exported internationally are safe and effective for their intended uses. The activities the FDA regulates include the following:
• | ● | product design, development and manufacture; |
| ● | product safety, testing, labeling and storage; |
| ● | pre-clinical testing in animals and in the laboratory; |
| ● | clinical investigations in humans; |
| ● | premarketing clearance, approval, or licensing; |
| ● | record-keeping and document-retention procedures; |
| ● | advertising and promotion; |
| ● | the import and export of products; |
| ● | product marketing, sales and distribution; |
| ● | post-marketing surveillance and medical device reporting, including reporting of deaths, serious injuries, communicable diseases, device malfunctions or other adverse events; and |
| ● | corrective actions, removals and recalls. |
Product design, development, and manufacture;
•Product safety, testing, labeling, and storage;
•Pre-clinical testing in animals and in the laboratory;
•Clinical investigations in humans;
•Pre-marketing clearance, approval, or licensing;
•Record-keeping and document-retention procedures;
•Advertising and promotion;
•The import and export of products;
•Product marketing, sales, and distribution;
•Post-marketing surveillance and medical device reporting, including reporting of deaths, serious injuries, communicable diseases, device malfunctions, or other adverse events; and
•Corrective actions, removals and recalls.
Failure to comply with applicable FDA regulatory requirements may subject Axogen to a variety of administrative or
judicially-imposedjudicially imposed penalties or sanctions and/or prevent it from obtaining or maintaining required approvals, clearances, or licenses to manufacture and market its products.
Such failure to comply with the applicable FDA requirements mayIt could also subject Axogen to
stringent administrative or judicialenforcement actions or sanctions, such as agency refusal to approve pending applications, warning letters, product recalls, product seizures, total or partial suspension of production or distribution of products, injunctions, or civil
monetary penalties or criminal prosecution.
FDA’s PremarketPre-market Clearance and Approval Requirements - Medical Devices
Unless an exemption applies, each medical device distributed commercially in the U.S. requires either a 510(k) premarketpre-market notification submission or a Pre-Market Approval (“PMA”) Application to the FDA. Medical devices are classified into one of
three classes—Class I, Class II, or Class III—depending on the degree of risk, the level of control necessary to assure the safety and effectiveness of each medical device and how much is known about the type of device. For devices first intended for marketing after May 28, 1976, pre-market review and clearance by the FDA for Class I and II medical devices is accomplished through the 510(k) pre-market notification procedure by finding a device substantially equivalent to a legally marketed Class I or II device, unless the device is exempt. The majority of Class I medical devices are exempt from the 510(k)
premarketpre-market notification requirement. Devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting, or implantable devices for which Class II controls are inadequate to assure safety or effectiveness, and novel devices, including devices deemed not substantially equivalent to a previously cleared 510(k) device, are placed in Class III. Class III devices generally require an approved PMA prior to marketing.
A PMA must be supported by extensive data, including, but not limited to, technical,
preclinical,pre-clinical, clinical trials, manufacturing and labeling to demonstrate to the FDA’s satisfaction,
and the safety and effectiveness of the device.
FDA’s Premarket Approval Requirements - Biologic Products
Biological Product License Application (BLA) Pathway
Biological products subject to BLA requirements are approved under the Public Health Service Act.
Biological products require FDA approval of a BLA to be marketed.
In order toTo be approved, a BLA must demonstrate the safety, purity, and potency of the product candidate based on results of
preclinicalpre-clinical studies and clinical trials. A BLA must also contain extensive
CMCChemistry, Manufacturing and Controls ("CMC") and other manufacturing information, and the applicant must pass an FDA pre-approval inspection of the manufacturing facility or facilities at which the biologic product is produced to assess compliance with the FDA’s
cGMP.current Good Manufacturing Practice ("cGMP") requirements. Satisfaction of FDA approval requirements for biologics typically takes several years and the actual time required may vary substantially based on the type, complexity, and novelty of the product. Axogen cannot be certain that any BLA approvals for its products will be granted on a timely basis, or at all.
The steps for obtaining FDA approval of a BLA to market a biologic product in the U.S. include:
• | ● | completion of preclinical laboratory tests, animal studies and formulation studies under the FDA’s good laboratory practices regulations; |
| ● | submission to the FDA of an IND, for human clinical testing, which must become effective before human clinical trials may begin and which must include independent Institutional Review Board, or IRB, approval at each clinical site before the trials may be initiated; |
| ● | performance of an adequate and well-controlled clinical trial in accordance with Good Clinical Practices to establish the safety and efficacy of the product for each indication; |
| ● | submission to the FDA of a BLA, which contains detailed information about the CMC for the product, reports of the outcomes and full data sets of the clinical trials, and proposed labeling and packaging for the product; |
| ● | satisfactory review of the contents of the BLA by the FDA, including the satisfactory resolution of any questions raised during the review; |
| ● | satisfactory completion of an FDA Advisory Committee review, if applicable; |
| ● | satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the product is produced to assess compliance with cGMP regulations, to assure that the facilities, methods and controls are adequate to ensure the product’s identity, strength, quality and purity; and |
| ● | FDA approval of the BLA including agreement on post-marketing commitments, if applicable. |
Completion of pre-clinical laboratory tests, animal studies, and formulation studies under the FDA’s good laboratory practices regulations;
Preclinical
•Submission to the FDA of an Investigational New Drug application ("IND") for human clinical testing, which must become effective before human clinical trials may begin and which must include independent Institutional Review Board, ("IRB"), approval at each clinical site before the trials may be initiated;
•Performance of an adequate and well-controlled clinical trial in accordance with Good Clinical Practices to establish the safety and efficacy of the product for each indication;
•Submission to the FDA of a BLA, which contains detailed information about the CMC for the product, reports of the outcomes and full data sets from the clinical trials, and proposed labeling and packaging for the product;
•Satisfactory review of the contents of the BLA by the FDA, including the satisfactory resolution of any questions raised during the review;
•Satisfactory completion of an FDA Advisory Committee review, if applicable;
•Satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the product is produced to assess compliance with cGMP regulations, to assure that the facilities, methods, and controls are adequate to ensure the product’s identity, strength, quality, and purity; and
•FDA approval of the BLA, including agreement on post-marketing commitments, if applicable.
Pre-clinical tests include laboratory evaluations of product chemistry, toxicity, and formulation, as well as animal studies. An IND sponsor must submit the results of the preclinicalpre-clinical tests, together with manufacturing information and analytical data, to the FDA as part of the IND. Some preclinicalpre-clinical testing may continue after the IND is submitted. The
IND must become effective before human clinical trials may begin. An IND will automatically become effective 30 days after receipt by the FDA, unless before that time the FDA raises concerns or questions about issues such as the conduct of the trials and or supporting preclinicalpre-clinical data as outlined in the IND. In that case, the IND sponsor and the FDA must resolve any outstanding FDA concerns or questions before clinical trials can proceed. In other words,Therefore, submission of an IND may not result in the FDA allowing clinical trials to commence.
Axogen met with the FDA Center for Biologics Evaluation and Research ("CBER") in July 2010 and, between July 2010 and November 2010, provided information to CBER that resulted in the FDA issuing a letter stating the agency’s intent to exercise enforcement discretion with respect to the continued introduction or delivery for introduction into interstate commerce of Avance Nerve Graft assuming that certain conditions were met relating to the transition of Avance Nerve Graft from regulation as an HCT/P under Section 361 to a biological product under Section 351 of the Public Health Service Act. Specifically, the FDA is permitting Avance Nerve Graft to be distributed, subject to FDA enforcement discretion, provided that:
Biosimilar Biological Products•Axogen transitions to compliance with Section 501(a)(2)(B) of the FD&C Act, the current cGMP regulations in 21 CFR Parts 210 and 211 and the applicable regulations and standards in 21 CFR Parts 600-610 prior to initiation of a phase 3 clinical trial designed to demonstrate the safety, purity, and potency of Avance Nerve Graft.
A
◦Axogen has performed several gap analyses of its quality system for compliance with 21 CFR Parts 210 and 211 and 600-610 regulations. The gap analyses have identified areas in which our quality system could improve with respect to compliance with the regulations. The transition is in process and we periodically review the 21 CFR Parts 210 and 211 and 600-610 regulations to ensure that we create and implement appropriate changes, including new quality procedures. Through our internal auditing process, we periodically assess our compliance to the regulations. As Axogen completes the phase 3 clinical trial and eventual BLA submission, we will retain an external audit firm with experience in auditing to 21 CFR Parts 210 and 211 and 600-610 regulations to verify quality system compliance with the regulations.
•Axogen conducts a phase 3 clinical trial to demonstrate safety, purity and potency of Avance Nerve Graft under a Special Protocol Assessment (“SPA”).
◦Axogen and the FDA agreed to the SPA in August 2011 and in accordance with FDA regulations in 21 CFR §Part 312, Axogen submitted an IND to the FDA in April 2013. The IND was approved and became effective in March 2015 and the phase 3 clinical trial was initiated in the second quarter of 2015. The study completed initial enrollment in January 2019. As required by the SPA and agreed to by FDA and Axogen, an independent statistical analysis was conducted to determine if greater study enrollment was appropriate to maintain the planned statistical power of the trial. As part of that review, the targeted enrollment was increased to 220 subjects, and the number of participating centers was increased to up to 25. The study completed initial subject enrollment in July 2020 and the last patient last visit followup was in August 2021. No outcome data is available at this time.
•Axogen continues to comply with the regulations and standards under 21 CFR Part 1271.
◦Axogen was audited by the FDA at its processing facility in March 2013, March 2015 and October 2016 and at its Distribution Facility in October 2015. The quality system was found to be in compliance with 21 CFR Part 1271 and no FDA Form 483 observations were issued.
◦In February 2018. Axogen was audited by the FDA with respect to its Medical Device Quality System under 21 CFR Part 820 and its Human Tissue Quality System under 21 CFR Part 1271. Such audit resulted in two Form 483 observations on general procedures on our Medical Device Quality System and no Form 483 observations on our Human Tissue Quality System. Axogen has taken corrective action to correct these observations and the FDA has accepted the corrective action plan.
◦In November 2018, Axogen was audited again by the FDA with respect to its Human Tissue Quality System under 21 CFR Part 1271. Such audit resulted in one Form 483 observation on tissue tracking. Axogen has taken corrective action to correct this observation and the FDA has accepted the corrective action plan.
Axogen is working with the FDA to ensure compliance with applicable regulations regarding the transition of Axogen's quality system to 21 CFR Parts 210 and 211 and 600-610 compliance and through audits for compliance to 21 CFR Part 1271. Axogen also maintains regular communication with the FDA regarding the IND. The final determination of regulatory approval pathway for biosimilars was establishedcompliance will be made by The Biologics Price Competition and Innovation Act (“BPCIA”),the FDA during the pre-license inspection as part of the Patient ProtectionBLA review. If the FDA does not find Axogen to be in compliance, or if Axogen is unable to meet the required standards for pre-clinical studies, clinical studies and Affordable Care Act of 2010. An important componentCMC, the approval of the legislation specifiedBLA could be delayed or denied.
Axogen has marketed Avance since 2007. In 2010, the FDA provided Axogen with an enforcement discretion letter authorizing the marketing of Avance so long as Axogen complied with certain terms that focused the Company on taking the necessary steps to support a manufacturerBLA submission for the product. The FDA will end the period of enforcement discretion upon a referencefinal determination of Axogen’s future BLA submission or if prior to the BLA submission, the FDA finds that Axogen does not meet the conditions for the transition plan or is not exercising due diligence in executing the transition (e.g., study completion, or BLA submission is neither timely nor adequate). If final action on the BLA is negative or Axogen is found to not meet the conditions for the transition plan or its execution, Axogen will not be able to continue to distribute Avance Nerve Graft. Axogen continues to work diligently to execute the transition plan, including maintaining regular communication with the FDA, and, in this context, continues to distribute Avance Nerve Graft.
The BLA application of Avance Nerve Graft, if approved, will require a potentially substantial user fee payment to the FDA, although certain exemptions, waivers and discounts of the user fees may apply, including certain waivers or discounts for small businesses.
The FDA Reauthorization Act ("FDARA"), which was signed into law on August 18, 2017, amended the FD&C Act. FDARA includes the Prescription Drug User Fee Amendments of 2012, which authorizes the FDA to continue to collect the
following user fees from applicants who submit certain new drug and biological product applications and supplements. The fees are updated each federal fiscal year:
•Application Fee: Each new BLA has a fee required at the time of submission. For Axogen fiscal year 2022 (through September 2022 – the FDA resets the fee starting in October of each year), this fee for a BLA requiring clinical data was approximately $3.1 million. Since the fee is adjusted each year, we cannot provide an accurate estimate of what our fee will be upon submission of our BLA. For small companies (fewer than 500 employees and no other approved biologic product on the market) submitting its first application, a waiver of the application fee is available.
•Program Fee: A program fee is assessed for each strength or potency in which the approved (non-revoked, non-suspended) product is manufactured in final dosage form. The program fee is based on an estimate of the number of products that would be subject to, and for which the companies would pay, program fees. The program fee is determined by dividing the adjusted total fee revenue from program fees by the number of estimated products (based on previous year’s program fees) subject to the program fee (excluding program fee waivers and reductions granted 12 yearsby the FDA). For Axogen fiscal year 2022 (through September 2022 – the FDA resets the fee starting in October of non-patent data exclusivity beforeeach year), the program fee has been established at $0.364 million. Axogen may have to pay a biosimilar couldprogram fee after BLA approval.
The current version of the Prescription Drug User Fee Act ("PDUFA") expires on October 1, 2022. Congress must reauthorize the program by September 30, 2022. New user fee amounts will be approveddetermined during the reauthorization process. In addition, the PDUFA legislation may contain other provisions that modify sections of FD&C Act. The future version of PDUFA is unknown at this time and we cannot provide an accurate description on how the future version of PDUFA will have on our BLA submission.
In September 2018, the FDA granted a Regenerative Medicine Advanced Therapy ("RMAT") designation for marketingAvance Nerve Graft. A regenerative medicine therapy is eligible for the designation if it is intended to treat, modify, reverse, or cure a serious or life-threatening disease or condition, and preliminary clinical evidence indicates that the product has the potential to address unmet medical needs for such a disease or condition. The RMAT designation provides access to a streamlined approval process for regenerative medicine technologies and ensures continued informal meetings with the FDA in the US. An application for a biosimilar product may not be submitted to FDA until four years after the approval datesupport of the BLA for the reference biological product. BPCIA provides for an abbreviated licensure process for a biosimilar, i.e., a biological productAvance Nerve Graft.
The Company believes that
is highly similar to an FDA-approved biological product, known as a reference product, and has no clinically meaningful differences compared to the reference product in terms of safety, purity and potency.At its discretion, the FDA can waive a requirement for any required element in an application for a biosimilar product. In addition, the legislation distinguished approval of a biosimilar from approval of such a product as a substitute for the reference biological products. Where a product is approved as a biosimilar and additionally approved as a substitute for the reference biologic, it is considered an interchangeable product. Approval as interchangeable requires that the product is biosimilar and can be expected to produce the same clinical results as the reference product in any given patient, and if intended for repeat dosing, a demonstration that the risk in terms of safety or diminished efficacy of alternating or switching between the use of the interchangeable and reference product is not greater than the risk of using the reference product without such alternating or switching. Interchangeable products can be substituted for a reference product without intervention of the prescribing healthcare provider. Most states have enacted or are considering laws that regulate the use and substitution of biosimilar and interchangeable products. For example, Virginia requires licensure as interchangeable by the FDA for a pharmacist to dispense a biosimilar in place of a prescribed biological product (Virginia § 54.1-3408.04).
FDA’s Pre-Approval and Pre-Licensing Requirements
Before approving a BLA, the FDA generally inspects the facility or the facilities at which the product is manufactured. The FDA will not approve the product if it finds that the facility does not appear to be in cGMP compliance. If the FDA determines the application, manufacturing process or manufacturing facilities are not acceptable, it will either not approve the application or issue a complete response letter to indicate that the review cycle for an application is complete and that the application is not ready for approval. The letter will describe specific deficiencies and, when possible, will outline recommended actions the applicant might take to get the application ready for approval. Notwithstanding the submission of any requested additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval.
The testing and approval process requires substantial time, effort and financial resources, and each may take several years to complete. Data obtained from clinical activities are not always conclusive and may be susceptible to varying interpretations, which could delay, limit or prevent regulatory approval. The FDA may not grant approval on a timely basis, or at all. Axogen may encounter difficulties or unanticipated costs in its efforts to secure necessary governmental approvals, which could delay or preclude it from marketing its products. The FDA may limit the indications for use or place other conditions on any approvals that could restrict the commercial application of the products. After approval, some types of changes to the approved product, such as adding new indications, manufacturing changes and additional labeling claims, are subject to further testing requirements and FDA review and approval.
Post-Approval Requirements
After regulatory approval of a product is obtained, Axogen willfuture, competitive peripheral nerve allograft would be required to comply with a numberfollow the standard pathway for biologic licensing, which typically entails multiple clinical trials and takes many years. The FDA provided updated guidance, "Regulatory Considerations for Human Cells, Tissues, and Cellular and Tissue-Based Products: Minimal Manipulation and Homologous Use" in November 2017 (revised in July 2020), which made clear that any processing that alters the biological characteristics of post-approval requirements. For example, as a condition of approval ofperipheral nerve tissue would be considered more than minimal manipulation, and therefore require a BLA prior to marketing.
The Company has maintained a collaborative dialogue with the FDA may require post marketing testing and surveillancewill continue to monitor the product’s continued safety or efficacy. In addition, holders of an approved BLA are required to keep extensive records, to report certain adverse reactions and production problems such as biologic
deviation reports towork closely with the FDA as it progresses towards its BLA submission. Upon BLA approval, we believe Avance Nerve Graft will have 12 years of data exclusivity with regard to provide updated safety and efficacy information and to complypotential biosimilars with requirements concerning advertising and promotional labeling for their products. Also, quality control and manufacturing procedures must continue to conform to cGMP regulations as wellAvance Nerve Graft being designated as the manufacturing conditions of approval set forth in the BLA. The FDA periodically inspects manufacturing facilities to assess compliance with cGMP regulations, which impose certain procedural, substantive and recordkeeping requirements. Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain compliance with cGMP and other aspects of regulatory compliance.
Future FDA inspections may identify compliance issues at Axogen’s facilities or at the facilities of its contract manufacturers that may disrupt production or distribution, or require substantial resources to correct and prevent recurrence of any deficiencies. In addition, discovery of problems with a product or the failure to comply with applicable requirements may result in restrictions on a product, manufacturer or holder of an approved BLA, including withdrawal or recall of the product from the market or other voluntary, FDA-initiated or judicial action that could delay or prohibit further marketing. Newly discovered or developed safety or effectiveness data may require changes to a product’s approved labeling, including the addition of new warnings and contraindications. Finally, new government requirements, including those resulting from new legislation, may be established that could delay or prevent regulatory approval of Axogen products that are currently under development or regulatory activity.
The FDA has broad regulatory compliance and enforcement powers. If the FDA determines that Axogen failed to comply with applicable regulatory requirements, it can take a variety of compliance or enforcement actions, such as issuing a FDA Form 483 notice of inspectional observations, warning letter, or untitled letter, imposing civil money penalties, suspending or delaying issuance of approvals, requiring product recall, imposing a total or partial shutdown of production, withdrawal of approvals or clearances already granted, and pursuing product seizures, consent decrees or other injunctive relief, and criminal prosecution through the U.S. Department of Justice (the “DOJ”). The FDA can also require Axogen to repair, replace or refund the cost of devices that it manufactured or distributed. If any of these events were to occur, it could materially adversely affect Axogen’s business.
Reference Product.
Clinical trials are required to support a BLA or PMA and are sometimes required for 510(k) clearance. Clinical trials involve the administration of the investigational product to human subjects under the supervision of qualified investigators. Clinical trials are conducted under strict requirements to ensure the protection of human subjects participating in the trial and under protocols detailing, among other things, the objectives of the study, the parameters to be used in monitoring and safety, and the effectiveness criteria to be evaluated. Clinical trials for biological products require the submission and FDA acceptance of an IND and clinical trials for medical devices require the submission and FDA approval of an Investigational Device Exemption ("IDE") application or IDE, unless the device regulations provide for an exemption from the IDE requirement. Clinical trials for significant risk devices may not begin until the IDE is approved by the FDA and the Institutional Review Board (IRB)IRB overseeing the particular clinical trial. If the product is considered a non-significant risk device under FDA regulations, the trial must only be approved by an IRB prior to its initiation. A protocol for each clinical trial and any subsequent protocol amendments must be submitted to the FDA as part of the IND or IDE, for significant risk devices. In addition, for these studies, an IRB at each site at which the study is conducted must approve the protocol, subject consent form and any amendments for each site at which the study is conducted. All research subjects must be informed, among other things, about the risks and benefits of the investigational product and provide their informed consent in writing.
Clinical trials under an IND typically are conducted in three sequential phases, but the phases may overlap or be combined. In Axogen’s case, Axogen believes that the
Phasephase 3 clinical trial study for
the Avance Nerve Graft represents the only
newprospective clinical data that will be required to evaluate safety and effectiveness.
Phase 1 clinical trials usually involve the initial introduction of the investigational product into a small group of healthy volunteers (e.g., 10 to 20) to evaluate the product’s safety (dosage tolerance and pharmacokinetics if a biologic product) and, if possible, to gain an early indication of its effectiveness. Phase 2 clinical trials usually involve controlled trials in a larger but limited patient population (e.g., a few hundred) to:
| ● | evaluate dosage tolerance and appropriate dosage; |
| ● | identify possible adverse effects and safety risks; and |
| ● | provide a preliminary evaluation of the efficacy of the product for specific indications. |
Phase 3 clinical trials usually further evaluate clinical efficacy and test further for safety in an expanded patient population (e.g., a hundred to several thousand).population. Phase 3 clinical trials usually involve comparison with placebo, standard treatments, or other comparators. Usually at least onemultiple well-controlled large Phasephase 3 or pivotal clinical trialtrials demonstrating safety and efficacy isare required to support a BLA. These trials are intended to establish the overall risk-benefit profile of the product and provide an adequate basis for physician labeling. Phase 3 trials are almost always larger, more time consuming, complex and costly than Phase 1 and Phase 2 clinical trials. Phase 1, Phase 2 and Phase 3 clinicalClinical testing may not be completed successfully within any specified period, if at all. Furthermore, the FDA or Axogen may suspend or terminate a clinical trialstrial at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk, have experienced a serious and unexpected adverse event, or that continued use in an investigational setting may be unethical. Similarly, an IRB can suspend or terminate approval of research, for example, if the research is not being conducted in accordance with the IRB’s requirements or if the research has been associated with unexpected serious harm to patients.
Investigational New Drug Application
For a biologic product, an IND must Additionally clinical data obtained from the observational study, RANGER, will be submitted prior to the initiation of the clinical study. The IND application must contain information in three broad areas:
| ● | Animal Pharmacology and Toxicology Studies - Preclinical data to permit an assessment as to whether the product is reasonably safe for initial testing in humans. Also included are any previous experiences with the product in humans (often foreign use). |
| ● | Manufacturing Information - Information pertaining to the composition, manufacturer, stability, and controls used for manufacturing of the drug substance and the drug product. This information is assessed to ensure that the company can adequately produce and supply consistent batches of the drug. |
| ● | Clinical Protocols and Investigator Information - Detailed protocols for proposed clinical studies to assess whether the initial-phase trials will expose subjects to unnecessary risks. Also, information on the qualifications of clinical investigators—professionals (generally physicians) who oversee the administration of the experimental compound—to assess whether they are qualified to fulfill their clinical trial duties. Finally, commitments to obtain informed consent from the research subjects, to obtain review of the study by an IRB, and to adhere to the investigational new drug regulations. |
Once the IND is submitted, the sponsor must wait 30 calendar days before initiating any clinical trials. During this time, the FDA has an opportunity to review the IND forprovided as supportive safety to assure that research subjects will not be subjected to unreasonable risk.
data.
Axogen has an active clinical research program to gather data on AvanceNerve Graft.its product portfolio. Axogen has completed two clinical studies and is performing twosix ongoing clinical studies and has plans to initiate further clinical studies. The ongoing studies are “Aare:
•“A Multicenter Retrospective Study of Avance Nerve Graft Utilization, Evaluations, and Outcomes in Peripheral Nerve Injury Repair (“RANGER”)”,
•"A Matched Autograft and “ATube Conduit Case Control Cohort Arm of RANGER ("MATCH")",
•“A Multicenter, Prospective, Randomized, Patient and Evaluator Blinded Comparative Study of Nerve Cuffs and Avance Nerve Graft Evaluating Recovery Outcomes for the Repair of Nerve Discontinuities (“RECON”)”",
•Breast Neurotization Outcomes for Women: A Registry Study of Recovery Outcomes, Quality of Life and Patient Satisfaction in Post-Mastectomy Autologous Breast Reconstruction ("Sensation-NOW")",
•A Multicenter, Prospective and Subject Blinded Comparative Study of Axoguard Nerve Cap and Neurectomy for the Treatment of Symptomatic Neuroma and Prevention of Recurrent End-Neuroma Pain ("REPOSE"), and
•"An Ambispective, Multicenter, Observational Registry Study of Patients Considering Surgical Treatment for Chronic Neuropathic Pain ("ReThink Pain")."
With the voluntary suspension of marketing for Avive Soft Tissue Membrane, the following study has stopped recruiting: "A Registry of Avive Soft Tissue Membrane Utilization in Selected Applications of Acute Trauma in the Upper Extremity ("ASSIST").
Completed studies are “A Multicenter, Prospective, Randomized, Comparative Study of Hollow Nerve Conduit and Avance Nerve Graft Evaluation Recovery Outcomes of the Nerve Repair in the Hand (“CHANGE”)”
published by Means et al and a pilot study to evaluate the use of Avance Nerve Graft in the reconstruction of nerves following prostatectomy.
Axogen will continue to accept patients in the RANGER clinical study, a utilization registry of Avance Nerve Graft. As of December 31, 2019, six publications and more than 65 scientific conference presentations have been generated to date from the registry. The RANGER Study is an observational study in current enrollment. It is designed to allow enrollment of up to a total of 5,000 subjects over the next several years. The follow-up for the RANGER Study is
standard of care with a target of up to 36 months post peripheral nerve repair. At the time of the BLA submission, Axogen will submit an interim report in the BLA for the enrolled subjects. In 2013, a Matched Autograft and Tube Conduit Case Control Cohort Arm of RANGER (“MATCHSM”) comparative arm was added. Subjects treated with Avance Nerve Graft were matched to the peripheral nerve autograft or tube conduit treated groups based on size of gap length. We anticipate having approximately 300 repairs with peripheral nerve autograft and/or tube conduit in the comparative arm.
Axogen created an additional RANGER Study arm called Sensation Neurotization Outcomes for Women (“Sensation-NOW”). This registry cohort is designed to assess breast sensation following reconstruction with or without neurotization. The study is currently enrolling and is designed to enroll up to 2,000 subjects who have undergone mastectomy and breast reconstruction.
The RANGER Study database is also utilized to monitor different nerve repair techniques. As part of this, Axogen utilizes the database to support clinical evidence submissions for Axoguard and Avance Nerve Graft.
Axogen has worked with leading institutions, researchers and surgeons to support innovation in the field of surgical peripheral nerve repair. Axogen believes that RANGER is currently the largest multi-center observational clinical study conducted in peripheral nerve gap repair. Axogen’s ongoing RECON study will also continue our clinical work, providing a new multi-center, prospective, randomized, clinical study on Avance Nerve Graft. The January 2012 edition of Microsurgery, November 2012 edition of The Journal of Hand Surgery June 2015 edition of Journal of Reconstructive Microsurgery, the January 2017 edition of HAND and the March 2019 edition of Plastic and Reconstructive Surgery Global, each contain an article summarizing RANGER study results (Brooks, et al. Processed nerve allografts for peripheral nerve reconstruction: A multicenter study of utilization and outcomes in sensory, mixed, and motor nerve reconstructions. Microsurgery, 2012 Jan; 32(1): 1-14; and Cho, et al. Functional outcome following nerve repair in the upper extremity using processed nerve allograft. J Hand Surg Am 2012 Nov; 37(11):2340-9 and Rinker, et al. Outcomes of short-gap sensory nerve injuries reconstructed with processed nerve allografts from a multicenter registry study. J Reconstr Microsurg 2015 Jun; 31(5):384-90). Brooks et al. reported on 55 Avance Nerve Graft nerve repairs and resulted in meaningful motor and sensory recovery in 87% of nerve transections between 5 and 50 mm and no safety concerns were identified. Cho et al. showed that Avance Nerve Graft provided 89% meaningful recovery for digital nerve injuries, and 80% meaningful recovery for motor function in mixed and motor nerve injuries and no safety concerns were identified. An expanded data milestone was presented at the 5th Vienna Symposium on Surgery of Peripheral Nerves in June 2014 and such expanded RANGER data provides that of the injuries repaired with the Avance Nerve Graft 90%, 80% and 87% achieved meaningful recovery for gap lengths of 5-14 mm, 15-29 mm and 30-65 mm, respectively. Rinker et al. reported on a subgroup from the RANGER registry on sensory recovery of short-gap digital nerve repairs between 5-15 mm using Avance Nerve Graft. The study cohort included 24 subjects with 37 digital nerve repairs. Outcomes analysis demonstrated meaningful levels of sensory recovery. No implant related adverse experiences were reported in any of such reports. In a second publication, Rinker et al. reported on a subgroup from RANGER with nerve gaps >25 mm. They found that in the population of 28 subjects, meaningful sensory recovery was reported in 86% of the repairs and no safety concerns were reported. Isaacs and Safa reported on a subgroup of subjects with large diameter nerve injuries repaired with Avance Nerve Graft. The study included 15 nerve repairs with 4-5 mm diameter Avance Nerve Grafts. Outcomes analysis found that meaningful levels of sensory and motor function were achieved and no safety concerns were reported. Safa et al 2019., reported on functional motor recovery after repair with AvanceNerve Graft. The study is a cohort of the RANGER Registry Program, and included 22 nerve repairs with sufficient follow up time to assess the motor function associated with the injured nerve. The authors found that 73% of the repairs returned meaningful motor function and no safety concerns were identified.
The following describes available clinical outcomes data from published papers on the leading synthetic and collagen conduit. Published papers on the leading synthetic collagen conduit by Weber, et al., 2000 and Wangensteen and Kalliainen, 2009, showed meaningful improvement: 74% in sensory nerves and 43% in sensory, mixed and motor nerves, respectively, of cases bridging a gap in the particular type of nerve. A paper published by Haug, et al., 2013 on the leading synthetic and collagen conduit showed meaningful improvement in 40% sensory nerves using the static 2-point discrimination test. Autograft studies where autograft and direct repair or direct suture were tested by Weber, et al., 2000, Kim and Kline 2001-2006, Frykman and Gramyk, 1991, Frykman and Gramyk, 1991 and Kallio, 1993, as interpreted by Brooks et al. 2012, reported meaningful recovery: 86% in sensory nerves, 67-86% in sensory and mixed
nerves, 80% in sensory nerves, 75-78% mixed nerves and 70% sensory nerves, respectively, of cases bridging a gap in the particular type of nerve. Published papers by Kim and Kline 2001-2006 and Frykman and Gramyk, 1991 reported successful recovery in 75% and 78% of mixed and motor nerves, respectively. A study by Kallio et al., 1993 showed recovery in 67% of mixed and motor nerves where recovery was defined as results indicating a classification of useful or better motor and sensory recovery.
The RECON study is a prospective, randomized, controlled, patient and evaluator blinded, comparative study of Avance Nerve Graft and Collagen Nerve Cuffs in the repair of peripheral nerve transections. The study is a non-inferiority study designed to assess the outcome of peripheral nerve repair originally in approximately 170 subjects in up to 20 centers. Subjects will be followed over the course of 12 months to assess safety and efficacy outcomes with assessments being performed at various defined intervals up to 12 months. The study completed initial subject enrollment in January 2019. As required by the SPA and agreed to by FDA and Axogen, an independent statistical analysis was conducted to determine if greater study enrollment is appropriate to maintain the planned statistical power of the study. As part of that review, the targeted enrollment was increased to 220 subjects, and the number of participating centers was increased to up to 25. Enrollment of the additional subjects is underway and no outcome data is available at this time.
CHANGE was a prospective randomized controlled pilot study of nerve cuffs and Avance Nerve Graft for the reconstruction of peripheral nerve transections in male and female subjects that sustained injury to at least one nerve in the hand, distal to the superficial palmar arch that after resection resulted in a nerve gap of >5 mm and ≤20 mm. The study results were published by Means et al in the June 2016 edition of HAND. The authorsrandomized 23 participants with 31 digital nerve injuries. Sixteen participants with 20 repairs had at least six months of follow-up while 12-month follow-up was available for 15 repairs. There were no significant differences in participant and baseline characteristics between treatment groups. The average static two-point discrimination (s2PD) for the Avance Nerve Graft was 5 ± 1 mm (n = 6) compared with 8 ± 5 mm (n = 9) for hollow conduits. All injuries randomized to processed nerve allograft returned some degree of s2PD as compared with 75% of the repairs in the conduit group. The authors concluded that in this pilot study, patients whose digital nerve reconstructions were performed with processed nerve allografts had significantly improved and more consistent functional sensory outcomes compared with hollow conduits.
A pilot study on the repair of the cavernous nerves in prostate cancer patients at Vanderbilt with 24-month follow-up has been completed. A total of 12 subjects were enrolled in this single center study. The primary objective of this study was to assess the technical feasibility of using Avance Nerve Graft for neurovascular bundle (NVB) reconstruction during Robotic Assisted Laparoscopic Prostatectomy (RALP). The secondary objective of the study was to assess the long-term safety and efficacy of NVB reconstruction by assessing quality of life and erectile function through validated questionnaires 24 months post-repair.
ASM-CP-001 is a registry study to evaluate the role of Avive Soft Tissue Membrane in the management of nerve injury following acute trauma. The study is designed to collect safety, functional and healthcare economic outcomes data in a select set of acute trauma injuries. The study is designed to enroll up to 200 subjectshas enrolled an initial tranche of the planned subjects. Additional enrollment is on hold while the initial pilot subjects complete their study evaluations.
Axogen is conducting REPOSE, a two-phase study comparing standard neurectomy to Axoguard Nerve Cap, a porcine small intestine submucosa-based nerve termination cap which leverages Axogen’s chambered technology to aid in the management of symptomatic or painful neuroma. The first phase, a non-randomized pilot has completed enrollment. The second phase, a prospective, randomized controlled study planned, is actively enrolling. Overall enrollment is targeted at enrollment of up to 101 subjects, with approximately 15 in the open pilot phase followed by 86 in the randomized phase. The study will assess pain scores, quality of life and health outcomes over a 12-month follow-up period. Enrollment has been initiated.
In addition to these clinical research programs, Axogen is developing additional clinical trials in peripheral nerve repair, including mixed and motor nerve repair, breast neurotization and pain.
Clinical trials are subject to extensive recordkeeping and reporting requirements. Axogen’s clinical trials must be conducted under the oversight of an IRB for the relevant clinical trial sites and must comply with FDA regulations, including but not limited to, those relating to good clinical practices.Good Clinical Practices. Axogen is also required to obtain the patients’ written, informed consent in a form and substance that complies with both FDA requirements and state and federal privacy and human subject protection regulations. Axogen, the FDA or the IRB may suspend a clinical trial at any time for various reasons, including a belief that the risks to study subjects outweigh the anticipated benefits. Even if a trial is completed, the results of clinical testing may not adequately demonstrate the safety and efficacy of the biological product or device, or may otherwise not be sufficient to obtain FDA approval to market the product in the U.S. Similarly, in Europe,the E.U., the clinical study for a medicine product must be authorized by the Competent Authority in each Member State in whichwhere the clinical trial is to be conducted and must receive a favorable opinion from an ethics committee. See Risk"Risk Factors - Clinical trials can be long, expensive and results are ultimately uncertain, which could jeopardize Axogen’sour ability to obtain regulatory approval and continue to market itsour Avance Nerve Graft product.product".
RANGER
The RANGER study is an observational study currently in enrollment and is a utilization registry of Avance Nerve Graft. As of December 31, 2021, eleven publications and more than 70 scientific conference presentations have been generated to date from the study. RANGER is designed to allow up to 2,500 subjects. An additional 500 subjects are allowed to be enrolled in Addendum 1, MATCH, and 2,000 enrolled in Addendum 2, Sensation-NOW. Sensation-NOW is a clinical study cohort designed to assess breast sensation following reconstruction with or without neurotization. Axogen resumed enrollment in 2021 at select centers after pausing enrollment due to COVID-19 in 2020. The follow-up for the RANGER study is standard of care with a target of up to 36 months post peripheral nerve repair. At the time of BLA submission for Avance Nerve Graft, Axogen will provide to the FDA Real World Evidence based primarily on Real World Data from the RANGER study data for all qualifying peripheral nerve repairs.
The RANGER study database is also utilized to monitor different nerve repair techniques. As part of this, Axogen utilizes the database to support additional regulatory submissions for the Axoguard products and Avance Nerve Graft.
Axogen has worked with leading institutions, researchers, and surgeons to support innovation in the field of surgical peripheral nerve repair. Axogen believes that RANGER is currently the largest multi-center observational clinical study conducted in peripheral nerve gap repair. Axogen’s RECON study will also continue our clinical work, providing a new multi-center, prospective, randomized, clinical study on Avance Nerve Graft. Various reviewers of the RANGER study have found Avance Nerve Graft nerve repairs resulted in meaningful motor and sensory recovery and reduced pain following neuroma excision and reconstruction with no safety concerns identified.
RECON
The RECON study is a prospective, randomized, controlled, patient and evaluator blinded, comparative study of Avance Nerve Graft and Collagen Nerve Cuffs (manufactured conduits) in the repair of peripheral nerve transections in digital nerves with gaps of 5 to 25mm. The study is designed to assess the outcomes of peripheral nerve repair in approximately 170 subjects in up to 20 centers. Subjects were intraoperatively randomized in a 1:1 ratio after stratification by length of the nerve injury by gap length into short gap (5-14mm) and long gap (15-25mm) categories. The primary objective of the study is to evaluate the safety and efficacy of Avance Nerve Graft for non-inferiority and if met, superiority, of static two-point discrimination, a measure of sensory function, at twelve months as compared to nerve cuffs. Given the pooled standard deviation assumptions and a non-inferiority margin of 2mm, approximately 88 patients per treatment group are required to assess non-inferiority with at least 83% power. In addition to non-inferiority, a minimum treatment effect is required to be demonstrated. Based on an agreement with the FDA in the original protocol and an independent statistical analysis of the pooled standard deviation, the number of subjects was increased to 220 in up to 25 centers. Subjects were followed over the course of 12 months (based on the agreed-upon protocol, subjects have up to an additional three months to complete trial requirements) to assess safety and efficacy outcomes with assessments performed at various defined intervals up to 12 months. The study completed subject enrollment in July 2020. Subject follow-up was completed in August 2021. The study remains on schedule with a top line study data read-out expected in the second quarter of 2022, followed by filing of the BLA submission in 2023.
REPOSE
Axogen is conducting a multicenter, prospective, randomized, and subject blinded study of Axoguard Nerve Cap as compared to neurectomy for the treatment of systematic neuroma ("REPOSE"). REPOSE is a two-phase study comparing standard neurectomy to Axoguard Nerve Cap, which leverages Axogen’s chambered technology to aid in the management of symptomatic neuromas. The first phase, a non-randomized pilot has completed enrollment and one-year follow-up. The second phase, a prospective, randomized controlled study, is actively enrolling. Overall enrollment is designed to target 101 subjects with 15 in the first pilot phase followed by up to 86 in the randomized, comparative phase. The study will assess pain scores, quality of life, neuroma recurrence, and health outcomes over a 12-month follow-up period.
ReThink Pain
ReThink Pain is a prospective and retrospective, multicenter, observational clinical study of patients considering surgical treatment for chronic neuropathic pain. Enrollment resumed in 2021 after pausing in 2020 due to COVID-19. ReThink Pain evaluates a patient's healthcare journey and pain history through detailed medical history and record review. For patients who undergo surgical treatment for pain, standardized outcome measures such as post-operative pain, pain medication usage, quality of life outcomes, and functional outcome of associated nerves as compared to pre-operative levels will be assessed.
There are numerous regulatory requirements that apply after a product is cleared or approved. For medical devices, these include, but are not limited to:to the FDA’s regulations for device labeling (21 CFR Part 801), medical device reporting (21 CFR Part 803), reporting of corrections and removals (21 CFR Part 806), establishment of registration and device listing requirements (21 C.F.R.CFR Part 807); and compliance with the Quality System Regulation (“QSR”)QSR per 21 CFR Part 820. Distribution of medical devices is also subject to license/registration requirements in some states. For tissue and biologic products, the regulatory requirements include: the FDA’s registration and listing requirements, donor eligibility requirements and compliance with Good Tissue Practices (“GTP”)GTP in 21 CFR Part 1271 for human tissue products, compliance with the FDA’s cGMP in 21 CFR Parts 210, 211, and 600 for licensed biological products, and post-market BLA requirements (21 CFR Part 601). Among other things, these regulations require manufacturers, including third party manufacturers to:
•Follow stringent design, testing, control, documentation, and other quality assurance procedures during all aspects of the manufacturing process;
| ● | follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the manufacturing process; |
| ● | comply with labeling regulations and FDA prohibitions against the false or misleading promotion or the promotion of products for uncleared, unapproved or off-label uses or indications; |
| ● | comply with requirements to obtain clearance or approval for certain changes affecting the product, including changes to the product’s manufacturing, labeling, or intended use; |
| ● | report to the FDA certain adverse events, adverse reactions and deviations: (a) for medical devices, a report to FDA is required if the device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction were to recur; (b) for biologics, a deviation from current GMP or an unexpected or unforeseeable event that may affect the safety, purity, or potency of the product must be reported; and (c) for human tissue products, FDA requires reporting of certain adverse reactions involving a communicable disease related to an HCT/P that the company made available for distribution; |
| ● | comply with post-approval restrictions or conditions, including post-approval study commitments and post-market safety and annual reporting requirements; |
| ● | follow post-market surveillance regulations that may apply when necessary to protect the public health or to provide additional safety and effectiveness data for the device; and |
| ● | follow requirements to issue notices of correction or removal, or conduct market withdrawals or recalls where quality or other issues arise. |
•Comply with labeling regulations and FDA prohibitions against the false or misleading promotion or the promotion of products for uncleared, unapproved or off-label uses, or indications;
•Comply with requirements to obtain clearance or approval for certain changes affecting the product, including changes to the product’s manufacturing, labeling, or intended use;
•Report to the FDA certain adverse events, adverse reactions, and deviations;
•Comply with post-approval restrictions or conditions, including post-approval study commitments and post-market safety and annual reporting requirements;
•Follow post-market surveillance regulations that may apply when necessary to protect the public health or to provide additional safety and effectiveness data for the device; and
•Follow requirements to issue notices of correction or removal, or conduct market withdrawals, or recalls where quality or other issues arise.
Axogen has not received any reports of adverse events concerningwhere the event was determined to be product related for Avance Nerve Graft or Avive Soft Tissue Membrane products. EightAlthough Axogen has voluntarily suspended marketing of Avive, the suspension was not due to a recall or any safety concerns. Nine adverse events have been reported by Cook Biotech for the Axoguard products (one each in 2013, 2014, 2015, 2016, and 20162020; and two each in 2017 2018 and 2019). Axogen reported three biological deviations (two in 2018 and one (1) biological deviation in 20192019) for quality system issues related to human tissue distribution (no patient safety issues were involved). In December 2020, a user facility presented a Medwatch report for Avance Nerve Graft for a sizing issue and potential delay in procedure. Axogen follow up indicated that there was no delay in procedure and Axogen is filing subsequent information to the FDA on this event. Axogen has not had to submit any Medical Device Reports (“MDRs”) or tissue adverse reaction reports to the FDA. Although Axogen’s Axoguard products have had just eightnine adverse events reported to date, there may have been other incidents, including patient deaths, whichthat may have occurred during procedures utilizing Axogen’s products without Axogen being aware of any such incidents. In addition, there can be no assurance that in the future Axogen’s products will not cause or
contribute to an adverse event that would require Axogen to submit MDRs, biological deviation reports, or tissue adverse reaction reports to the FDA.
The
In addition to the FDA, the advertising and promotion of medical products are also regulated by the Federal Trade Commission and
in some instances by state regulatory and enforcement authorities. Recently, some promotional activities for FDA-regulated products have been the subject of enforcement action brought under healthcare reimbursement laws and consumer protection statutes. In addition, under the Federal Lanham Act and similar state laws, competitors, and others can initiate litigation relating to advertising claims.
All Axogen
islocations are properly registered with the FDA as
a tissue
establishmentestablishments for
the Avance Nerve Graft and Avive Soft Tissue Membrane. The FDA has broad post-market and regulatory enforcement powers. Axogen is subject to unannounced inspections by the FDA to determine compliance with the GTP, GMP, and other regulations, and these inspections may also include
thesuppliers' manufacturing
facilities of suppliers.
facilities.
Failure by Axogen or by Axogen’s suppliers to comply with applicable regulatory requirements can result in enforcement action by the FDA or other federal or state authorities, which may include any of the following sanctions, among others:
• | ● | warning letters, fines, injunctions, consent decrees and civil penalties; |
| ● | customer notifications, repair, replacement, refunds, recall or seizure of our products; |
| ● | operating restrictions, partial suspension or total shutdown of production; |
| ● | suspension or termination of our clinical trials; |
| ● | refusing our PMA or BLA for new products, new intended uses or modifications to existing products; |
| ● | withdrawing or spending premarket approvals that have already been granted; and |
Warning letters, fines, injunctions, consent decrees and civil penalties;
•Customer notifications, repair, replacement, refunds, recall or seizure of our products;
•Operating restrictions, partial suspension, or total shutdown of production;
•Suspension or termination of our clinical trials;
•Refusing our PMA or BLA for new products, new intended uses, or modifications to existing products;
•Withdrawing or spending pre-market approvals that have already been granted; and
•Criminal prosecution.
Education Grants, U.S. Anti-kickback, False Claims and Other Healthcare Fraud and Abuse Laws
A medical product manufacturer may provide financial or in-kind support, including support by way of grants, to
third-partiesthird parties for the purpose of conducting medical educational activities. If these supported activities are considered by the FDA to be independent of the manufacturer, then the activities fall outside the FDA restrictions on promotion to which the manufacturer is subject.
The FDA considers several factors in determining whether an educational event or activity is independent from the substantive influence of the product manufacturer and therefore non-promotional, including, but not limited to, the following:
| ● | whether the intent of the funded activity is to present clearly defined educational content, free from commercial influence or bias; |
| ● | whether the third-party grant recipient and not the manufacturer has maintained control over selecting the faculty, speakers, audience, program content and materials; |
| ● | whether the program focuses on a single product of the manufacturer without a discussion of other relevant existing competitive products or treatment options; |
| ● | whether there was meaningful disclosure to the audience, at the time of the program, regarding the manufacturer’s funding or other support of the program, any significant relationships between the provider, presenters, or speakers and the supporting manufacturer; and whether any unapproved uses will be discussed; |
| ● | whether there are legal, business, or other relationships between the supporting manufacturer and provider or its employees that could enable the supporting manufacturer to exert influence over the content of the program; |
| ● | whether the individuals employed by the provider and involved in designing or conducting the educational activities are also involved in advising or assisting the company with respect to sales or marketing; |
| ● | whether the information about the company’s products is further disseminated after the initial program, by or at the direction of the company, other than in response to an unsolicited request or through an independent provider; and |
| ● | whether the provider is compliant with standards for independence, balance, objectivity, and scientific rigor when putting on ostensibly independent educational programs. |
Axogen seeks to ensure that the educational activities it supports through its grants program are in accordance with thesethe appropriate criteria for independent educational activities. However, Axogen cannot provide assurance that the FDA or other government authorities would view the programs supported as being independent.
Fraud, Abuse and False Claims
Axogen is directly and indirectly subject to various federal and state laws governing relationships with healthcare providers and pertaining to healthcare fraud and abuse, including anti-kickback laws. In particular, the U.S. Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, offering, receiving, or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing, arranging for or recommending a good or service for which payment may be made in whole or part under federal healthcare programs, such as the Medicare and Medicaid programs. Penalties for violations could include criminal penalties and civil sanctions such as fines, imprisonment and possible exclusion from Medicare, Medicaid, and other federal healthcare programs. In implementing the statute, the Office of Inspector General of the U.S. Department of Health and Human Services (“OIG”) has issued a series of regulations, known as “safe harbors.” These safe harbors set forth provisions that, if all their applicable requirements are met, will assure healthcare providers and other parties that they will not be prosecuted under the Anti-Kickback Statute for activities that fit within a safe harbor. The failure of a transaction or arrangement to fit precisely within one or more safe harbors does not necessarily mean that it is illegal or that prosecution will be pursued. However, conduct and business arrangements that do not fully satisfy each applicable element of a safe harbor may result in increased scrutiny by government enforcement authorities, such as the OIG, and may be “at risk” activities unless a favorable advisory opinion is obtained from the OIG.
The Federal False Claims Act (“FCA”) imposes civil liability on any person or entity that submits, or causes the submission of, a false or fraudulent claim to the U.S. government. Damages under the FCA can be significant and consist of the imposition of fines and penalties. The FCA also allows a private individual or entity with knowledge of past or present fraud against the federal government to sue on behalf of the government to recover the civil penalties and treble damages. The
DOJU.S. Department of Justice ("DOJ") has previously alleged that the marketing and promotional practices of pharmaceutical and medical device manufacturers
includedincluding the off-label promotion of products or the payment of prohibited kickbacks to doctors violated the FCA resulting in the submission of improper claims to federal and state healthcare entitlement programs such as Medicaid.
In certain cases, manufacturers have entered into criminal and civil settlements with the federal government under which they entered into plea agreements, paid substantial monetary amounts and entered into corporate integrity agreements that require, among other things, substantial reporting and remedial actions going forward.
AdvaMed is one of the primary voluntary U.S. trade associations for medical device manufacturers. This association has established guidelines and protocols for medical device manufacturers in their relationships with healthcare professionals on matters, including research and development, product training and education, grants and charitable contributions, support of third-party educational conferences, and consulting arrangements. Adoption of the AdvaMed Code by a medical device manufacturer is voluntary, and while the OIG and other federal and state healthcare regulatory agencies encourage its adoption, they do not view adoption of the AdvaMed Code as proof of compliance with applicable laws. Axogen has incorporated the principles of the AdvaMed Code in its standard operating procedures, sales force training programs, and relationships with doctors. Key to the underlying principles of the AdvaMed Code is the need to focus the relationships between manufacturers and healthcare professionals on matters of training, education and scientific research, and limit payments between manufacturers and healthcare professionals to fair market value for legitimate services provided and payment of modest meal, travel, and other expenses for a healthcare professional under limited circumstances. Axogen has incorporated these principles into its relationships with healthcare professionals
under its consulting agreements, payment of travel and lodging expenses, research and educational grant procedures and sponsorship of third-party conferences. In addition, Axogen has conducted and will continue to conduct training sessions on these principles. Finally, the Sunshine act,Act, as defined below, imposes additional reporting and disclosure requirements on Axogen for any “transfer of value” made or distributed to physicians and teaching hospitals, as well as reporting of certain physician ownership interests. Axogen cannot provide any assurance that regulatory or enforcement authorities will view its relationships with physicians or policies as being in compliance with applicable regulations and laws.
Regulation Outside of the
United States
U.S.
Distribution and sales of medical products outside of the U.S. are subject to foreign governmental regulations that vary substantially from country to country.
The time required to obtain certification or approval by a foreign country may be longer or shorter than that required for FDA clearance or approval and the requirements may be different.
There are restrictions under U.S. law on the export
from the U.S. of medical devices and biological
productproducts that cannot be legally distributed in the U.S.
If a Class I or Class II device does not have 510(k) clearance andThe FDA has set forth certain requirements for the
manufacturer reasonably believes that the device could obtain 510(k) clearance in the U.S., then the device can be exported to a foreign country for commercial marketing without the submissionexport of
any type of export request or prior FDA approval if (i) the device is not sold or offered for sale in the U.S., (ii) is labeled for export only and (iii) satisfies certain criteria relating primarily to specificationsdevices outside of the
foreign purchaserU.S. depending on the class of device and
compliance with the laws of the country to which it is being exported, known as Importing Country Criteria. An unapproved Class III device can be exported if it (i) complies with the criteria discussed above for devices that could obtain 510(k) clearance, (ii) meets certain other quality and labeling requirements, and (iii) has a valid marketing authorization from one of a list of countries listed in the FD&C Act. If an unapproved Class III device does not have a valid marketing authorization from one of the listed countries, an export permit from theits FDA is required in order to export it. An unapproved biological product can be exported without submitting an export request to FDA if the product has received a marketing authorization in one of a list of countries listed in the FD&C Act and it meets applicable requirements of the FD&C Act and the laws of the country to which it is exported. An investigational biological product may also be exported under an IND if a listed investigator is in a foreign country and certain requirements specified in FDA’s regulations are met.approval. Axogen currently believes it complies with applicable regulations when exporting its products and Axogen intends to continue such compliance in the event there are any regulatory changes regarding its products in the United States.
U.S.
The primary regulatory body in Europe is the E.U. which has adopted numerous directives and promulgated voluntary standards regulating the design, manufacture and labeling of, and clinical trials and adverse event reporting for, medical devices. Devices that comply with the requirements of a relevant directive will be entitled to bear CE marking, indicating that the device conforms to the essential requirements of the applicable directives and
accordingly, can be commercially distributed throughout the member states of the E.U. and other countries that comply with these directives. The method for assessing conformity varies depending on the type and class of the device, but normally involves an assessment by the manufacturer and a third-party assessment by a notified body, an independent and neutral institution appointed by a country to conduct the conformity assessment. This third-party assessment may consist of an audit of the manufacturer’s quality system and specific testing of the manufacturer’s device. Such an assessment is required for a manufacturer to commercially distribute the product throughout these countries. In the second quarter of 2014, Axogen’s Quality System became registered to ISO 13485 for Receipt, Handling, Storage and Distribution of
Medical Devices related to nerve repair.
Axoguard Nerve Connector and Axoguard Nerve Protector and Axogen will maintain the registration through 2023.
Cook Biotech is responsible for all regulatory filings for the Axoguard Nerve Connector and Axoguard Nerve Protector products, including international registrations. Axogen works with Cook Biotech by providingprovides the countries for Cook Biotech to register or get approval for these Axoguard products.with, and Cook Biotech prepares and submits the product filing documentation and submits this documentation to the Ministry of Health (“MOH”) for the country. Each country or region has its own regulations and the documentation required for submission varies. It typically takes less than nine months from the initiation of the project to obtain clearance in a given country or region. To date, the Axoguard Nerve Connector and Axoguard Nerve Protector product lines were registered in May 2013 in Canada for distribution and inApril 2013 the product lines were awarded the CE Mark allowing distribution into the E.U. and other countries that accept the CE Mark. Cook Biotech is currently renewingreceived the Axoguard productrenewal of the CE Mark for Axoguard Nerve Connector and although we believe such renewal is imminent, it has taken longer than anticipated andAxoguard Nerve Protector in May 2021.
could experience continued delays. Until such renewal Axogen is able to sell only those Axoguard products that are currently in inventory in the E.U., which inventory has not been sufficient to satisfy all product sales, and will no longer be available after February, 2020. Although Axoguard product revenue in Europe is not material, the inability to supply physicians who wish to use Axoguard could have a negative effect on Axogen’s planned expansion in the E.U.
In addition, the new European Medical Device Regulation (“EUE.U. MDR”) passed in the European Parliament on April 5, 2017 and went into effect on May 25, 2017, replacing the Medical Device Directive.2017. The EUE.U. MDR is an extensive reform of the rules that governgoverning the medical device industry in Europe. Under this regulation, manufacturers will have three (3) yearshad through May 2021 to comply with a broad set of new rules for almost every kind of medical device. The EUE.U. MDR will requirerequires changes in the clinical evidence required for medical devices, post-market clinical follow-up evidence, annual reporting of safety information for Class III products, and bi-annual reporting for Class II products, Unique Device Identification (“UDI”) for all products, submission of core data elements to a European UDI database prior to placement of a device on the market, reclassification of medical devices, and multiple other labeling changes.
Under the new EU MDR rules, medical device companies will have to, among other things. do the following:
| ● | provide significantly more clinical evidence to get new products to market and even to keep existing products on the market; |
| ● | make changes to product labeling and make certain product data available to the public; and |
| ● | conduct product portfolio assessments to determine the impact of the EU MDR on the Company's margins. |
Overall, medical device companies can expect longer lead times to obtain product registrations
(CE(i.e., CE Mark Certification) in the
EUE.U. and a substantially costlier pathway to compliance in the
EU.E.U. We are not yet able to determine the costs of complying with these regulations, how the
EUE.U. will interpret and enforce them, what the timelines for approvals of products will be and the overall effect of the
EUE.U. MDR on the marketplace. Given the significant additional pre-market and post-market requirements imposed by the
EUE.U. MDR, the overall impact of these new rules could have a material, adverse effect on the Company’s
revenuesrevenue and expenses.
The UK left the E.U. in January 2020.
From now until December 31, 2020, E.U. Law will remain applicable thus the placement on the market of medical devices may continue uninterrupted on both sides of the English Channel and the notified body certificates will remain valid while the UK and E.U. negotiate new arrangements. Axogen registers its human tissue products in each individual E.U. country and each distributor in the UK has import authority for Axogen’s human tissue product. It is expected that
a licensed UK establishments that import or export tissues or cells will need written agreements with the relevant E.U. licensed establishments to continue importing and exporting with the E.U. As Axogen ships directly to the UK from the U.S., we
currently expect no
delaydelays in shipment of human tissue products into the UK in
2020.2021. Further, the RANGER clinical trial being performed at select hospitals in the UK
wouldwas not
be affected by Brexit
(defined below in "Risk Factors - Regulation Outside of the U.S.") as long as the products continue to come directly from the U.S.
At this time it is unclear whether Axoguard Beginning in January 2021, new changes became effective as the transition period for the UK’s exit from the E.U. ended. Specifically, all medical devices placed into the UK market had to be registered, subject to applicable grace periods, with the Medicines and Healthcare products Regulatory Agency ("MHRA"), will need to appoint a newUK Responsible Person, and separate marketing authorizationcomply with additional product marking and conformity assessment requirements. Medical devices
must be registered with the MHRA if they are being placed in the UK
post-Brexit. According to recent guidance issued bymarket after May 1, 2021. Cook Biotech is responsible for appointing the UK
government, any new rules will take effect on Jan. 1, 2021Responsible Person and
companies can “useregistering Axoguard Nerve Connector and Axoguard Nerve Protector in the
CE marking” if they are placing goods on the UK market during the transition period, currently expected to last through 2020. Legislation has been recently proposed in Parliament that would update the UK regulatory framework for human and veterinary medicines, clinical trials and medical devices. We anticipate new rules to be developed over the next several months.
UK.
Tissue products are not currently regulated under the CE Mark
Axogen is responsible for all regulatory filings for Avance Nerve Graft and Avive Soft Tissue Membrane
including international registrations.(which we have voluntarily suspended from the market). To obtain
international approvals, Axogen will prepare the product filing documentation and submit this documentation to the
Ministry of Health (“MOH”)MOH for a country.
Although some standards of harmonization exist, each country in which Axogen conducts business has its own specific regulatory requirements.requirements, which are dynamic in nature and continually changing. Axogen procures and processes its tissue for the Avance Nerve Graft and Avive Soft Tissue Membrane in the U.S., and markets the Avance Nerve Graft in Canada, the United Kingdom,UK, and certain other countries under compliance with the individual country regulations. These requirements are dynamic in nature and, as
such, are continually changing. New regulations may be promulgated at any time and with limited notice. Axogen willconducts a regulatory review the regulations at the time of submission of the product dossier for regulatory review.dossier. This review involves reviewing the appropriate MOH regulations, discussion with in-country distributors and use of consultants. It typically takes less than nine months from the initiation of the product to develop a product dossier (specific for that country), submission of the documentation and MOH review of the product filing. While Axogen believes that it is in compliance with all existing pertinent international and domestic laws and regulations, there can be no assurance that changes in governmental administrations and regulations will not negatively impact Axogen’s operations. Avive Soft Tissue Membrane is currently available in the U.S. and has received regulatory registration allowing for distribution in both Canada, UK, and Austria.
The FDA and international regulatory bodies conduct periodic compliance inspections of Axogen’s U.S. processing facilities.
All of Axogen’s
operationslocations are
properly registered with CBER as
a tissue
establishment.establishments. Axogen is also accredited by the AATB and is licensed in the states of Florida, New York, California, Maryland, Delaware, Oregon, and Illinois. Axogen believes that worldwide regulation of tissue products is likely to intensify as the international regulatory community focuses on the growing demand for these implant products and the attendant safety and efficacy issues of recipients. Changes in governing laws and regulations could have a material adverse effect on Axogen’s financial condition and results of operations. Axogen management further believes that it can help to mitigate this exposure by continuing to work closely with government and industry regulators.
EnvironmentalEnvironmental
Axogen’s products, as well as the chemicals used in processing
these products, are handled and disposed of in accordance with country-specific, federal, state, and local environmental regulations. Since 2007, Axogen has used outside third parties to perform all biohazard waste disposal.
Axogen contracts with independent, third parties to perform sterilization of its allografts. Because of the engagement of a third party to perform irradiation services, the requirements for compliance with radiation hazardous waste do not apply, and therefore Axogen does not anticipate that this engagement will have any material adverse effect upon its capital expenditures, results of operations or financial condition. However, Axogen is responsible for assuring that the service is
being performed in accordance with applicable regulations. Although Axogen believes it is in compliance with all applicable environmental regulations, the failure to fully comply with any such regulations could result in the imposition of penalties, fines
and/or sanctions
whichthat could have a material adverse effect on Axogen’s business.
Human Capital
As of December 31, 2021, we had approximately 451 total employees, including approximately 23 part-time employees and 428 full-time employees.Corporate History
On September 30, 2011, Axogen Corporation (“AC”),Of these employees, 228 work in sales and marketing, 79 work in corporate, 65 work in research and development and 56 work in operations. As of the date of this Annual Report on Form 10-K we have not had a Delaware corporation, completedwork stoppage and no employees are represented by a labor union.We believe our relationship with our employees is satisfactory.We encourage our employees to be effective stewards of the gift of human tissue. We believe in creating and maintaining a culture that encourages and rewards honesty, openness, and passionate debate among its business combinationemployees, respect is the foundation for communication and action, and patient safety is our first priority. In response to COVID-19, our top priority has been the health and safety of those we serve, including healthcare professionals and their patients, as well as our employees, communities, and suppliers.
The Compensation Committee of our board of directors (the "Board of Directors") has oversight of our culture and human capital management, including diversity, equity, and inclusion with LecTec Corporation (“LecTec”), respect to our employees.
Ta Minnesota corporation, in accordance with the termsble of an Agreement and Plan of Merger, dated as of May 31, 2011, by and among LecTec, Nerve Merger Sub Corp., a subsidiary of LecTec (“Merger Sub”), and AC, which the parties amended on August 9, 2011 and September 30, 2011 (as amended, the “Merger Agreement”). Pursuant to the Merger Agreement, Merger Sub merged with and into AC, with AC continuing after the merger as the surviving corporation and a wholly owned subsidiary of LecTec (the “Merger”). Immediately following the Merger, LecTec changed its name to Axogen, Inc. In October 2011, Axogen Inc. moved its corporate headquarter facilities (principal executive office) from Texarkana, Texas to Alachua, Florida.Contents
Available Information
Our website address is http://
www.Axogeninc.com.www.axogeninc.com. We have included our website address as an inactive textual reference only. We make available, free of charge through our website, our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file, such material, or furnish itsuch material to the SEC. We also similarly make available, free of charge on our website, the reports filed with the SEC by our executive officers, directors and 10% stockholdersshareholders pursuant to Section 16 under the Exchange Act as soon as reasonably practicable after copies of those filings are provided to us by those persons. We areReference to our website, or any other website, does not includingconstitute incorporation by reference of the information contained at http://www.Axogeninc.com, or at any other website.
Employees
At December 31, 2019, Axogen had approximately 394 total employees, including approximately 23 part-time employeeson the site and approximately 371 full-time employees. As of the dateshould not be considered part of this annual reportAnnual Report on Form 10-K Axogen has not had a work stoppage and no employees are represented by a labor union. Axogen believes its relationship with its employees is satisfactory.10-K.
Executive Officers of the Registrant
The following table lists the names and positions of the individuals who are, as of February
24, 2020,23, 2022, executive officers of Axogen:
| | | | | | | | |
Name |
| Title |
Karen Zaderej |
| Chairman, Chief Executive Officer and President |
Peter J. Mariani |
| Executive Vice President and Chief Financial Officer |
Gregory G. Freitag, JD, CPA
Bradley L. Ottinger |
| General Counsel and Director Chief Compliance Officer |
Eric A. Sandberg |
| Chief Commercial Officer |
Mark Friedman, Ph.D.
Maria Martinez |
| Vice President of Regulatory Affairs and Quality Assurance
Chief Human Resource Officer |
Maria Martinez
|
| Chief Human Resources Officer
|
Isabelle Billet |
| Chief Strategy and Business Development Officer |
Erick DeVinney
|
| Vice President of Clinical and Translational Sciences
|
Mike Donovan
|
| Vice President of Operations
|
Angelo G. Scopelianos, Ph.D. |
| Vice President ofChief Research and Development
Officer |
| Erick DeVinney | | Vice President, Peripheral Nerve Science and Clinical Innovations |
| Mike Donovan | | Vice President, Operations |
| Mark Friedman, Ph.D. | | Vice President, Regulatory Affairs and Policy |
Biographical information for each of our executive officers is included below.
Karen Zaderej, Chairman, Chief Executive Officer and President (Age
58)
60)
Ms. Zaderej joined Axogen Corporation in May 2006. Ms. Zaderej has served as
Axogen’sAxogen's President, Chief Executive Officer,
and a member of our
boardBoard of
directors (the “Board of Directors”)Directors since September 2011 and became
the Chairman of
ourthe Board of Directors in May 2018. She has served as
the Chief Executive Officer
of Axogen, and
as a member of
Axogen’s boardthe Board of
directorsDirectors of Axogen Corporation since May
2010. Ms. Zaderej joined Axogen in2010 and as Chief Operating Officer from October 2007 to May
20062010 and
served as Vice President of Marketing and Sales from May 2006 to October
2007 and as Chief Operating Officer from October 2007 to May 2010.2007. From October 2004 to May 2006, Ms. Zaderej worked for Zaderej Medical Consulting, a consulting firm she founded, which assisted medical device companies
inwith building and executing successful commercialization plans. From 1987 to 2004, Ms. Zaderej worked at Ethicon, Inc., a Johnson & Johnson
("J&J") company, where she held senior positions in marketing, business development,
and research & development,
as well as ran a manufacturing business.and manufacturing. Ms.
Zaderej is a Directormember of Viveve Medical, Inc., a public women's intimate health company. Ms. Zaderejthe University of Tampa Board of Trustees and the MedExec Women Board of Advisors. She has a MBA degree from the Kellogg Graduate School of Business and a BSB.S. degree in Chemical Engineering from Purdue University.
Peter
J. Mariani, Chief Financial Officer (Age
56)
58)
Mr. Mariani has been Axogen’s Chief Financial Officer since March 2016. Prior to joining Axogen, heHe brings more than 25 years of experience as a financial executive in private and public companies. He previously served as Chief Financial Officer of Lensar, Inc, a privately held laser refractive cataract surgery company, from July 2014 through January 2016, which was soldfollowing the sale of Lensar in December 2015. From June 2011 to June 2014, Mr. Marianihe served as Chief Financial Officer of Hansen Medical, a publicly traded medical device company developing robotic solutions for intravascular procedures. From 2007 through 2010, Mr. Marianihe served as Chief Financial Officer for two privately held companies: Harlan Laboratories (2007companies (Harlan Laboratories: 2007 – 2009);2009 and BMW Constructors (2009Constructors: 2009 – 2010). From 1994 through 2006, Mr. Marianihe served in various senior financial roles with Guidant Corporation, a publicly traded leader in the development and sale of medical devices for the treatment of cardiovascular disease. Mr. Mariani began his career with Guidant Corporation as Director of Corporate Financial Reporting where he supported the initial public offering of Guidant Corporation and ultimately served as Vice President, Controller and Chief Accounting Officer. Mr. Mariani’sHis experience at Guidant Corporation included two years as Director of Financial Reporting, Guidant Vascular Intervention
in Santa Clara, California, and four years in Tokyo, Japan, mostly as Vice President Finance and Administration whereAdministration. While in Japan, he helped to facilitate the conversion and scale of the Japan business from a
distributor network to a direct sales and marketing organization. Following the 2006 sale of Guidant
Corporation to Boston Scientific Corporation,
Mr. Marianihe co-led the initial integration of the two companies. From 1987 to 1994, Mr. Mariani worked with Ernst and Young, LLP, where he served a diverse client base as a Certified Public Accountant. Mr. Mariani received a
Bachelor of Science DegreeB.S. degree in Accounting from Indiana University.
Gregory G. Freitag,Bradley L. Ottinger, JD, CPA,General Counsel (Age 52)
Mr. Ottinger joined Axogen as General Counsel and
Director (Age 58)
Chief Compliance Officer on June 1, 2020. Prior to joining Axogen, Mr. Freitag, JD, CPA, has been Axogen’sOttinger most recently served as the Vice President, General Counsel, Chief Administrative Officer, and Secretary of MicroPort Orthopedics Inc., a wholly owned subsidiary of Shanghai-based MicroPort Scientific Corporation, a manufacturer of total hip and knee implants, from October 2017 to January 2020. From March 2015 until October 2017, Mr. Ottinger served as MicroPort’s Vice President, Legal, Compliance, and Human Resources, having joined MicroPort as Associate General Counsel in January 2014. From March 2015 until his departure, Mr. Ottinger also served as a member of our Board of Directors since September 2011. He was Axogen’s Chief Financial OfficerMicroPort Scientific’s Intercontinental Executive and Intercontinental Orthopedics Committees. Mr. Ottinger joined MicroPort following his tenure with Buckeye Technologies Inc., where from SeptemberDecember 2011 to MayJanuary 2014 he served as Associate General Counsel, providing a breadth of legal services to the enterprise, with a primary focus on corporate transactions. Prior to joining Buckeye Technologies, Mr. Ottinger concentrated his private practice in securities law/litigation and August 2015corporate transactions with both an international and domestic focus and used that foundation to March 2016,develop expertise in corporate compliance and its Senior Vice President Business Developmentethics with which he maintains professional certifications. Prior to attending law school, Mr. Ottinger worked with Accenture (formerly known as Andersen Consulting) as a Management Consultant and with First Horizon Bank (formerly known as First Tennessee Bank) in Human Resources delivering management development programs and managing succession planning. Mr. Ottinger holds a J.D. degree from May 2014 to October 2018. He was Chief Executive Officer, Chief Financial OfficerWashington University in St. Louis, a M.Ed. degree from Vanderbilt University, and a board member of LecTec Corporation, an IP licensing and holding company that merged with AxogenB.A. degree in September 2011, from June 2010 through September 2011. From May 2009 to the present, Mr. Freitag has been a principal of FreiMc, LLC, a healthcare and life science consulting and advisory firm he founded that provides strategic guidance and business development advisory services. Prior to founding FreiMc, LLC, Mr. Freitag was a Director of Business Development at Pfizer Health Solutions, a former subsidiary of Pfizer, Inc., from January 2006 to May 2009. From July 2005 to January 2006, Mr. Freitag worked for Guidant Corporation in its business development group. Prior to Guidant Corporation, Mr. Freitag was the Chief Executive Officer of HTS Biosystems, a biotechnology tools start-up company, from March 2000 until its sale in early 2005. Mr. Freitag was the Chief Operating Officer, Chief Financial Officer and General Counsel of Quantech, Ltd., a public point of care diagnostic company, from December 1995 to March 2000. Prior to that time, Mr. Freitag practiced corporate law in Minneapolis, Minnesota. Mr. Freitag is also a director of PDS Biotechnology Corporation (NASDAQ: PDSB), a clinical stage biopharmaceutical company developing immunotherapies for cancer and other disease areas such as infectious disease. Mr. Freitag holds a JDLiberal Arts from the University of Chicago and a BA Economics & Business and Law & Society from Macalester College, Minnesota.
Pennsylvania State University.
Eric A. Sandberg, Chief Commercial Officer (Age
55)
57)
Mr. Sandberg has served as Axogen’s Chief Commercial Officer since January 2019. From 2016 until joining Axogen, he served as the Chief Executive Officer of Visura Technologies, Inc., a cardiologist-founded medical device company. From 2016 until 2018, Mr. Sandberg served as the Chief Business Officer of Rhythm Therapeutics, Inc., an electrophysiologist-founded preclinical biotechnology company. From 2014 until 2016, he served as the President and Chief Executive Officer of Tangent Medical Technologies, Inc., ahas extensive leadership experience in commercializing medical device company. Mr. Sandberg also served as Senior Vice President, Sales at CardioDx, Inc., a molecular diagnostics company, from 2008 until 2013. Prior to joining CardioDx, Inc., Mr. Sandberg worked at Russell Reynolds Associates andtechnologies. He held leadership positions across sales, marketing, corporate accounts, and business development during a twelve plus year career at medical device manufacturers Guidant Corporation and Boston Scientific. While at Guidant, Mr. Sandberg currentlybuilt and led commercial teams that challenged the standard of care with innovative new solutions; including Guidant's first coronary stent system, which achieved market leadership in three months post launch and generated $700 million in sales within fifteen months. He built and led the sales organization for CardioDx, a genomic diagnostic company, spearheading efforts to launch and create market demand for the company’s inaugural product. As President and Chief Executive Officer for Tangent Medical Technologies, Mr. Sandberg led all aspects of the company as it commercialized an innovative intravenous catheter system. Most recently, he served as Chief Executive Officer for Visura Technologies, successfully leading the development, patenting, FDA process, and commercialization of a novel transesophageal echocardiography camera assist device system, and as Chief Business Officer of gene therapy company, Rhythm Therapeutics. Mr. Sandberg earned a MBA degree from Harvard Business School and a B.S. degree from Bradley University.
Maria Martinez, Chief Human Resource Officer (Age 54)
Ms. Martinez has served as Axogen’s Chief Human Resource Officer since October 2018. She brings more than 25 years of human resource ("HR") leadership experience to the Company. From January 2018 until joining Axogen, Ms. Martinez provided HR consulting and leadership services through her firm, MDM Consulting Services, LLC. From June 2014 to December 2017, Ms. Martinez served as Chief Human Resource Officer at HSNi, a $4 billion direct to consumer retail portfolio with more than 7,000 employees in nine locations. She held the Senior Vice President Talent Management role at HSNi from July 2010 until June 2014 when she was promoted. Ms. Martinez originally joined HSNi as Manager in 1995 and left the company in 2005 as Vice President, Human Resources. From September 2008 to June 2010, Ms. Martinez served as the Vice President, Human Resources for Laser Spine Institute, an organization dedicated to performing minimally invasive spine surgery, where she established the company’s human resources function and supported the expansion of the organization’s business to multiple sites. She held the role of Human Resources leader for Bausch & Lomb’s U.S. Pharmaceutical division from April 2007 to September 2008. From July 2005 to April 2007, she served as Sr. Director Human Resources for Darden Restaurants. Ms. Martinez serves as an observer on the Board of Directors of Visura Technologies,Good360, a national not for profit organization. Ms. Martinez earned a Master of Arts degree in Industrial/Organizational Psychology from Florida Institute of Technology, a B.S. degree in Psychology and a B.A. degree in French from the University of South Florida.
Isabelle Billet, Chief Strategy and Business Development Officer (Age 60)
Ms. Billet has served as Axogen’s Chief Strategy and Business Development Officer since October 2018. She brings more than 30 years of global medical device strategy, marketing, and business development experience to the Company. From July 2013 until joining the Company, Ms. Billet worked for IBHC Advisors LLC, a consulting firm she founded. IBHC assisted
medical device companies with developing organic and inorganic growth strategies and supported private equity firms on their investment strategy and due diligence. Ms. Billet worked at Cardinal Health, Inc. Mr. Sandbergfrom 2010 to 2013, where she served as Senior Vice President of Marketing and Innovation for the Medical segment focusing on their private brand portfolio development. She was Vice President Marketing and New Business Development for C.R. Bard Medical division from 2005 to 2010. She worked for J&J from 1992 to 2005, splitting her tenure between Advanced Sterilization Products and Ethicon, Inc. in positions of increasing responsibilities in marketing and new business development in France, Europe, and the U.S. Ms. Billet spent the first seven years of her career as the head pharmacist and material manager for a private hospital in France. Ms. Billet is a former member of the Clinical Innovations Board of Directors. She earned ana MBA degree from HarvardEM Lyon Business School, France and Cranfield School of Management, UK and a BachelorDoctorate in Pharmacy degree from Montpellier University in France.
Angelo G. Scopelianos, Ph.D., Chief Research and Development Officer (67)
Dr. Scopelianos has served as Axogen’s Chief Research and Development Officer since January 2021. From September 2018 to January 2021, he served as Axogen's Vice President of ScienceResearch and Development. From 2012 until joining Axogen, Dr. Scopelianos was an independent consultant specializing in medical devices. He began consulting after his retirement from a 24-year tenure at J&J. Dr. Scopelianos began at J&J in 1988 as section manager of Research and Development and held the escalating positions of Manager of Research and Development, Director of Research and Development, Vice President of Research and Development and finally from October 2010 to September 2012 Senior Vice President of Research and Development. He joined J&J after research leadership positions at EI Dupont de Nemours in Wilmington, Delaware, and Pennwalt Corporation. Dr. Scopelianos received his doctorate degree in mechanical engineeringorganic chemistry from BradleyPennsylvania State University, following completion of a B.S. degree from the State University of New York—Oneonta. He holds over 35 U.S. patents and numerous international patents, and his awards include the Outstanding Science Alumni Award by Pennsylvania State University and the Scientific Leadership Award in Peoria, IL.Biomaterials Science awarded by a consortium of New Jersey research universities.
Erick DeVinney, Vice President, Peripheral Nerve Science and Clinical Innovations (Age 46)
Mr. DeVinney has served as Axogen’s Vice President, Peripheral Nerve Science and Clinical Innovations since January 2014. From April 2007 until January 2014, Mr. DeVinney was the Director of Clinical and Translational Sciences for Axogen. Mr. DeVinney has over 18 years of experience in the successful planning and management of clinical trials. He has a diverse background, including research at a large academic facility and management of clinical operations for a medical device and pharmaceutical company. Mr. DeVinney has been involved in clinical research at Medical College of Virginia Hospitals, National Clinical Research, PRA International and Angiotech. He has been involved in the successful submission of eight IDE or new drug applications, as well as numerous premarket notification submissions ("510(k)s"). He has a B.S. degree in chemistry from Virginia Commonwealth University.
Mike Donovan, Vice President, Operations (Age 57)
Mr. Donovan has served as Axogen’s Vice President, Operations since September 2015. Prior to September 2015, Mr. Donovan was Axogen’s Director of Operations from January 2011 until September 2015. From 1988 to 2010, Mr. Donovan held positions at Zimmer Holdings in manufacturing, continuous improvement, quality assurance, and sterilization, including Director of Manufacturing from 2002 to 2010. Mr. Donovan has a B.S. degree in Chemical Engineering and a MBA degree from the University of Akron.
Mark Friedman, Ph.D., Vice President, of Regulatory Affairs and Quality Assurance(Age 62)Policy (Age 64)
Dr. Friedman has served as Axogen's Vice President, Regulatory Affairs and Policy since March 2021. Previously Dr. Friedman served as Axogen’s Vice President of Regulatory Affairs and Quality Assurance sincefrom November 2011.2011 to March 2021. He has also served as Axogen’s Director, of Quality Assurance and Regulatory Affairs from September 2006 to June 2011. Prior to joining Axogen, Dr. Friedman held several regulatory and quality leadership positions at Enable Medical Corporation, a medical device company, including Director of Quality Assurance from 1997 to 1998 and Vice President of Quality and Regulatory from 1998 to 2001 and from 2004 to 2005. Dr. Friedman also worked for AtriCure, Inc., a company that develops, manufactures, and sells surgical ablation systems to treat atrial fibrillation, as Vice President of Quality and Regulatory from 2001 to 2004 and as Vice President of Operations in 2004. AtriCure acquired Enable Medical Corporation in 2005. Dr. Friedman has over 2524 years of experience in developing and directing regulatory strategy and quality systems for medical products, including 15fifteen years with start-upstartup medical product firms. Dr. Friedman has a Ph.D. degree in Chemistry specializing in protein biochemistry from the University of Cincinnati.Dr. Friedman sits on various agency committees for the Alliance of Regenerative Medicine, Medical Device Manufacturer’s
Association and American Association of Tissue Banks, working on improving regulatory laws and standards for regenerative products and medical devices.
Maria Martinez, Chief Human Resources Officer (Age 52)
Ms. Martinez has served as Axogen’s Chief Human Resources Officer since October 2018. From January 2018 until joining Axogen as Chief Human Resources Officer, Ms. Martinez provided consulting services related to human resources through her consulting firm MDM Consulting Services, LLC. Prior to founding MDM , she was Chief Human Resources Officer at HSNi, a $3.5B interactive multichannel retailer overseeing nearly seven thousand employees in nine locations. Ms. Martinez joined HSNi in July 2010 and served as SVP Talent Management until she assumed the role of Chief Human Resources Officer. Prior to joining HSNi, Ms. Martinez was Vice President of Human Resources with Laser Spine Institute, LLC., a minimally invasive spine surgery company, having started with them in 2008. From 2007 to 2008, she worked at Bausch + Lomb, Inc. where she served as Director, Human Resources US Pharmaceuticals and, from 2005 to 2007, Ms. Martinez was Sr. Director, Human Resources Corporate with Darden Restaurants, Inc. Prior to 2005, Ms. Martinez held positions related to the field of human resources.
Ms. Martinez has a Master of Arts in Industrial/Organizational Psychology from the Florida Institute of Technology, Melbourne, FL and a Bachelor of Arts in Psychology; Bachelor of Arts in French, Minor in Italian from the University of South Florida, Tampa, FL.
Isabelle Billet, Chief Strategy and Business Development Officer (Age 58)
Ms. Billet has served as Axogen’s Chief Strategy and Business Development Officer since October 2018. From July 2013 until joining Axogen as Chief Strategy and Business Development Officer, Ms. Billet worked for IBHC Advisors LLC, a consulting firm she founded which assisted medical device companies in their organic and inorganic growth strategies and supported private equity firms on their investment strategy and due diligence. From 2010 to 2013, Ms. Billet worked at Cardinal Health, Inc where she served as Senior Vice President of Marketing and Innovation for the Medical segment focusing on their private brand portfolio development. From 2005 to 2010, she was Vice President Marketing and New Business Development for C.R. Bard Medical division. She worked for Johnson and Johnson from 1992 to 2005, splitting her tenure between Advanced Sterilization Products and Ethicon, Inc in positions of increasing responsibilities in marketing and new business development in France, Europe and US. Ms. Billet spent the first 7 years of her career as the head pharmacist and material manager for a private hospital in France. Ms. Billet is a member of the Clinical Innovations Board of Directors, a medical device company exclusively focused in Labor and Delivery and Neonates Intensive Care. She has an MBA from EM Lyon Business School, France and Cranfield School of Management, UK and a Doctorate in Pharmacy from Montpellier University in France.
Erick DeVinney, Vice President of Clinical and Translational Sciences (Age 44)
Mr. DeVinney has served as Axogen’s Vice President of Clinical and Translational Sciences since January 2014. From April 2007 until January 2014, Mr. DeVinney was the Director of Clinical and Translational Sciences for Axogen. Erick has over 14 years of experience in the successful planning and management of clinical development. Prior to joining Axogen Mr. DeVinney served as Manager of Clinical Operations for Angiotech Pharmaceuticals from 2005 to 2007 and Clinical Program Lead for Pharmaceutical Research Associates International from 2001 to 2005. Mr. DeVinney has been involved in the successful submission of numerous 510(k), IDE and NDA applications. He has a BS in Chemistry from Virginia Commonwealth University.
Mike Donovan, Vice President of Operations (Age 55)
Mr. Donovan has served as Axogen’s Vice President of Operations since September 2015. Prior to September 2015, Mr. Donovan was Axogen’s Director of Operations from January 2011 until September 2015. From 1988 to 2010, Mr. Donovan held positions at Zimmer Holdings in manufacturing, continuous improvement, quality assurance and sterilization including Director of Manufacturing from 2002 to 2010. Mr. Donovan has a BS in Chemical Engineering and an MBA from the University of Akron.
Angelo G. Scopelianos, Ph.D., Vice President of Research and Development (65)
Dr. Scopelianos has served as Axogen’s Vice President of Research and Development since September 2018. From 2012 until joining Axogen, Dr. Scopelianos was an independent consultant specializing in medical devices. He began consulting after his retirement from a 24-year tenure at Johnson & Johnson (J&J). Angelo began at J&J in 1988 as section manager of R&D and held the escalating positions of manager of R&D, director of R&D, vice president of R&D and finally from October 2010 to September 2012 senior vice president of R&D. He joined J&J after research leadership positions at EI Dupont de Nemours in Wilmington, Delaware, and Pennwalt Corporation. Angelo received his doctorate degree in organic chemistry from Pennsylvania State University, following completion of a Bachelor of Science degree from the State University of New York—Oneonta. He holds over 35 U.S. patents and numerous international patents, and his awards include the Outstanding Science Alumni Award by Penn State University; the Scientific Leadership Award in Biomaterials Science awarded by a consortium of NJ research universities: Rutgers University, Princeton University and NJ Institute of Technology; the Johnson & Johnson Philip B. Hofmann Award for technical achievements in scientific research; and an Honorary Doctor of Science Degree bestowed by the State University of New York.
ITEM 1A. RISK FACTORS
FACTORS
Axogen’s
Our business involves a number of risks, some of which are beyond itsour control. The risk and uncertainties described below are not the only ones the Company faces.we face. Set forth below is a discussion of the risks and uncertainties that management believes to be material to Axogen.us.
Risks Related
To The Company
Axogen has not experienced positive cash flow from its operations, and the ability to achieve positive cash flow from operations will depend on increasing revenue from distribution of its products, which may not be achievable.
Axogen has historically operated with negative cash flow from its operations. As of December 31, 2019, Axogen had an accumulated deficit of approximately $180 million. If revenue does not increase as anticipated, then it will continue to experience negative cash flows and adverse operating conditions. Axogen’s continuing capital needs and other factors could cause the Company to raise additional funds through public or private equity offerings, debt financings or from other sources. The sale of additional equity may result in dilution to Axogen’s shareholders. There is no assurance that Axogen will be able to secure funding on terms acceptable to it, or at all.
Our revenue growth depends on itsour ability to expand its sales force, increase distribution and sales to existing customers and develop new customers, domestically and abroad, and there can be no assurance that these efforts will result in significant increases in sales.
Beginning in
2020, and in part as response to the
processCOVID-19 pandemic, we adjusted our commercial strategy to focus on deeper penetration of
investingour existing surgeon customers through the development of long-term users of Avance in
its distributionour largest market opportunity of extremity trauma. Throughout the pandemic, we kept the sales team and
broader commercial organization intact and took the opportunity to provide extensive sales
channels composedtraining. Our sales team developed new skills and shared best practices for remote case support in hospitals where access was restricted. We believe this remote support has been appreciated by customers and has expanded the sales team’s ability to support customers during COVID-19 and beyond. We believe that near-term growth can be supported first through expanded productivity of
a combination of its directour existing sales force
and independent agencies/distributors to allow it to increase distribution and sales towith existing customers and
reach newaccounts and second by adding additional customers.
There can be no assuranceWe expect the number of direct sales professionals to increase over time. Additionally, we believe that
these effortswe have successfully utilized a hybrid commercial approach that includes the use of independent agencies in more remote geographies to provide appropriate local support for customers, without the travel time required of a direct sales representative. We anticipate that we will
be successfulcontinue to add to the number of independent sales agencies as it continues to drive higher productivity and efficiency with our direct sales force. We may also need to establish a regional distribution center or centers at some point in
expanding Axogen’s revenue. Axogen currently distributes tissue and sells products directly through its sales force and indirectly through agency relationships. Axogen is engaged in an initiativethe future to
build and further expand sales and marketing capabilities.account for growth. The incurrence of these expenses
impacts Axogen’smay impact our operating results, and there can be no assurance of their effectiveness. If
Axogen iswe are unable to
develop its sales force, increase sales to existing customers and attract new customers,
it may notand develop our sales force, there could be
able to grow revenue or maintain its current levela material adverse impact on our business, results of
revenue generation.operations, financial condition, and prospects.
Our revenue depends primarily on four products.
Substantially all of Axogen’sour revenue is currently derived from only four products, Avance Nerve Graft, Avive Soft Tissue Membrane, Axoguard Nerve Protector, Axoguard Nerve Connector, and Axoguard Nerve Connector,Cap for the treatment of peripheral nerve damage. Of these four products, Avance Nerve Graft represents approximately half of the Company’s total revenues.revenue.Effective June 1, 2021, we voluntarily suspended the market availability of Avive Soft Tissue Membrane. Any disruption in Axogen’sour ability to generate revenue from the processing, distribution, of tissue and sale of products will have a material adverse impact on Axogen’sour business, results of operations, financial condition, and growth prospects.
Avance Nerve Graft and Avive Soft Tissue Membrane (which we have voluntarily suspended from the market) processing consists of several steps and we use a number of recovery and/or acquisition agencies to supply the human tissue needed for these products. While we believe our current contracts and the ability to enter into future contracts will provide us with the tissues required for the products, we cannot be sure that we will be able to obtain the tissue that we need in the future. Disruptions in the tissue supply may adversely impact both tissue products and our overall business.
The Axoguard Nerve Connector and Axoguard Nerve Protector are only available through the Cook Biotech Distribution Agreement. The Distribution Agreement was amended February 26, 2018 to extend the termination date to June 30, 2027. However, there are conditions for continuation of the agreement, including payment terms and minimum purchase requirements, that if breached could result in an earlier termination of the agreement; except that throughagreement. Through mutual agreement, the parties have not established such minimums and to date have not enforced such minimum purchase provision. Additionally, in the event that Axogenwe and Cook Biotech were to fail to reach an agreement as to minimum purchase quantities, Cook Biotech could terminate the agreement if it was deemed that Axogen had failedwe fail to generate commercially reasonable sales of Axoguard as measured by sales similar to a competitive product at the same stage in its commercial launch as verified by a mutually acceptable third party. We distribute the Axoguard Nerve Connector and Axoguard Nerve Protector for Cook Biotech, and Cook Biotech is the contract manufacturemanufacturer for our Axoguard Nerve Cap. Although there are products that Axogen believes itwe believe we could develop or obtain products that would replace the Axoguard products obtained through the agreements with Cook Biotech agreements, the loss of the ability to sell the Axoguard Nerve Connector and Protector products and the Axoguard Nerve Cap if it becomes a significant product line, could have a material adverse effect on Axogen’sour business, untilresults of operations, financial condition, and prospects.
The COVID-19 pandemic could continue to have a material adverse effect on our ability to operate, results of operations, financial condition, liquidity, and capital investments.
The World Health Organization declared the COVID-19 outbreak a pandemic in March 2020. COVID-19, or similar extraordinary events in the future, could have a material adverse effect on our ability to operate, results of operations, financial condition, liquidity, and capital investments.
In response to COVID-19, the reduced activities of the U.S. population due to the "shelter-in-place" policies at the beginning of the pandemic reduced the incidence of traumatic nerve injuries, which affected demand for our products. Additional effects impacting the medical industry in general include reallocating employees and resources to prepare for increased COVID-19 patients; deferrals of or limits on elective and non-emergency procedures; restricted hospital access to non-essential personnel, including sales and clinical representatives; and limiting or pausing clinical research activities.
COVID-19 caused and may continue to cause decreased access to customer channels, slowing or stopping of the development of clinical products or clinical data, decreased employee availability, hospital staffing shortages, adverse economic conditions, border closures and other replacement products are available.disruptions to our business, as well as the businesses of our business partners and others. Furthermore, COVID-19 may have the effect of heightening many of the other risks described in this Annual Report on Form 10-K. COVID-19 has also imposed significant burden on the FDA and forced the agency to divert resources from product review and its approval process.
Although economic activity is normalizing, the Delta and Omicron variants of COVID-19 continue to spread in the U.S. and across the globe. The ultimate impact of these variants, and other new strains that may develop, cannot be predicted at this time, and could depend on numerous factors, including vaccination rates among the population, the effectiveness of COVID-19 vaccines against variants and the response by governmental bodies and regulators, which could include vaccine mandates.
Furthermore, global supply chain disruptions, labor shortages, which may affect our ability to retain and attract new talent, and inflationary conditions caused by the COVID-19 pandemic could have a material adverse effect on our business, results of operations, financial condition, and prospects. The rapid development and fluidity of the situation surrounding COVID-19 prevent any prediction as to the ultimate impact COVID-19 will have on our business, results of operations, financial condition, and prospects, which will depend largely on future developments directly or indirectly relating to the duration and scope of the COVID-19 outbreak in the U.S. and globally.
Our success will be dependent on continued acceptance of itsour products by the medical community.
Continued market acceptance of
Axogen’sour products will depend on
itsour ability to demonstrate that
itsour products are an attractive alternative to existing or new nerve reconstruction treatment options, including both surgical techniques and products.
The Company’sOur ability to do so will depend on surgeons’ evaluations of clinical safety, efficacy, ease of use, reliability, and cost-effectiveness, including insurance reimbursement, of
Axogen’sour nerve repair products. For example, although
Axogen’sour Avance Nerve Graft follows stringent safety standards, including sterilization by gamma irradiation,
Axogen believeswe believe that a small portion of the medical community has lingering concerns over the risk of disease transmission through the use of allografts in general. If the medical community and patients do not ultimately accept our products as safe and effective or we are unable to raise awareness of our products and processes, our ability to sell the products may be materially and adversely affected, and
theour business, results of
our operations,
financial condition, and prospects may be adversely affected.
Negative publicity concerning methods of donating human tissue
We have not consistently experienced positive cash flow from our operations, and
screening of donated tissue, in the
industry in which Axogen operates, may reduce demand for its products and negatively impact the supply of available donor tissue.
Axogen is highly dependent on its ability to recover human peripheral nerve tissueachieve consistent, positive cash flow from tissue donors for its Avance Nerve Graft product and acquire birth tissue for its Avive Soft Tissue Membrane. The availabilityoperations will depend on increasing revenue from distribution of acceptable donors is relatively limited, and this availability is impacted by regulatory changes, general public opinion of the donation process and Axogen’s reputation for its handling of the donation process. Media reports or other negative publicity concerning both improper methods of tissue recovery from donors and disease transmission from donated tissue, including bones and tendons, may limit widespread acceptance of Axogen’s Avance Nerve Graft and Avive Soft Tissue Membrane. Unfavorable reports of improper or illegal tissue recovery practices, both in the U.S. and internationally, as well as incidents of improperly processed tissue leading to transmission of disease, may broadly affect the rate of future tissue donation and market acceptance of allograft technologies and donated tissue use. Potential patientsour products, which may not be ableachievable.
We have historically operated with negative cash flow from our operations. As of December 31, 2021, we had an accumulated deficit of approximately $230.6 million. If revenue does not increase as anticipated, then we will continue to
distinguish Axogen products, technologies,experience negative cash flows and
tissue recoveryadverse operating conditions. In June 2020, we entered into a seven-year $70 million debt facility with Oberland Financial, the proceeds of which are expected to be used for working capital and
processing procedures from others engagedgeneral corporate purposes. As our debt obligations mature or if our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, sell assets, seek additional capital, or restructure or refinance our indebtedness. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. If we raise funds by selling additional equity, such sale would result in
tissue recovery. In addition, unfavorable reports could make families of potential donors or donors themselves from whom Axogendilution to our shareholders. There is
no assurance that if we are required to
obtain consent before processing tissue reluctantsecure funding, we can do so on terms acceptable to
agree to donate tissue to for-profit tissue processors. Any disruption in the supply could have negative consequences for Axogen’s revenue, operating results and continued operations.us, or at all.
We are highly dependent on the continued availability of itsour facilities and could be harmed if the facilities are unavailable for any prolonged period of time.
Any failure in the physical infrastructure of Axogen’sour facilities, including the facility it licenseswe license from CTS, could lead to significant costs and disruptions that could reduce its revenuesour revenue and harm itsboth our business reputation and financial results. Any natural or man-made event that impacts Axogen’sour ability to utilize itsour facilities could have a significantmaterial impact on its operatingour business, results reputationof operations, financial condition, and ability to continue operations.prospects. This includes termination of the CTS Agreement, which is set to expire on December 31, 2023, subject to earlier termination by either party at any time for cause (subject to the non-terminating
party’s(unless a right to cure in certain circumstances)by the non-terminating party applies), or without cause by Axogenus upon 6six months prior notice whereby such notice cannot be provided until March 1, 2021. Axogen believes itnotice. We believe we can find and make operational a new licensed facility in less than six months, if required. In addition, Axogenwe acquired property whichthat is located near the CTS facility, and it is expected that renovations will be completed by the termination date of the CTS Agreement to provide a new processing facility that can be included in our BLA for the Avance Nerve Graft. However, renovations and the regulatory process for approval of facilities whether licensed or owned is time-consuming and unpredictable. Axogen’sIt could cause a significant disruption in service to our customers if we were to lose, even temporarily, the availability of our production or distribution facilities. In addition, we may plan to open additional office, lab or distributions space in the future, and our ability to license, renovate, rebuild, or find acceptable service facilities takes a considerable amount of time and expense and could cause a significant disruption in service to its customers if it were to lose the availability of its production or distribution facilities.expense. Although Axogen haswe have business interruption insurance whichthat would cover certain costs in instances other than service agreement termination, cover certain costs, it may not cover all costs nor help to regain Axogen’sour standing in the market.
Delays, interruptions, or the cessation of production by our third-party suppliers of important materials may prevent or delay our ability to manufacture or process the final products.
Most of the raw materials used in the process for Avance Nerve Graft and Avive Soft Tissue Membrane, which we have voluntarily suspended from the market, are available from more than one supplier. However, there are materials within the manufacturing and production process that come from single suppliers or certain supplies may be difficult to procure due to supply chain shortages or changes in global trade regulations. The COVID-19 pandemic and its ongoing effects could cause disruptions in the supply chain and impair our ability to obtain the materials needed for our product line.
Axogen
We do not have written contracts that guarantee supply with any of our suppliers, and at any time they could stop supplying our orders. FDA review of a new supplier may be required if these materials become unavailable from our current suppliers. Although there may be other suppliers that have equivalent materials that would be available to us, if FDA review is required, it could take several months or years to obtain, if approval is able to be obtained at all. Any delay, interruption, or cessation of production by our third-party suppliers of important materials, or any delay in qualifying new materials, if necessary, would prevent or delay our ability to manufacture products.
In addition, an uncorrected impurity, a supplier’s variation in a raw material or testing, either unknown to us or incompatible with our manufacturing process, or any other problem with our materials, testing or components, would prevent or delay our ability to process tissue. These delays may limit our ability to meet demand for our products and delay our clinical trials, which would have a material adverse impact on our business, results of operations, financial condition, and prospects.
Technological change and competition for newly developed products could reduce demand for our products.
The medical technology industry is intensely competitive. We compete with both U.S. and international entities that engage in the development and production of medical technologies and processes, including:
•biotechnology, orthopedic, pharmaceutical, biomaterial, chemical, and other companies;
•academic and scientific institutions; and
•public and private research organizations.
Our products compete with autograft, hollow-tube conduits, commercially available wraps, and amnion products, as well as with alternative medical procedures. For the foreseeable future, we believe a significant number of surgeons will continue to choose to perform autograft procedures when feasible, despite the necessity of performing a second operation and its drawbacks. In addition, many members of the medical community will continue to prefer the use of hollow-tube conduits due in part to their familiarity with these products and the procedures required for their use. Amnion products are widely available, and we may not be able to distinguish the Avive Soft Tissue Membrane, which we have voluntarily suspended from the market, from such other products so as to produce significant revenue from its distribution. Also, steady improvements have been made in synthetic human tissue substitutes, which could compete with our products in the future. Unlike allografts, synthetic tissue technologies are not dependent on the availability of human or animal tissue. Although our growth strategy contemplates the introduction of new technologies, the development of these technologies is a complex and uncertain process, which require a high level of innovation, as well as the ability to accurately predict future technology and market trends. We may not be able to respond effectively to technological changes and emerging industry standards, or to successfully identify, develop or support
new technologies or enhancements to existing products in a timely and cost-effective manner, if at all. There can be no assurance that in the future our competitors will not develop products that have superior performance or are less expensive relative to our products, rendering our products obsolete or noncompetitive. In this regard, Integra and Baxter each have or will commercialize a product consisting of a hollow tube conduit filled with material which they suggest is superior to their current hollow conduit products. Due to our limited resources, smaller size, and relatively early stage, we may face competitive challenges from these new products or existing products and barriers that are difficult to overcome and could negatively impact our growth. Finally, a Chinese company provides a human peripheral nerve allograft in China; however, such product is not sold in our markets of interest because of the protection afforded by our intellectual property.
We must maintain high quality processing of itsour products.
Our Avance Nerve Graft is processed through
itsour Avance
ProcessMethod, which requires careful calibration and precise, high-quality processing and manufacturing.
ItsOur Avive Soft Tissue Membrane,
which we have voluntarily suspended from the market, is also human tissue that requires skill in its processing. Achieving precision and quality control requires skill and diligence by
itsour personnel. If
it failswe fail to achieve and maintain these high levels of quality control and processing standards, including avoidance of processing errors, defects, or product failures,
Axogenwe could experience recalls or withdrawals of
itsour product, delays in delivery, cost overruns or other problems that would adversely affect
itsour business.
Axogen reported one (1) biological deviations in 2019 for quality system issues related to human tissue distribution (no patient safety issues were involved) and corrective action was taken without a material adverse consequence to Axogen. AxogenWe cannot completely eliminate the risk of errors, defects or
failures.failures and could experience quality system issues where corrective actions must be taken. In addition,
Axogenwe may experience difficulties in scaling-up processing of
itsour Avance and Avive products, including problems related to yields, quality control and assurance, tissue availability, adequacy of control policies and procedures, and lack of skilled personnel. If
Axogen iswe are unable to process and produce
itsour human tissue products on a timely basis, at acceptable quality and costs, and in sufficient quantities, or if
it experienceswe experience unanticipated technological problems or delays in production,
itsour business,
results of operations, financial condition, and prospects would be adversely affected.
Delays, interruptions or the cessation of production by Axogen’s third party suppliers of important materials or delays in qualifying new materials, may prevent or delay Axogen’s ability to manufacture or process the final products.
Most of the raw materials used in the process for Avance Nerve Graft and Avive Soft Tissue Membrane are available from more than one supplier. However, there are materials within the manufacturing and production process that come from single suppliers. Axogen does not have written contracts with any of its single source suppliers, and at any time they could stop supplying Axogen’s orders. FDA review of a new supplier may be required if these materials become unavailable from Axogen’s current suppliers. Although there may be other suppliers that have equivalent materials that would be available to Axogen, FDA review of any alternate suppliers, if required, could take several months or years to obtain, if able to be obtained at all. Any delay, interruption or cessation of production by Axogen’s third party suppliers of important materials, or any delay in qualifying new materials, if necessary, would prevent or delay Axogen’s ability to manufacture products. In addition, an uncorrected impurity, a supplier’s variation in a raw material or testing, either unknown to Axogen or incompatible with its manufacturing process, or any other problem with Axogen’s materials, testing or components, would prevent or delay its ability to process tissue. These delays may limit Axogen’s ability to meet demand for its products and delay its clinical trial, which would have a material adverse impact on its business, results of operations and financial condition.
The failure of third parties to perform many necessary services for the commercialization of Avance Nerve Graft and Avive Soft Tissue Membrane, including services related to recovery/acquisition, distribution and transportation, would impair Axogen’s ability to meet commercial demand.
Axogen relies upon third parties for certain recovery/acquisition, distribution and transportation services for its Avance Nerve Graft and Avive Soft Tissue Membrane. In accordance with product specifications, third parties ship Avance Nerve Graft in specially validated shipping containers at frozen temperatures. If any of the third parties that Axogen relies upon in its recovery/acquisition, distribution or transportation process fail to comply with applicable laws and regulations, fail to meet expected deadlines, or otherwise do not carry out their contractual duties to Axogen, or
encounter physical damage or natural disaster at their facilities, Axogen’s ability to deliver product to meet commercial demand may be significantly impaired.
Axogen is dependent on its relationships with independent agencies to generate revenue.
Axogen derives material revenues through its relationships with independent agencies. In 2019 approximately 10% of global productOur revenue was generated through independent agencies. If certain agency relationships were terminated or discontinued for any reason, it could materially and adversely affect Axogen’s ability to generate revenues and profits. If Axogen required additional agencies it may not be able to find additional agencies who will agree to market and distribute Axogen’s products on commercially reasonable terms, if at all. If Axogen is unable to establish new agency relationships or renew certain current distribution agreements on commercially acceptable terms, its operating results could suffer.
Loss of key members of management, who it needs to succeed, could adversely affect its business.
Axogen’s future success depends on the continued efforts of the members of its executive management team. Competition for experienced management personnel in the healthcare industry is intense. If one or more of Axogen’s executives or other key personnel are unable or unwilling to continue in their present positions, or if Axogen is unable to attract and retain high quality executives or key personnel in the future, its business may be adversely affected.
Axogen’s operating results will be harmed if it is unable to effectively manage and sustain its future growth or scale its operations.
There can be no assurance that Axogen will be able to manage its future growth efficiently or profitably. Its business is unproven on a large scale and actual revenue and operating margins, or revenue and margin growth, may be less than expected. If Axogen is unable to scale its production capabilities efficiently or maintain pricing without significant discounting, it may fail to achieve expected operating margins, which would have a material and adverse effect on its operating results. Growth may also stress Axogen’s ability to adequately manage its operations, quality of products, safety and regulatory compliance. If growth significantly decreases it will negatively impact Axogen’s cash reserves, and it may be required to obtain additional financing, which may increase indebtedness or result in dilution to shareholders. Further, there can be no assurance that Axogen would be able to obtain additional financing on acceptable terms if all at.
There may be significant fluctuations in Axogen’s operating results.
Significant quarterly fluctuations in Axogen’s results of operations may be caused by, among other factors, its volume of revenues, seasonal changes in nerve repair activity, timing of sales force expansion and general economic conditions. There can be no assurance that the level of revenues and profits, if any, achieved by Axogen in any particular fiscal period, will not be significantly lower than in other comparable fiscal periods. Axogen’s expense levels are based, in part, on its expectations as to future revenues. As a result, if future revenues are below expectations, net income or loss may be disproportionately affected by a reduction in revenues, as any corresponding reduction in expenses may not be proportionate to the reduction in revenues.
Axogen’s revenues depend upon prompt and adequate reimbursement from public and private insurers and national health systems.
Political,
societal, economic, and regulatory influences are
subjecting the healthcare industry infundamentally changing the U.S.
to fundamental change.healthcare industry. The ability of a hospital or an ambulatory surgery center
(“ASC”) to pay fees for
Axogen’sour products depends in part on the availability of adequate coverage and reimbursement from third-party payors for
either our products specifically, the procedures associated with the use of our products, or both. Providers that purchase our products generally rely on third-party payors to reimburse all or part of the costs and fees associated with the procedures performed with our products or the products themselves.
AdequateTherefore, adequate coverage and reimbursement from third-party payors, including
governmentalgovernment payors such as Medicare and Medicaid,
therefore, is important for obtaining product acceptance and widespread adoption in the marketplace.
When our products (Avance Nerve Graft, Axoguard Connector, Axoguard Nerve Cap, Axoguard Protector, Avive Soft Tissue Membrane) are used in the operating room of a hospital, they are commonly treated as general supplies utilized in surgery, and the cost is included in payment to the facility for the procedure. When Avance Nerve Graft and Axoguard Connector are used in an outpatient setting where the nerve repair is the primary reason for the procedure, facilities may use a Category I CPT code to facilitate payment.
In January 2018, the American Medical Association created a Category I CPT code (64912) specific to nerve repair with nerve allograft (Avance Nerve Graft)Graft) and a separate code (+64913) for each additional strand of allograft used in a procedure. Category I CPT codes are used by providers to facilitate payment to the provider (either hospital or ASC)ambulatory surgery center) for outpatient procedures. Additionally, Category I CPT codes are used to facilitate payment to the surgeon, for both time spent in outpatient and inpatient procedures. Prior to January 2018, there was no designated Category I CPT code for nerve repair cases that included nerve allograft. The Category I CPT code specific to nerve repair with nerve allograft, has allowed for nerve allograft repair cases to be uniquely identified in the Medicare claims data. This in turn allowed CMS visibility to nerve allograft nerve procedure costs, and thereby confirm that nerve allograft qualified as a device intensive procedure leadingprocedure.
Another important change in nerve repair reimbursement occurred in January 2020, when most direct repair procedures were moved from the higher paying level 2 nerve repair Ambulatory Payment Category 5432 to the lower paying level 1 Ambulatory Payment Category 5431, thus aligning payment rates more consistently with the lesser costs of a 78% increase in Medicare paymentdirect repair.
As a result of the allograft device intensive status and direct repair Ambulatory Payment Category realignment, CMS reimbursement rates for nerve allograft repair in the outpatient setting have changed significantly during the last two years. With the new 2022 CMS reimbursement rates for nerve repair in the outpatient setting that became effective January 1st, reimbursement for procedures using Avance have increased 28% in hospital outpatient centers and 102% in ambulatory surgery centers beginning January 1, 2020.since 2019. During this same timeframe, reimbursement rates for procedures involving conduits and connectors also increased 28% in hospital outpatient centers and 49% in ambulatory surgery centers. While Medicare patients represent a relatively small percentage of trauma cases, CMS’ direction often influences commercial payor policies and payments.
The process for securing coding for a product or procedure is separate from the process of securing coverage and establishing a reimbursement payment rate. In the
United States,U.S., coverage and reimbursement for medical devices
varyvaries among payors. In addition, payors review coverage policies on an ongoing basis and can
without notice, change or deny coverage for these new products and
procedures.procedures without notice. We estimate that commercial payors covering a significant number of U.S. covered lives have legacy non-coverage policies relating to our Avance Nerve Graft,
Avive Soft Tissue Membrane (which we have voluntarily suspended from the market), and our Axoguard product lines, designating these products investigational or experimental. Some commercial payors do not currently cover or reimburse our products because they have determined insufficient evidence of favorable clinical outcomes is available. Although some
payors consider
the Avance Nerve Graft,
Avive Soft Tissue Membrane (which we have voluntarily suspended from the market), and our Axoguard product lines investigational or experimental at this time, these payors may in the future determine sufficient evidence has been developed to cover and reimburse our products and related procedures.
WeIn partnership with healthcare providers, we are
working actively
working to reverse these non-coverage decisions
butand have been successful with several regional plans in 2020 and 2021. However, we cannot provide assurance that we will
continue to be successful in these efforts. If we are not successful in reversing existing non-coverage policies, or if other third-party payors issue similar policies, this could have a material adverse effect on our business and operations. Further, third-party payors who currently cover and reimburse customers for procedures using our products may in the future choose to decrease current levels of reimbursement or eliminate reimbursement altogether,
either of which
willwould cause our business to suffer.
The amount of reimbursement received by our customers from third-party payors is dependent generally on fee schedules established by these payors for the existing CPT codes. For governmental payors, such as Medicare and Medicaid, the fee schedule amount is determined by statutory and regulatory
formulas.formulas as previously discussed. For commercial payors, the reimbursement amount generally is dependent upon the specific contract terms between the provider and payor. We cannot provide assurance that government or commercial payors will continue to reimburse for procedures with our products using the existing codes, nor can we provide assurance that the payment rates will be adequate. If providers and physicians are unable to obtain reimbursement for the procedure at
cost-effectiveadequate levels when use of our products is included, this could have a material adverse effect on our business and operations. Hospitals and
ASCsambulatory surgery centers may not purchase our products if they do not receive payment sufficient to cover the cost of our products and related procedures. In addition, in the event that the current coding and/or payment methodology for these procedures changes, this could have a material
adverse effect on our business,
results of operations, financial condition, and
business operations.prospects.
We are party to a number
Negative publicity concerning methods of
pending lawsuitsdonating human tissue and
other disputes whichscreening of donated tissue may
have an adverse impact on our business, operations or financial condition.
We are or may become a party to pending lawsuits and other disputes, including patent, product liability, securities violations or other lawsuits. These current and future matters, including the Einhorn securities litigation decribed in Item -3 Legal Proceedings, may result in a loss of patent protection, reduced revenue, incurrence of significant liabilities and diversion of our management’s time, attention and resources. Given the uncertain nature of litigation and other disputes generally, we are not able in all cases to estimate the amount or range of loss that could result from an unfavorable outcome in these current matters. In view of these uncertainties, the outcome of these matters may result in charges in
excess of any established reserves, and, to the extent available, liability insurance. Even claims without merit could subject us to adverse publicity and require us to incur significant legal fees. While Axogen currently carries liability insurance, protracted litigation and other disputes, including any adverse outcomes, may have an adverse impact on our business, operations or financial condition.
Axogen may be subject to future product liability litigation which could be expensive, and its insurance coverage may not be adequate.
Although Axogen is not currently subject to any product liability proceedings and it has no provision for product liability disbursements, it may incur material liabilities relating to product liability claims in the future, including product liability claims arising out of the usage of Axogen products. Although Axogen currently carries product liability insurance in an amount it believes is consistent with industry averages, its insurance coverage and any provision it may maintain in the future for product related liabilities may not be adequate and Axogen’s business could suffer material adverse consequences.
Technological change could reduce demand for Axogen’s products.our products and negatively impact the supply of available donor tissue.
We are highly dependent on our ability to recover human peripheral nerve tissue from tissue donors for our Avance Nerve Graft product and acquire birth tissue for our Avive Soft Tissue Membrane, which we have voluntarily suspended from the market. The
medical technology industryavailability of acceptable donors is
intensely competitive. Axogen competes withrelatively limited, and this availability is impacted by regulatory changes, general public opinion of the donation process, and our reputation for handling the donation process. Media reports or other negative publicity concerning both
improper methods of tissue recovery from donors and disease transmission from donated tissue, including bones and tendons, may limit widespread acceptance of our Avance Nerve Graft and Avive Soft Tissue Membrane. Unfavorable reports of improper or illegal tissue recovery practices, both in the U.S. and
international entities that engage in the development and production of medical technologies and processes including:
| ● | biotechnology, orthopedic, pharmaceutical, biomaterial, chemical and other companies; |
| ● | academic and scientific institutions; and |
| ● | public and private research organizations. |
Axogen products compete with autograft, hollow-tube conduits, commercially available wraps and amnion products,internationally, as well as with alternative medical procedures. Forincidents of improperly processed tissue leading to transmission of disease, may broadly affect the foreseeablerate of future Axogen believes a significant numbertissue donation and market acceptance of surgeons will continue to choose to perform autograft procedures when feasible, despite the necessity of performing a second operationallograft technologies and its drawbacks. In addition, many members of the medical community will continue to prefer the use of hollow-tube conduits due in part to their familiarity with these products and the procedures required for theirdonated tissue use. Amnion products are widely available and AxogenPotential patients may not be able to distinguish our products, technologies, and tissue recovery and processing procedures from others engaged in tissue recovery. In addition, unfavorable reports could make families of our potential donors or donors themselves from whom we are required to obtain consent before processing tissue reluctant to agree to donate tissue to for-profit tissue processors. Any disruption in the Avive Soft Tissue Membrane from such othersupply caused by these publicity issues could have a material impact for our business, results of operations, financial condition, and prospects.
The failure of third parties to perform many necessary services for the commercialization of our products, so asincluding services related to produce significant revenue from its distribution. Also, steady improvements have been maderecovery/acquisition, distribution, and transportation, would impair our ability to meet commercial demand.
We rely upon third parties for certain recovery/acquisition, distribution, and transportation services for our products. If any of the third parties that we rely upon in synthetic human tissue substitutes,our recovery/acquisition, distribution or transportation process fail to comply with applicable laws and regulations, fail to meet expected deadlines, or otherwise do not carry out their contractual duties, experience delays due to the ongoing COVID-19 pandemic, or encounter physical damage or natural disaster at their facilities, our ability to deliver product to meet commercial demand may be significantly impaired, which could compete with Axogen’s products in the future. Unlike allografts, synthetic tissue technologieshave a material adverse impact on our business, results of operations, financial condition or prospects.
We are not dependent on the availabilityour relationships with independent agencies to generate a material portion of humanour revenue.
We derive material revenue through our relationships with independent agencies. In 2021, approximately 12% of global product revenue was generated through independent agencies. If certain agency relationships were terminated or animal tissue. Although Axogen’s growth strategy contemplates the introduction of new technologies, the development of these technologies is a complex and uncertain process, requiring a high level of innovation, as well as thediscontinued for any reason, it could adversely affect our ability to accurately predict future technologygenerate revenue and market trends. Axogenprofit. If we require additional agencies, we may not be able to respond effectivelyfind additional agencies who will agree to technological changesmarket and emerging industry standards, or to successfully identify, develop or support new technologies or enhancements to existingdistribute our products in a timely and cost-effective manner,on commercially reasonable terms, if at all. If we are unable to establish new agency relationships or renew certain current distribution agreements on commercially acceptable terms, our business, results of operations, financial condition, and prospects could be materially and adversely impacted.
If we do not manage product inventory in an effective and efficient manner, it could adversely affect profitability.
Many factors affect the efficient use and planning of product inventory, such as our ability to predict demand for donor tissue, prepare manufacturing to meet that demand and product mix and handle product expiration. We may be unable to manage our inventory efficiently, keep inventory within expected budget goals, keep our work-in-process inventory on hand or manage it efficiently, control expired product or keep sufficient product on hand to meet demand. Finally, we can provide no assurance that we can keep inventory costs within our target levels, particularly in light of overall cost increases due to global inflation. Failure to do so may materially and adversely impact our business, results of operations, financial condition, and prospects.
Our operating results could be adversely impacted if we are unable to effectively manage and sustain our future growth or scale our operations.
There can be no assurance that we will be able to manage our future growth efficiently or profitably. Our business is unproven on a large scale, and actual revenue and operating margins, or revenue and margin growth, may be less than expected. If we are unable to scale our production capabilities efficiently or maintain pricing without significant discounting, we may fail to achieve expected operating margins, which would have a material and adverse effect on our operating results. Growth may also stress our ability to adequately manage our operations, quality of products, safety, and regulatory compliance. Failure to implement necessary procedures, equipment, or processes or to hire the necessary personnel in a timely and effective manner could result in higher costs or an inability to meet market demand and could have a material adverse impact on our business, results of operations, financial condition, and prospects. Additionally, our future growth will increase the future Axogen’s competitorsdemands placed on our third-party suppliers, and there is no guarantee that our suppliers will be able to support our anticipated growth. If growth significantly decreases, it will negatively impact our cash reserves, and we may be required to obtain additional financing, which may increase indebtedness or result in dilution to shareholders. Further, there can be no assurance that we would be able to obtain additional financing on acceptable terms, if at all.
There may be significant fluctuations in our operating results.
Significant quarterly fluctuations in our results of operations may be caused by, among other factors, our volume of revenue, seasonal changes in nerve repair activity, timing of sales force expansion, unforeseen restrictions on our ability to access healthcare providers such as during the COVID-19 pandemic, and general economic conditions. There can be no assurance that the level of revenue and profit, if any, we achieve in any particular fiscal period, will not develop products that have superior performancebe significantly lower than in other comparable fiscal periods. Our expense levels are based, in part, on our expectations as to future revenue. As a result, if future revenue is below expectations, net income or are less expensive relativeloss may be disproportionately affected by a reduction in revenue, as any corresponding reduction in expenses may not be proportionate to Axogen’s products rendering Axogen’s products obsolete or noncompetitive. In this regard, Integra and Baxter each have or will commercialize a product consisting of a hollow tube conduit filled with material which they suggest is superior to their current hollow conduit products. Due to Axogen’s limited resources, its smaller size and its relatively early stage, Axogen may face competitive challenges from these new products or existing products and barriers that are difficult to overcome and could negatively impact its growth. Finally, a Chinese company provides a human peripheral nerve allograftthe reduction in China, however, such product is not sold in markets of interest of Axogen because of Axogen’s IP protection in its identified markets.revenue.
We may be unsuccessful in commercializing itsour products outside the U.S.
To date, Axogen haswe have focused itsour commercialization efforts in the U.S., except for minor revenuesrevenue in certain countries outside the U.S. Axogen intendsforeign countries. We intend to expand distribution and sales in these and other countries outside the U.S. and will need to comply with applicable foreign regulatory requirements, including obtaining the requisite approvals to do so. The regulatory environment for Axogen’sour portfolio of products is complex. Avance Nerve Graft is distributed in Canada, United Kingdom,the UK, and certain other countries. AxogenWe received approval to distribute Avance Nerve Graft in
Germany in December 2019 and is making plans for a market launch in Germany in 2020. Distribution2019. Avance use in Spain currently allows only for compassionate use. Axogen is not seekingrequires approval for France and Italy at this time. Avive Soft Tissue Membrane is currently available in the U.S. and select other countries for expansion. Cook Biotech is currently renewing theeach case to be approved by tissue authorities under an alternative therapies designation. The Axoguard Nerve Connector and Nerve Protector CE Mark and although we believe such renewal is imminent, it has taken longer than anticipated and could experience continued delays. Until such renewal Axogen is able to sell only those products that are currently in inventory inbeen renewed as of May 2021 by Cook Biotech.
In January 2020, the
E.U., which inventory has not been sufficient to satisfy all product sales, and will no longer be available after February, 2020. Although Axoguard product revenue in Europe is not material, the inability to supply physicians who wish to use Axoguard could have a negative effect on Axogen’s planned expansion in the E.U.
In addition, the United KingdomUK exited the E.U. (“Brexit”) following a transition period that ended on December 31, 2020. Brexit could continue to disrupt trade between the UK and Axogenthe E.U. or other nations, as the UK pursues independent trade regulations. It is still unclear exactly how Brexit will affect legislative and regulatory systems within the UK, as many decisions are left to be made that will determine how far the UK will choose to diverge from existing E.U. rules. Therefore, we cannot be sure what changes could occur or the cost of regulatory compliance with both the United KingdomUK and the E.U. going forward. Until such time as Axogen we
can obtain, if at all, the necessary registrations and approvals for
itsour products, material expansion beyond the
United StatesU.S. will be limited.
Finally, the cost of regulatory compliance for sales outside the U.S. can be significant and time consuming.
Further,
Axogenwe will need to either enter into distribution agreements with third parties or develop a direct sales force in foreign markets. If
it doeswe do not obtain adequate levels of reimbursement from
third partythird-party payers outside of the U.S.,
itwe may be unable to develop and grow
itsour revenue internationally. Outside of the U.S., reimbursement systems vary significantly by country. Many ex-U.S. markets have government-managed healthcare systems that govern reimbursement for medical devices, implants, and procedures. Some ex-U.S. reimbursement systems provide for limited payments in a given period and therefore result in extended payment periods. If
Axogen iswe are unable to successfully commercialize
itsour products internationally,
itsour long-term growth prospects may be limited.
If Axogen does not manage tissue and tissue donation in an effective and efficient manner, it could adversely affect its business.
Many factors affect the supply, quantity and timing of donor medical releases, such as effectiveness of donor screening, the effective recovery of tissue, the timely receipt, recording, review and approval of required medical and testing documentation, changes in donor eligibility criteria and employee loss and turnover in Axogen’s and its contractor’s recovery department. Axogen can provide no assurance that tissue recovery or donor medical releases will occur at levels that will maximize processing efficiency and minimize Axogen’s costs.
If Axogen does not manage product inventory in an effective and efficient manner, it could adversely affect profitability.
Many factors affect the efficient use and planning of product inventory, such as effectiveness of predicting demand, effectiveness of preparing manufacturing to meet demand, efficiently meeting product mix and product demand requirements and product expiration. Axogen may be unable to manage its inventory efficiently, keep inventory within expected budget goals, keep its work-in-process inventory on hand or manage it efficiently, control expired product or keep sufficient product on hand to meet demand. Finally, Axogen can provide no assurance that it can keep inventory costs within its target levels. Failure to do so may harm long term growth prospects.
Axogen’s failure to protect its technology systems and comply with data protection laws and regulations could lead to government enforcement actions and significant penalties against Axogen, and adversely impact Axogen’s operating results.
We rely on information technology systems, including technology from third party vendors, to process, transmit and store electronic information in our day-to-day operations. Similar to other companies, the size and complexity of our information technology systems makes them vulnerable to a cyber-attack, malicious intrusion, breakdown, destruction, loss of data privacy, or other significant disruption. Our information systems require an ongoing commitment of resources to maintain, protect and enhance existing systems and develop new systems to keep pace with continuing changes in information processing technology, evolving systems and regulatory standards and the increasing need to protect patient and customer information. Any failure by us to maintain or protect our information technology systems and data integrity, including from cyber-attacks, intrusions or other breaches, could result in the unauthorized access to
patient data and personally identifiable information, theft of intellectual property or other misappropriation of assets, or otherwise compromise our confidential or proprietary information and disrupt our operations.
In the U.S., federal and state privacy and security laws require certain of our operations to protect the confidentiality of personal information including patient medical records and other health information. Limiting and/or restricting the use of certain personal data and information, as well as added transparency obligations to data subjects is becoming an increasing focus as evidenced by the implementation of the California Consumer Privacy Act (“CCPA”) which became effective on January 1, 2020. In Europe, E.U. member states and other foreign jurisdictions, including Switzerland, have adopted data protection laws and regulations which impose significant compliance obligations. Moreover, the collection and use of personal health data in the E.U. is governed by the European Union General Data Protection Regulation (“GDPR”). The GDPR imposes several requirements relating to the consent of the individuals to whom the personal data relates, the information provided to the individuals, the security and confidentiality of the personal data, data breach notification and the use of third-party processors in connection with the processing of personal data. The GDPR also imposes strict rules on the transfer of personal data out of the E.U. to the United States, provides an enforcement authority and imposes large penalties for noncompliance, including the potential for fines of up to 4% of the annual global revenues of the noncompliant company. The recent implementation of the GDPR has increased Axogen’s responsibility and liability in relation to personal data that Axogen processes, including in clinical trials, and Axogen may in the future be required to put in place additional mechanisms to ensure compliance with the GDPR, which could divert management's attention and increase Axogen’s cost of doing business.
Compliance with applicable data privacy and security laws and regulations (together with applicable industry standards) may increase Axogen’s costs of doing business. In this regard and in light of the CCPA’s implementation, Axogen expects that there will be other proposed laws, regulations and industry standards relating to privacy and data protection in the United States, the E.U. and other jurisdictions, and Axogen cannot determine the impact such future laws, regulations and standards may have on its business.
Axogen’s management has broad discretion in the use of Axogen’s cash and cash equivalents and, despite management’s efforts, cash and cash equivalents may be used in a manner that does not increase the value of shareholders’ investments.
Axogen’s management has broad discretion in the use of Axogen’s cash and cash equivalents, and investors must rely on the judgment of management regarding the use of such cash and cash equivalents. Management may invest Axogen’s cash and cash equivalents in short-term or long-term, investment-grade, interest-bearing securities. These investments may not yield favorable returns to shareholders. If Axogen does not invest or apply its cash and cash equivalents in ways that enhance shareholder value, Axogen may fail to achieve expected financial results, which could cause its stock price to decline.
Axogen incursincur costs as a result of operating as a public company, and itsour management is required to devote substantial time to compliance initiatives.
As a public company, Axogen incurswe incur legal, accounting, and other expenses to comply with relevant securities laws and regulations, including without limitation, the requirement of establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Axogen’sOur management devotes substantial time and financial resources to these compliance initiatives. Failure to comply with public company requirements could have a material adverse effect on Axogen’sour business. In addition, activity by shareholders or others that bring into question aspects of Axogen’sour business, financial reporting, or management’s integrity, whether based on facts, beliefs or baseless and contrived for individual economic gain, can have a negative impact on the price of Axogen’sour stock and can result in substantial time and financial resources being expended to address the situation.
Changes in the tax code could have a material adverse effect on our results of operations, financial condition, liquidity, and stock pricecapital investments.
In recent years, political discourse has centered on potential changes in tax laws or tax rulings. Certain of these changes could negatively affect our financial condition. In addition, our ability to use net operating loss and tax credit carryforwards and certain built-in losses to reduce future tax payments may be
adversely affected if our internal controls are not effective.
Section 404limited by provisions of the Sarbanes-Oxley ActInternal Revenue Code, and it is possible that certain transactions or a combination of 2002 requires that public companies conduct a comprehensive evaluation of their internal control over financial reporting. To comply with this statute, each year we are required to document and
test our internal control over financial reporting and our management is required to assess and issue a report concerning it.
Although we have systems in place to strengthen our internal control over financial reporting, we cannot assure you that we will not discover material weaknesses in the future or that no material weakness will result from any difficulties, errors, delays or disruptions while we implement and transition to new internal systems. The existence of one or more material weaknesses couldcertain transactions may result in errors in our financial statements, and substantial costs and resources may be required to rectify these or other internal control deficiencies. If we cannot produce reliable financial reports, investors could lose confidence in our reported financial information, the market price of our common stock could decline significantly, we may be unable to obtainmaterial additional financing to operate and expand our business and our business and financial condition could be harmed.
Our business and financial performance could be adversely affected, directly or indirectly, by disasters, by terrorist activities or by international hostilities.
Neither the occurrence nor the potential impact of disasters (such as hurricanes and other natural disasters), terrorist activities and international hostilities can be predicted. However, these occurrences could impact Axogen directly as a result of damage to our facilities or by preventing us from conducting our business in the ordinary course, or indirectly as a result of their impactlimitations on our customers, suppliers or other counterparties. We could also suffer adverse consequences to the extent that disasters, terrorist activities or international hostilities affect the financial markets or the economy in general or in any particular region.
Axogen’s ability to mitigate the adverse consequences of such occurrences is in part dependent on the quality ofuse our resiliency planning,net operating loss and our ability, if any, to anticipate the nature of any such event that occurs. The adverse impact of disasters or terrorist activities or international hostilities also could be increased to the extent that there is a lack of preparedness on the part of national or regional emergency responders or on the part of other organizations and businesses that we deal with, particularly those that we depend upon but have no control over.
tax credit carryforwards.
Risks Related to the Regulatory Environment in which Axogenthe Company Operates
Our business is subject to continuing regulatory compliance by the FDA and other authorities, which is costly and could result in negative effects on itsour business.
We are subject to extensive regulation by foreign and domestic government entities, including compliance with regulations governing appropriate relationships with healthcare professionals, such as physicians, hospitals, and those to whom and through whom we may market our products. We are subject to various federal, state, and territorial laws in the United StatesU.S. and other jurisdictions in which we conduct business. These include, for example, anti-kickback laws, false claims laws, health carehealthcare fraud, waste, and abuse laws, and anti-bribery laws such as the United StatesU.S. Foreign Corrupt Practices Act. Violations of these laws can be punishable by criminal and/or civil sanctions, including, in some instances, fines, imprisonment and, within the United States,U.S., exclusion from participation in government healthcare programs, including Medicare, Medicaid, and Veterans Administration health programs. These laws are administered and enforced by, among others, the U.S. Department of Justice (“DOJ”),DOJ, which issued new compliance guidance in 2020, the Office of Inspector General of the Department of Health and Human Services, state attorneys general, and their respective counterparts in the applicable foreign jurisdictions in which we conduct business. Many of these agencies have increased their enforcement activities with respect to medical device manufacturers in recent years. There can also be changes to the regulations by foreign and domestic government entities that require Axogenus to update or upgrade business processes or to perform additional validation activities for product or processes. Compliance with such changes can be costly to implement or result in non-compliance, thus restricting the ability to distribute tissue or sell products, thatwhich could have a material adverse effect.effect on our business, results of operations, financial condition, and prospects.
Our products are also subject to regulation by the FDA in the U.S. The FDA regulates the development, pre-clinical and clinical testing, requirements for commercial marketing and distribution, manufacturing and quality, safety, labeling, and promotion of human cell and tissue products (HCT/Ps), medical devices, and biological products, such as that of Axogen’s Avance Nerve Graft product.products. The FDA requires the approval of a biological product, like Avance Nerve Graft, through a BLA prior to marketing. Although the Avance Nerve Graft product has not yet been approved by FDA through a BLA, FDA is permitting the product to be distributed, subject to FDA enforcement discretion, provided that Axogen:we: (1) transitions
transition to compliance with section 501(a)(2)(B) of the FD&C Act, the cGMP regulations in 21 CFR Parts 210 and 211 and the applicable regulations and standards in 21 CFR Parts 600-610 prior to initiation of a phase 3 clinical trial designed to demonstrate the safety, purity, and potency of AvanceNerve Graft; (2) conductsconduct a
phase 3 clinical trial to demonstrate safety, purity, and potency of Avance Nerve Graft under an SPA; (3) continuescontinue to comply with the requirements of 21 CFR Part 1271; and (4) exercisesexercise due diligence in executing the transition plan. See “Business — Government Regulations — U.S. Government Regulation Review.Overview.”
Avive Soft Tissue Membraneis processed and distributed in accordance with FDA requirements for Human Cellular and Tissue-based Products (HCT/P) under 21 CFR Part 1271 regulations and U.S. State regulations.
The FDA also regulates medical devices, for example the Axoguard products, and
generally requires them to be cleared through the 510(k)
premarketpre-market notification process prior to
marketing.marketing or through other pre-market approval processes. The FDA’s
premarketpre-market review process for new and modified existing devices that precedes product marketing can be time consuming and expensive. Some of the future products and enhancements to such products that
Axogen expectswe expect to develop and market may require marketing clearance or approval from the FDA.
There can be no assurance, however, that clearance or approval will be granted with respect to any of Axogen’sour medical device products or enhancements of marketed products or that Axogen’sour Avance Nerve Graft will meet FDA’s requirements for continued marketing and transition to a BLA or ultimately an approved BLA. FDA review of Axogen’sour devices or biological products may encounter significant delays during FDA’s premarketpre-market review process that would adversely affect Axogen’sour ability to market itsour products or enhancements. In addition, there can be no assurance that Axogenour products, including the Avance Nerve Graft, or enhancements will not be subject to a lengthy and expensive approval process with the FDA.
It is possible that if regulatory clearances or approvals to market a product are obtained from the FDA, the clearances or approvals may contain limitations on the indicated uses of such product and other uses may be prohibited. Product approvals by the FDA can also be withdrawn due to failure to comply with regulatory standards or the occurrence of unforeseen problems following initial approval. Furthermore, the FDA could limit or prevent the distribution of
Axogenour products, and the FDA has the
powerauthority to require the recall of such products. FDA regulations depend heavily on administrative interpretation, and there can be no assurance that future interpretations made by the FDA or other regulatory bodies will not adversely affect
Axogen’s operations. Axogen,our business, results of operations, financial condition, and
itsprospects. We, and our facilities, may be inspected by the FDA from time to time to determine whether it is in compliance with various regulations relating to specifications, development, documentation, validation, testing,
manufacturing, quality control and product labeling. A determination that
Axogen iswe are in violation of such regulations could lead to imposition of civil penalties, including fines, product recalls or product seizures and, in certain cases, criminal sanctions.
We have suspended market availability of our Avive Soft Tissue Membrane and there is no guarantee it will be placed back on the market.
Effective June 1, 2021, we voluntarily suspended the market availability of Avive Soft Tissue Membrane. The decision to suspend market availability of Avive was made following a communication with the FDA on May 14, 2021 regarding the appropriate classification and regulatory approval requirements for Avive. The suspension of market availability was not based on any patient safety or product performance issues or concerns associated with Avive Soft Tissue Membrane, a product that had been marketed by Axogen and routinely used by surgeons for patient care since 2016.
Avive is a processed human umbilical cord intended for surgical use as a resorbable soft tissue barrier and was processed and distributed in accordance with U.S. FDA requirements as a 361 HCT/P tissue product. In November 2017, the FDA outlined a regenerative medicine policy framework including guidance on the regulatory considerations for HCT/Ps and the potential for relevant products to be classified as a drug, device, or biological product subject to pre-market approval requirements. The policy requires manufacturers to confirm the classification and regulatory approval requirements for relevant products and allowed for a compliance and enforcement discretion period through May 31, 2021. We have been in dialogue with the FDA to determine the appropriate regulatory classification and requirements for Avive. We will continue discussions with the FDA with the goal of returning Avive to the market. There is no guarantee, however, that we will return Avive to the market.
The use, misuse or off-label use of Axogen’sour products may harm itsour reputation, or the image of itsour products, in the marketplace, or result in injuries that leadleading to product liability suits, which could be costly to Axogen’sour business, or result in FDA sanctions.
If our products are misused or used for off-label purposes, our reputation and our product’s reputation may suffer, injuries could occur, which may lead to product liability litigation, or we may be subject to FDA sanctions if the company iswe are deemed to have engaged in off-label promotion. Axogen isWe are seeking a biologics license through the BLA process for specific uses of Avance Nerve Graft under specific circumstances. ItsOur promotional materials and training methods must comply with FDA requirements and other applicable laws and regulations, including the prohibition against off-label promotion. Axogen’sOur promotion of the Axoguard products, which are regulated as medical devices, also must comply with FDA’s requirements, and must only use labeling that is consistent with the specific indication(s) for use included in the FDA substantial equivalence order that results in marketing the devices. Avive Soft Tissue Membrane,is which we have voluntarily suspended from the market, was processed and distributed in accordance with FDA requirements for (HCT/P) under 21 CFR Part 1271 regulations and is to be dispensed only by or on the order of a licensed physician and is contraindicated for use in any patient in whom soft tissue implants are
contraindicated. The FDA does not restrict or regulate a physician’s use of a medical product within the practice of medicine, and Axogenwe cannot prevent a physician from using itsour products for an off-label use. However, the FD&C Act and the FDA’s regulations restrict the kind of promotional communications that may be made about Axogen’sour products, and if the FDA determines that Axogen’sour promotional or training materials constitute the unlawful promotion of an off-label use, it could request that Axogenwe modify its training or promotional materials and/or subject the Company to regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, civil money penalties, seizure, injunction or criminal fines, and penalties. Other federal, state, or foreign governmental authorities might also take action if they consider Axogenour promotion or training materials to constitute promotion of an uncleared or unapproved use, which could result in
significant fines or penalties under other statutory authorities, such as laws prohibiting false claims for reimbursement, or exclusion from participation in federal health programs. In that event, Axogen’sour reputation could be damaged and theour products’ use of its products in the marketplace could be impaired.
There may be increased risk of injury if physicians or others attempt to use
Axogenour products off-label. Furthermore, the use of
Axogen’sour product for indications other than those for which
itsour products have been approved, cleared, or licensed by the FDA may not effectively treat the conditions not referenced in product indications, which could harm
Axogen’sour reputation in the marketplace among physicians and patients. Physicians may also misuse
Axogen’s productour products or use improper techniques if they are not adequately trained in the particular use, potentially leading to injury and an increased risk of product
liability.liability litigation. Product liability claims are expensive to defend and could divert management’s attention from
itsour primary business and result in substantial damage awards against
Axogen.us. Any of these events could harm
Axogen’sour business, results of operations,
financial condition, and
financial condition.prospects.
Our Avance Nerve Graft product is currently allowed to be distributed pursuant to a transition plan with the FDA and a change in position by the FDA regarding its use of enforcement discretion to permit the sale of Avance Nerve Graft would have a material adverse effect on Axogen.us.
The FDA considers Axogen’sour Avance Nerve Graft product to be a biological product, subject to BLA approval requirements. Although the Avance Nerve Graft product has not yet been approved by the FDA through a BLA, Axogen’s Avance Nerve Graft productit is currently distributed under the controls applicable to a HCT/P pursuant to Section 361 of the Public Health Service Act and 21 CFR Part 1271 of FDA’s regulations, subject to FDA’s enforcement discretion and Axogen’sour compliance with a transition plan established by the FDA. See “Business — Government Regulations — U.S. Government Regulation Review.Overview.” Axogen hasWe have continued to communicate with the CBER since the acceptance of the transition plan on clinical trial design, preclinicalpre-clinical studies, Chemistry, Manufacturing, and Controls (“CMC”)CMC for Avance Nerve Graft, and other issues related to the effective IND. Subject to the FDA’s enforcement discretion, Axogenwe can commercially distribute Avance Nerve Graft until the FDA makes a final determination on an Avance Nerve Graft BLA submission, assuming Axogen remainswe remain in compliance with the transition plan and exercisesexercise due diligence in executing the transition plan. In the event that the FDA becomes dissatisfied with Axogen’sour progress or actions with respect to the transition plan or the FDA changes its position for any reason regarding its use of enforcement discretion to permit Axogenus to distribute the Avance Nerve Graft product in accordance with the transition plan, Axogenwe would no longer be able to distribute Avance Nerve Graft, which would have a material adverse effect on Axogen’sour operations and financial viability. In addition, if Axogen doeswe do not meet the conditions of the transition plan, or failsfail to comply with applicable regulatory requirements, the FDA could impose civil penalties, including fines, product seizures, injunctions, or product recalls and, in certain cases, criminal sanctions. These consequences also would have a material adverse effect on Axogen’sour operations and financial viability.
Our business is subject to continuing compliance to standards by various accreditation and registration bodies which is costly, and loss of accreditation or registration could result in negative effects on itsour business.
Axogen isWe are subject to accreditation such as that by the AATB and as a Verified-Accredited Wholesale Distributor by National Association of Boards of Pharmacy. Axogen hasPharmacy (NABP) Accredited Drug Distributors. We have registration requirements such as that with ISO 13485 registration bodies. These accreditations and regulations can affect distribution and sale of Axogenour products on a state-by-state basis, within the United StatesU.S. and also affects distribution and sale of Axogenour products outside of the United States.U.S. The loss of accreditation or registration could keep Axogenus from selling and distributing itsour products, which may have negative effects on its business.
Axogen’s Axoguardour business, results of operations, financial condition, and Aviveprospects.
Our Axoguard products are subject to FDA and otherinternational regulatory requirements.
Our Axoguard product line is regulated as a medical device in the US and international countries where we market Axoguard products. In the U.S., Axoguard product line is regulated under the FD&C Act and subject to premarketpre-market notification and clearance requirements under section 510(k) of the FD&C Act, 21 CFR Part 820 (Quality System Regulation) and other FDA regulations. Axogen distributes for Cook BiotechIn the rest of the world, each region (such as the E.U.) or country has their independent international regulations such as the Medical Device Regulations (CE Mark) in Europe, UK Medicines and Healthcare products Regulatory Agency (MHRA), and Taiwan Pharmaceutical Affairs Act.
We distribute Axoguard Nerve Connector and Axoguard Nerve Protector products for Cook Biotech, and Cook Biotech is responsible for the regulatory compliance of these products. In the U.S., Cook Biotech has obtained a 510(k) premarketpre-market clearance for Axoguard Nerve Connector from the FDA for porcine (pig) small intestine submucosa for the repair of peripheral nerve transections where gap closure can be achieved by flexion of the extremity.
Cook Biotech has also obtained a 510(k) premarketpre-market clearance for Axoguard Nerve Protector for the repair of peripheral nerve damage in which there is no gap or where a gap closure is achieved by flexion of the extremity. AxogenIn countries where Axoguard is marketed, Cook Biotech has obtained regulatory clearance with the same indications except for Europe and the UK. For the CE Mark, the Axoguard Nerve Protector indication is the same; however, for Axoguard Nerve Connector, the indication is more specific - “The Axoguard Nerve Connector is indicated for the repair of peripheral nerve discontinuities with gaps up to 5 mm.”
We are responsible for the regulatory compliance of the Axoguard Nerve Cap. Axogen hasWe have obtained a 510(k) premarketpre-market clearance for Axoguard Nerve Cap to protect a peripheral nerve end and separate the nerve from the surrounding environment and to prevent or to reduce the development of symptomatic or painful neuroma.
If Axogenwe or Cook Biotech failsfail to comply with applicable regulatory requirements, the FDAregulatory bodies in each country could deny or withdraw 510(k) clearanceregulatory clearance/approval for the Axoguard products, or impose civil penalties, including fines, product seizures or product recalls and, in certain cases, criminal sanctions.
Avive Soft Tissue Membrane is processed and distributed in accordance with U.S. FDA requirements for Human Cellular and Tissue-based Products (361 HCT/P) and as such, complies with 21 CFR Part 1271 regulations, U.S. State regulations and the guidelines of the American Association of Tissue Banks (“AATB”). FDA could determine that Avive Soft Tissue Membrane should be regulated under Section 351 of the Public Health Service Act and cannot be marketed without a BLA. If so, FDA could take enforcement action including requiring that Axogen remove the product from the market until a BLA is approved. If Axogen fails to comply with applicable regulatory requirements, the FDA could also impose civil penalties, including fines, product seizures or product recalls and, in certain cases, criminal sanctions.
Axogen’s Axotouch product is subject to FDA and other regulatory requirements.
Axogen’s Axotouch product is regulated as a medical device under the FD&C Act and subject to premarket notification and clearance requirements under section 510(k) of the FD&C Act, 21 CFR Part 820 (Quality System Regulation) and other FDA regulations. If Axogen fails to comply with applicable regulatory requirements, the FDA could deny or withdraw 510(k) clearance for the product, or impose civil penalties, including fines, product seizures or product recalls and, in certain cases, criminal sanctions.
Defective Axogen productproducts could lead to recall or other negative business conditions.
If Axogen’sour products are defective or otherwise pose safety risks, the FDA could require their recall, or Axogenwe may initiate a voluntary recall of itsour products. The FDA may require recall of a marketed medical device product, such as the Axoguard products, in the event that it determines the medical device presents a reasonable probability of serious adverse health consequences or death. However, most device recalls do not rise to this level of health significance and result from voluntary action. The FDA has authority to recall biological products when a batch, lot or other quantity of the product presents an imminent or substantial hazard to the public health. However, in such circumstances, the FDA usually initially requests voluntary recalls of biological products, such as the Avance Nerve Graft. If a company does not comply with an FDA request for a recall, the FDA can order one under the above-referenced circumstances or take other enforcement actions, such as product seizure. In addition, manufacturers may, on their own initiative, recall a product to remove or correct a deficiency or to remedy a violation of the FD&C Act that may pose a risk to health. A government-mandated, government-requested, or voluntary recall could occur as a result of an unacceptable risk to health, reports of safety issues, failures, manufacturing errors, design or labeling defects or other deficiencies, and issues. Recalls and other field corrections for any of Axogen’sour products would divert managerial and financial resources and have an adverse effect on itsour business, results of operations, financial condition, and financial condition.prospects. A recall could harm Axogen’sadversely impact our reputation with customers and negatively affect itsour sales. Axogen may initiate recalls involving some of its products in the future that it determines do not require notification of the FDA. If the FDA were to disagree with Axogen’sour internal determinations itand decision making relative to potential recalls (including corrections and removal), we could request that it report those actions as recalls, and takebe subject to further regulatory or enforcement action against Axogen or the product.against.
If Axogen’sour products cause or contribute to a death, a serious injury, or any adverse reaction involving a communicable disease, related to its products, or malfunction in certain ways, itwe will be subject to reporting regulations, which can result in voluntary corrective actions or agency enforcement actions. See “Business — Regulation — Education Grants, U.S. Anti-kickback, False Claims and Other Healthcare Fraud and Abuse Laws — Pervasive and False Claims.Laws.” If Axogen failswe fail to report these events to the FDA within the required timeframes, or at all, the FDA could take regulatory or enforcement action against Axogen.us. Any adverse event involving Axogen’sour products could result in future voluntary corrective actions, such as recalls or customer notifications, or agency action, such as inspection, mandatory recall, or other enforcement action. Any corrective action, whether voluntary or involuntary, as
well as Axogen defending itselfourselves in a lawsuit, would require the dedication of time and capital, distract management from operating itsour business, and may harm Axogen’sadversely impact our reputation, business, results of operations, financial condition, and financial condition.prospects.
Our operations must comply with FDA and other governmental requirements.
Our operations require
itus to comply with the FDA’s and other governmental authorities’ laws and regulations
regardingon the topics including the manufacture and production
and sales and marketing of medical products,
whichand compliance efforts related to such laws is costly, and
failure to comply could subject
Axogenus to enforcement action. See “Business — Government Regulations — Education Grants, U.S. Anti-kickback, False Claims and Other Healthcare Fraud and Abuse Laws — Fraud, Abuse and False
Claims”. Any of theseClaims." Enforcement actions could impair
Axogen’sour ability to produce
its products in a cost-effective and timely manner
in order to meet customer demands.
AxogenWe may also be required to bear other costs or take other actions that may have an adverse impact on
itsour future revenue and
itsour ability to generate profits. Furthermore,
Axogen’sour key material suppliers, licensors and or other contractors may not continue to be in compliance with all applicable regulatory requirements, which could result in
Axogen’sour failure to produce
its products on a timely basis and in the required quantities, if at all.
Healthcare providers and facilities, and third-party payors, often play a primary role in the recommendation and prescription of any currently marketed products and product candidates for which we may obtain marketing approval. Our
current and future arrangements with healthcare providers and facilities, third-party payors and customers, and our sales, marketing, and educational activities, may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations (at the federal and state level) that may constrain our business or financial arrangements and relationships through which we market, sell, and distribute our products for which we obtain marketing approval. In addition, our operations are also subject to various federal and state fraud and abuse, and payment transparency.
Payments made to physicians and other healthcare providers, and other financial interests, have been the subject of a range of federal and state laws. The federal physician payment transparency requirements, sometimes referred to as the Physician Payments Sunshine Act, or the Sunshine Act, was created under the Affordable Care Act ("ACA"). The Sunshine Act, among other things, imposes reporting requirements on drug manufacturers for payments or other transfers of value made by them to physicians and teaching hospitals, as well as ownership and investment interests held by physicians, other healthcare providers, including physician assistants, nurse practitioners, and other mid-level healthcare practitioners, and their immediate family members. Reporting relative to these mid-level practitioners begins this year for payments or other transfers of value in 2021, which could increase the likelihood of a mistake in submission or failure to submit the required information by that group. Failure to submit required information may result in civil monetary penalties of up to an aggregate of $150,000 per year and up to an additional aggregate of $1 million per year for “knowing failures,” for all payments, transfers of value or ownership or investment interests that are not timely, accurately, and completely reported in an annual submission.Additionally, certain states also mandate implementation of compliance programs, impose restrictions on marketing practices and/or require the tracking and reporting of gifts, compensation and other remuneration to physicians and other HCPs.
In addition to the federal fraud, waste, and abuse laws noted, there are analogous state laws and regulations, such as state anti-kickback and false claims laws, and other state laws addressing the medical product and healthcare industries, which may apply to items or services reimbursed by any third-party payor, including commercial insurers, and in some cases may apply regardless of payor, i.e., even if reimbursement is not available. Some state laws require pharmaceutical or device companies to comply with the industry's voluntary compliance guidelines (the PhRMA Code and AdvaMed Code) and the relevant compliance program guidance promulgated by the federal government (HHS-OIG) in addition to other requirements, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts.
Distribution of
Axogenour human tissue products outside the U.S. are subject to foreign regulatory requirements that vary from country to country. In the
European Union (“E.U.
”), human tissue regulations, if applicable, differ from one E.U. member state to the next. Because of the absence of a harmonized regulatory framework and the proposed regulation for advanced therapy medicinal products in the E.U., as well as for other countries, the approval process for human derived cell or tissue based medical products may be extensive, lengthy, expensive, and unpredictable.
AxogenOur products are subject to E.U. member states’ regulations that govern the donation, procurement, testing, coding, traceability, processing, preservation, storage, and distribution of human tissues and cells and cellular or tissue-based products. In addition, some E.U. member states have their own tissue banking regulations. The inability to meet foreign regulatory requirements could materially affect
Axogen’sour future growth and compliance with such requirements could place a significant financial burden on
Axogen.
In addition, the United Kingdom exited the E.U. (“Brexit”) and Axogenus. As a result of Brexit, we cannot be sure what changes could occur or the cost of regulatory compliance with both the United Kingdom and E.U. Until such time as Axogen can obtain, if at all, the necessary registrations and approvals for its products, material expansion beyond the United States will be limited. Finally,UK. Accordingly, the cost of regulatory compliance for sales outside the U.S. can be significant and time consuming.
Finally, regulations in both the United StatesU.S. and other countries are subject to constant change. There can be no assurance that Axogenwe can meet the requirements of future regulations or that compliance with current regulations assures future capability to distribute and sell itsour products.
Clinical trials can be long, expensive and results are ultimately uncertain, which could jeopardize Axogen’sour ability to obtain regulatory approval and continue to market itsour Avance Nerve Graft product.
We are required to perform a clinical trial for
itsour Avance Nerve Graft under FDA’s statutory requirements to obtain approval of a BLA for the product. This trial is expensive, is expected to take several years to execute,
and is subject to factors within and outside of
Axogen’s control. Theour control, and the outcome
of this trial is uncertain.
We submitted an IND for the RECON study of Avance Nerve Graft in April 2013 and received FDA approval in March 2015. The phase 3 clinical trial was initiated in the second quarter of 2015. The RECON study iswas designed to assess the outcome of peripheral nerve repair in approximately 170 subjects in up to 20 centers. The study completed initial subject enrollment in January 2019. No outcome data is available at this time. As required by the SPA and agreed to by the FDA and Axogen,us, an independent statistical analysis was conducted to determine if greater study enrollment was appropriate to maintain the planned statistical power of the study. Based on the results of this analysis, the study'sstudy’s independent biostatistician recommended continuation of the study with a one-time expansion in enrollment according to a pre-defined sample size re-estimation. The recommendation was reviewed with the FDA, and on April 19, 2019, the FDA provided the companyCompany with a Revised Special Protocol Assessment Agreement whichSPA agreement that confirmed the expanded sample size and allowed the study enrollment target to be increased by 50 subjects, to a total target of 220 subjects. Axogen maysubjects and add up to five new study centers, for a total of 25 centers, to support enrollment and currently hasenrollment. Enrollment was completed in
125 centers engaged. Axogen restarted enrollment of subjects and expects to complete enrollment during the summerJuly of 2020 no later thanand follow-up of the end oflast RECON subject was completed in August 2021. The study remains on schedule with a top line study data read-out expected in the second quarter 2020.of 2022, followed by filing of the BLA submission in 2023.
We are working to ensure compliance with the applicable regulations by having ongoing discussions on the transition of the quality system to 21 CFR Parts 210/211 and 600-610 regulations with the FDA. Final determination of regulatory compliance with 21 CFR Parts 210/211 and 600-610 will be made during FDA’s pre-license inspection as part of the BLA review.
IfThe approval of our BLA would not occur or could be delayed, if the FDA is unable to agree with
Axogen,us, or
Axogen iswe are unable to meet the standards required
of it by the FDA regarding
preclinicalpre-clinical studies, clinical studies, and
CMC, the approval of Axogen’s BLA would not occur or be delayed.CMC.
We continue to work diligently with the FDA and, in this context, continuescontinue to distribute the Avance Nerve Graft products. The FDA will end the period of enforcement discretion upon a final determination of Axogen’sour BLA submission or if the FDA findsupon a finding that Axogen doeswe do not meet the conditions for the transition plan or isare not exercising due diligence in executing the transition (e.g., not progressing toward study completion or BLA submission in a timely or adequate fashion). If final action on the BLA is negative or Axogen iswe are found to not meet the conditions for the transition plan, or its execution, Axogenwe will not be able to continue to distribute Avance Nerve Graft, and Axogen’sour business, andresults of operations, financial condition, and prospects will be materially adversely affected.
The results of
non-clinicalpre-clinical studies do not necessarily predict future clinical trial results and predecessor clinical trial results may not be repeated in subsequent clinical trials. Additionally, the FDA may disagree with
Axogen’sour interpretation of the data from
its non-clinicalour pre-clinical studies and clinical trials and may require the company to pursue additional
non-clinicalpre-clinical studies or clinical trials, or not approve
Axogen’sour BLA. If
Axogen iswe are unable to demonstrate the safety and efficacy of
itsour product through
itsour clinical trials,
itwe will be unable to obtain regulatory approval to market the Avance Nerve Graft, and
we will not be able to continue to provide it.
Axogen expects to approach the FDA with the Avance Nerve Graft BLA submission to review the use of Avance Nerve Graft in the whole body for peripheral nerve repair. Axogen will provide the FDA with Real World Evidence based primarily on Real World Data from the RANGER study for qualifying peripheral nerve repairs from multiple areas in the body. The FDA may restrict the Avance Nerve Graft labeling upon approval of the BLA if (1) the clinical results from the RECON study are not expected per the protocol and/or (2) the FDA does not accept the Real World Data from RANGER. We expect that restrictions to our labeling would have an adverse effect on Avance Nerve Graft.
We rely on third parties to conduct itsour clinical trialtrials and they may not perform as contractually required or expected.
Axogen willWe rely on third parties, such as contract research organizations (“CROs”), medical institutions, clinical investigators, and contract laboratories to conduct itsour clinical trialtrials and certain nonclinical studies. AxogenWe and itsour CROs are required to comply with all applicable regulations governing clinical research, including good clinical practice or GCP.(“GCP”). The FDA enforces these regulations through periodic inspections of trial sponsors, principal investigators, CROs and trial sites. If Axogenwe or itsour CROs fail to comply with applicable FDA regulations, the data generated in itsour clinical trials may be deemed unreliable and the FDA may require Axogenus to perform additional clinical trials before approving itsour applications. AxogenWe cannot be certain that, upon inspection, the FDA and similar foreign regulatory authorities will determine that Axogen’sour clinical trial complies or complied with clinical trial regulations, including GCP. In addition, Axogen’sour clinical trial must be conducted with product produced under applicable cGMPGCP regulations. Failure to comply with the clinical trial regulations, including GCP, may require Axogenus to repeat clinical trials, which would delay the regulatory approval process. IfFurther, if these third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, if these third parties need to be replaced, or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to Axogen’sour clinical protocols or regulatory requirements or for other reasons, Axogen’sour non-clinical development activities or clinical trials may be extended, delayed, suspended or terminated, and itwe would not be able to obtain regulatory approval for itsour products on a timely basis, if at all, and itsour business, results of operations, financial condition, and growth prospects would be adversely affected. Furthermore, Axogen’s third partyour third-party clinical trial investigators may be delayed in conducting itsour clinical trials for reasons outside of their control.
U.S. governmental regulation could restrict the use of Axogen’sour Avance Nerve Graft and Avive Soft Tissue Membrane product, restrict Axogen’sour procurement of tissue or increase costs.
In addition to the FDA requirements for biological products, Avance Nerve Graft, and Avive Soft Tissue Membrane, which we have voluntarily suspended from the market, will continue to be subject to as is Avive Soft Tissue Membrane, various requirements for human tissue under 21 CFR Part 1271 controls.1271. Human tissues intended for transplantation have been regulated by the FDA since 1993. In May 2005, three new comprehensive regulations went into effect that address manufacturing activities associated with HCT/P. The first regulation requires that companies that produce and distribute HCT/Ps register with the FDA. The second regulation provides criteria that
must be met for donors to be eligible to donate tissues and is referred to as the “Donor Eligibility” rule. The third regulation governs the processing and distribution of the tissues and is often referred to as the “Current Good Tissue Practices” rule. The Current Good Tissue Practices rule covers all stages of allograft processing, from procurement of tissue to distribution of final allografts. Together, the three basic requirements of 21 CFR Part 1271 are designed to ensure that sound, high quality practices are followed to reduce the risk of tissue contamination and of communicable disease transmission to recipients. These
regulations increased regulatory scrutiny within the industry in which Axogen operateswe operate and have led to increased enforcement actions, which affects the conduct of itsour business. In addition, new guidance was issued by the FDA in lateNovember 2017 and revised in July 2020 on Regulatory Considerations for Human Cells, Tissues, and Cellular and Tissue-Based Products: Minimal Manipulation and Homologous Use, which could have potential implications on the regulatory status of Avive, which we have voluntarily suspended from the market, and future HCT/P products is being evaluated by the Company.
Additional regulations or guidance documents may be implemented by the FDA in the future. These changes may requireimpose new documentation requirements, process changes or testing that could increase costs, and regulatory burden. See “Business — Government Regulations.” These regulations can also increase the cost of tissue recovery activities. Finally, Avance Nerve Graft and Avive Soft Tissue Membrane, which we have voluntarily suspended from the market, are subject to certain state and local regulations, as well as compliance with the standards of the tissue bank industry’s accrediting organization, the AATB.
The procurement and transplantation of allograft nerve tissue is also subject to federal law pursuant to the National Organ Transplant Act (“NOTA”), a criminal statute
whichthat prohibits the purchase and sale of human organs used in human transplantation, including nerve and related tissue, for “valuable consideration.” NOTA only permits reasonable payments associated with the removal, transportation, processing, preservation, quality control, implantation, and storage of human nerve tissue.
Axogen makesWe make payments to certain of
itsour clients and tissue banks for their services related to recovering allograft nerve and umbilical cord tissue on its behalf. If NOTA is interpreted or enforced in a manner
whichthat prevents
Axogenus from receiving payment for services
it renders,we render or
which prevents
itus from paying tissue banks or certain of
itsour clients for the services they render for
Axogen, itsus, our business,
results of operations, financial condition, and prospects could be materially and adversely affected.
We have engaged, through
its marketing employees, independent sales agents and sales representatives, in ongoing efforts designed to educate the medical community as to
theour products’ benefits,
of Axogen products, and
Axogen intendswe intend to continue
itsour educational activities. Although
Axogen believeswe believe that NOTA permits payments in connection with these educational efforts as reasonable payments associated with the processing, transportation and implantation of
Axogenour products, payments in connection with such education efforts are not exempt from NOTA’s restrictions and
Axogen’sour inability to make such payments in connection with
itsthese education efforts may prevent
itus from paying
Axogenour sales representatives
for their education efforts and could adversely affect
Axogen’sour business,
results of operations, financial condition, and prospects. No federal agency or court has determined whether NOTA is, or will be, applicable to every allograft nerve tissue-based material
which Axogen’sthat our processing technologies may generate. Assuming that NOTA applies to
Axogen’sour processing of allograft nerve and umbilical cord tissue,
Axogen believeswe believe that
it complieswe comply with NOTA, but there can be no assurance that more restrictive interpretations of, or amendments to, NOTA will not be adopted in the future, which would call into question one or more aspects of
Axogen’sour method of operations.
Other regulatory entities include state agencies with statutes covering tissue banking. Regulations issued by Florida, New York, California, and Maryland, among other states, are particularly relevant to
Axogen’sour business. Most states do not currently have tissue banking regulations. However, incidents of allograft related issues in the industry may stimulate the development of regulation in other states. It is possible that third parties may make allegations against
Axogenus or against donor recovery groups or tissue banks about non-compliance with applicable FDA regulations or other relevant statutes or regulations. Allegations like these could cause regulators or other authorities to take investigative or other action or could cause negative publicity for
Axogen’sour business and the industry in which
it operates.we operate.
Our Axotouch product is subject to FDA and other regulatory requirements.
Our Axotouch product is regulated as a Class 1 510(k) exempt medical device under the FD&C Act and not subject to pre-market notification and clearance requirements under section 510(k) of the FD&C Act, 21 CFR Part 820 (Quality System Regulation) and other FDA regulations. If we fail to comply with applicable regulatory requirements, the FDA could require a 510(k) for the product, or impose civil penalties, including fines, product seizures or product recalls and, in certain cases, criminal sanctions, which may adversely affect our business, results of operations, financial condition, and prospects.
Healthcare law and policy changes may have a material adverse effect on Axogen.us.
In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act (the “Act”), which Act substantially changes the way healthcare is financed by both governmental and private insurers, and encourages improvements in the quality of healthcare items and services. While implementation of the Act hasU.S. there have been uneven, several provisions significantly impact
the biotechnology and medical device industries and could have a material adverse impact on numerous aspects of Axogen’s business.
This Act includes, among other things, the following measures:
| ● | a new Patient-Centered Outcomes Research Institute to oversee, identify priorities and conduct comparative clinical effectiveness research; |
| ● | reporting and disclosure requirements on healthcare manufacturers for any “transfer of value” made or distributed to physicians and teaching hospitals, as well as reporting of certain physician ownership interests (“Sunshine Act”); |
| ● | payment system reforms, including a national pilot program on payment bundling to encourage hospitals, physicians and other providers to improve the coordination, quality and efficiency of certain healthcare services through bundled payment models; and |
| ● | a new abbreviated pathway for the licensure of biologic products that are demonstrated to be biosimilar or biosimilar and interchangeable with a licensed biologic product. |
There are also a number of states (such as Vermont, Massachusetts, Minnesota) with their own Sunshine Acts-type reportinglegislative and disclosure requirements onregulatory changes and proposed changes regarding the healthcare manufacturerssystem that could prevent or delay marketing approval of our product candidates, restrict or regulate post-approval activities, and affect our ability, or the ability of our collaborators, to profitably sell any products for any “transfer of value” made or distributed to physicians and teaching hospitals,which we obtain marketing approval. We expect that current laws, as well as reportingother healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and in additional downward pressure on the price that we, or our collaborators, may receive for any approved products.
Since enactment of the ACA in 2010 there have been a number of legal challenges as well as other legislative and regulatory changes to the healthcare system that could impact our ability to sell our products profitably.In June 2021, however, the Supreme Court issued its opinion in California v. Texas, upholding the constitutionality of the ACA. The full effects of the
ACA may be unknown as the statutory provisions are fully implemented, and CMS, the FDA, and other federal and state agencies issue final applicable regulations or guidance. These developments could potentially alter coverage and marketing requirements, thereby affecting our pricing and market share if individuals lose coverage for certain
physician ownership interests, for applicable entities within that state.benefits.
In the future, there may continue to be additional proposals relating to the reform of the U.S. healthcare system.
CertainFuture legislation, federal agency regulations and Presidential Executive Orders may impact the healthcare system in ways important to Axogen's business. Adoption of
thesecertain proposals could limit the prices
Axogen iswe are able to charge for
itsour products or the amounts of reimbursement available for
itsour products and could also limit the acceptance and availability of
itsour products. The adoption of some or all of these proposals could have a material adverse effect on
Axogen’sour business, results of operations,
financial condition, and
financial condition.prospects.
Additionally, initiatives sponsored by government agencies, legislative bodies, and the private sector in the U.S. and elsewhere to limit the growth of healthcare costs, especially for drugs and biologics, including price regulation and
competitive pricing,policies regarding generic drugs and biosimilars, are ongoing in markets where
Axogen doeswe do business.
AxogenFor example, the Department of Health and Human Services announced a comprehensive plan in September of 2021 to lower drug prices. Whether any of these proposals will become enacted is hard to predict, as congressional negotiations are ongoing. Regardless, government efforts to lower healthcare costs would affect our market materially. We could experience an adverse impact on operating results due to increased pricing pressure in the U.S. and in other markets. Governments, hospitals, pharmacy benefit managers
(PBMs)(“PBMs”), and other third-party payors could reduce the amount of approved reimbursement for
Axogen’sour products, deny coverage altogether, or impose new requirements on manufacturers to justify their prices. Reductions in reimbursement levels or coverage or other cost-containment measures could unfavorably affect
Axogen’sour future operating results.
We could be subject to civil or criminal penalties if we are found to have violated laws protecting the confidentiality of health information, which could increase our liabilities and harm our reputation or our business.
There are a number of federal and state laws protecting the confidentiality of certain health information and restricting the use and disclosure of that protected information. In particular, the U.S. Department of Health and Human Services promulgated privacy rules under the Health Insurance Portability and Accountability Act (“HIPAA”). These privacy rules protect medical records and other personal health information by limiting their use and disclosure, giving individuals the right to access, amend and seek accounting of their own health information and limiting most use and disclosures of health information to the minimum amount reasonably necessary to accomplish the intended purpose. If we are found to be in violation of the privacy rules under HIPAA, we could be subject to civil or criminal penalties, which could increase our liabilities, harm our reputation, and have a material adverse effect on our business, results of operations, financial condition, and prospects.
Risks Related to
Axogen’sOur Intellectual Property
Failure to protect Axogen’s IPour intellectual property rights could result in costly and time-consuming litigation and itsour loss of any potential competitive advantage.
Our success will depend, to a large extent, on
itsour ability to successfully obtain and maintain patents, prevent misappropriation or infringement of
IP,intellectual property ("IP"), maintain trade secret protection, and conduct operations without violating or infringing on the IP rights of third parties. See “Business — Intellectual Property.” There can be no assurance that
Axogen’sour patented and patent-pending technologies will provide
itus with a competitive advantage, that
Axogenwe will be able to develop or acquire additional technology that is patentable, or that third parties will not develop and offer technologies which are similar to
Axogen’s.ours. Moreover,
Axogenwe can provide no assurance that confidentiality agreements with
itsour employees, consultants and other parties, agreements to protect trade secrets or similar agreements intended to protect unpatented technology or prevent unauthorized use, disclosure, or misappropriation will not be breached by those third parties. IP litigation is extremely expensive and time-consuming, and it is often difficult
if not impossible, to predict the outcome of such litigation. A failure by
Axogenus to protect
itsour IP, or a breach by third parties of agreements aimed at protecting
Axogen’sour IP, could have a materially adverse effect on
itsour business,
results of operations, financial condition, and
operating results and its ability to successfully compete in its industry.
prospects.
Future protection for Axogen’sour proprietary rights is uncertain and may impact itsour ability to successfully compete in itsour industry.
The degree of future protection for
Axogen’sour proprietary rights is uncertain.
AxogenWe cannot ensure that:
| ● | it, or its licensors, were the first to make the inventions covered by each of Axogen’s patents; |
| ● | it, or its licensors, were the first to file patent applications for these inventions; |
| ● | others will not independently develop similar or alternative technologies or duplicate any of Axogen’s technologies; |
| ● | any of Axogen’s pending patent applications will result in issued patents; |
| ● | any of Axogen’s issued patents or those of its licensors are valid and enforceable; |
| ● | any patents issued to Axogen or its collaborators will provide any competitive advantages or will not be challenged by third parties; |
| ● | it will develop additional proprietary technologies that are patentable; |
| ● | the patents of others will not have a material adverse effect on our business rights; or |
| ● | the measures Axogen relies on to protect its IP underlying its products are adequate to prevent third parties from using, disclosing or misappropriating that IP, all of which could harm its ability to compete in the market. |
•Axogen’sWe, or our licensors, were the first to make the inventions covered by each of our patents;
•We, or our licensors, were the first to file patent applications for these inventions;
•Others will not independently develop similar or alternative technologies or duplicate any of our technologies;
•Any of our pending patent applications will result in issued patents;
•Any of our issued patents or those of our licensors are valid and enforceable;
•Any patents issued to us or our collaborators will provide any competitive advantages or will not be challenged by third parties;
•We will develop additional proprietary technologies that are patentable;
•The patents of others will not have a material adverse effect on our business rights; or
•The measures we rely on to protect our IP underlying our products are adequate to prevent third parties from using, disclosing, or misappropriating that IP, all of which could harm our ability to compete in the market.
Our commercial success depends in part on
itsour ability and the ability of
itsour collaborators and licensors to avoid infringing patents and proprietary rights of third parties, which could expose
itus or our collaborators and licensors to litigation or commercially unfavorable licensing arrangements. Third parties may accuse
Axogenus or collaborators and licensors of employing their proprietary technology
without authorization in
Axogenour products, or in the materials or processes used to make
Axogen products, without authorization.our products. Any legal action against
Axogenour collaborators, licensors or
itthose claiming damages and/or seeking to enjoin
Axogen’sour commercial activities relating to the affected products, materials and processes could, in addition to subjecting
Axogenus to potential liability for damages, require
itus or
itsour collaborators and licensors to obtain a license to continue to utilize the affected materials or processes or to manufacture or market the affected products.
AxogenWe cannot predict whether
itwe or
itsour collaborators and licensors would prevail in any of these actions or whether any license required under any of these patents would be made available on commercially reasonable terms, if at all. If
Axogenwe were unable to obtain such a license,
itwe and
itsour collaborators and licensors may be unable to continue to utilize the affected materials or processes, or manufacture or market the affected products, or
Axogenwe may be obligated by a court to pay substantial royalties and/or other damages to the patent holder. Even if
Axogenwe were able to obtain such a license, the terms of such a license could substantially reduce the commercial value of the affected product or products and impair
Axogen’sour prospects for profitability. Accordingly,
Axogenwe cannot predict whether, or to what extent, the commercial value of the affected product or products or
Axogen’sour prospects for profitability may be harmed as a result of any of the liabilities discussed above. Furthermore, infringement and other IP claims, with or without merit, can be expensive and time-consuming to litigate and can divert management’s attention from
itsour core business.
AxogenWe and
itsour collaborators and licensors may be unable to obtain and enforce IP rights to adequately protect
itsour products and related
IP.IP, which could materially and adversely impact our business, results of operations, financial condition, or prospects.
The patent protection for our products may expire before we are able to maximize their commercial value which may subject us to increased competition and reduce or eliminate our opportunity to generate product revenue.
The patents for our commercialized products and products in development have varying expiration dates and, when these patents expire, we may be subject to increased competition and we may not be able to recover our development costs. For example, the material U.S. patents covering the formulations used in our Axoguard product line, which are held by Cook Biotech, have expired. Expiration of these patents could adversely affect our ability to successfully execute our business strategy to maximize the value of Axoguard products and could negativelymaterially and adversely impact our futurebusiness, results of operations, financial condition, and results of operations.prospects.
Others may claim an ownership interest in Axogenour IP which could expose itus to litigation and have a significant adverse effect on itsour prospects.
A third party may claim an ownership interest in one or more of Axogen’sour patents or other IP. A third party could bring legal actions against Axogenus claiming it infringeswe infringed their patents or proprietary rights and seek monetary damages
and/or enjoin clinical testing, manufacturing, and marketing of the affected product or products. While Axogen believes it ownswe believe we own the right, title, and interest in the patents for which itwe or itsour licensors have applied and Axogen’sour other IP (including that which is licensed from third parties), and is presently unaware of any claims or assertions by third-partiesthird parties with respect to Axogen’sour patents or IP, itwe cannot guarantee that a third party will not assert a claim or an interest in any of such patents or IP. If Axogen becomeswe become involved in any litigation, it could consume a substantial portion of Axogen’sour resources and cause a significant diversion of effort by Axogen’sour technical and management personnel regardless of the outcome of the litigation.personnel. If any of these actions were successful, in addition to any potential liability for damages, Axogenwe could be required to obtain a license to continue to manufacture or market the affected product, in which case Axogenwe may be required to pay substantial royalties or grant cross-licenses to Axogen’sour patents. AxogenWe cannot, however, assure that any such license will be available on acceptable terms, if at all. Ultimately, Axogenwe could be prevented from commercializing a product or be forced to cease some aspect of itsour business operations as a result of claims of patent infringement or violation of other IP rights, which could have a material and adverse effect on Axogen’sour business, results of operations, financial condition, and results of operations.prospects. Further, the outcome of IP litigation is subject to uncertainties that cannot be adequately quantified in advance, including the demeanor and credibility of witnesses and the identity of the adverse party. This is especially true in IP cases that may turn on the testimony of experts as to technical facts or the scope or meaning of patent claims upon which experts may reasonably disagree.
We depend on the maintenance of exclusive licenses.
We depend fundamentally on keeping and satisfying the terms of exclusive licenses of itsour nerve repair technologies from UFRF and UTA. Nonetheless, a disagreement between Axogenus and either licensor could have a negative impact on itsour ability to
effectively operate
its business effectively.our business. In addition,
Axogenwe could learn that the technologies
it haswe have licensed do not perform as purported, are not efficacious, or are not the property of the licensor, any of which would have an immediate and negative impact on
Axogen’sour business.
Axogen
Our trademarks are valuable, and our business may be adversely affected if trademarks are not adequately protected.
In the U.S. and other countries, we currently hold trademark registrations and have trademark applications pending, any of which may be the subject of a governmental or third-party objection, which could prevent the maintenance or issuance of the same. As our products mature, our reliance on our trademarks to protect our brand,
increase our name recognition and, in part, differentiate us from our competitors
increases and asincreases. As a result,
if our trademark applications are not successful and if we are unable to prevent third parties from adopting, registering, or using trademarks, including trade dress, that infringe, dilute, or otherwise violate our trademark rights, our business,
results of operations, financial condition, and prospects could be materially adversely affected.
Risks Related to Our Common Stock
An active trading market in our common stock may not be maintained.
The trading market in our common stock has been extremely volatile. The quotation of our common stock on The Nasdaq Capital Market does not assure that a meaningful, consistent, and liquid trading market will exist. We cannot predict whether an active market for our common stock will be maintained in the future. An absence of an active trading market could adversely affect our shareholders’ ability to sell our common stock at current market prices in short time periods, or possibly at all. Additionally, market visibility for our common stock may be limited and such lack of visibility may have a depressive effect on the market price for our common stock. As of December 31,
2019,2021, approximately
41.4%30.9% of our outstanding shares of common stock was held by our officers, directors, beneficial owners of 5% or more of our securities and their respective affiliates, which adversely affects the liquidity of the trading market for our common stock, in as much as federal securities laws restrict sales of our shares by these shareholders. If our affiliates continue to hold their shares of common stock, there will be limited trading volume in our common stock, which may make it more difficult for investors to sell their shares or increase the volatility of our stock price.
The price of Axogen’sour common stock could be highly volatile due to a number of factors, which could lead to losses by investors and costly securities litigation.
Our common stock is listed on
theThe Nasdaq Capital Market under the symbol “AXGN.” The stock market in general, and the market for medical technology companies in particular, have experienced
and could in the future experience extreme volatility that has often been unrelated to the operating performance of particular companies. The trading price of our common stock has experienced substantial volatility and is likely to continue to be highly volatile in response to a number of factors including, without limitation, the following:
| ● | fluctuations in price and volume due to investor speculation and other factors that may not be tied to the financial performance of Axogen; |
| ● | performance by Axogen in the execution of its business plan; |
| ● | actual or anticipated variations in our operating results; |
| ● | announcements of developments by us or our competitors; |
| ● | market conditions in our industry; |
| ● | announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments; |
| ● | adoption of new accounting standards affecting our industry; |
| ● | additions or departures of key personnel; |
| ● | introduction of new products by us or our competitors; |
| ● | sales of our common stock or other securities in the open market; |
| ● | regulatory developments in both the United States and foreign countries; |
| ● | performance of products sold and advertised by licensees in the marketplace; |
| ● | economic and other external factors; |
| ● | period-to-period fluctuations in financial results; and |
| ● | other events or factors, including the other factors described in this “Risk Factors” section, many of which are beyond our control. |
•Fluctuations in price and volume due to investor speculation, including short sales, social media speculation and other factors that may not be tied to our financial performance;
•Our performance in the execution of our business plan;
•Financial viability;
•Actual or anticipated variations in our operating results;
•Announcements of developments by us or our competitors;
•Market conditions in our industry;
•Announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
•Adoption of new accounting standards affecting our industry;
•Additions or departures of key personnel;
•Introduction of new products by us or our competitors;
•Sales of our common stock or other securities in the open market;
•Regulatory developments in both the U.S. and foreign countries;
•Performance of products sold and advertised by licensees in the marketplace;
•Economic and other external factors;
•Period-to-period fluctuations in financial results; and
•Other events or factors, including the other factors described in this “Risk Factors” section, many of which are beyond our control.
The stock market is subject to significant price and volume fluctuations. In the past,Such fluctuations have and several recent situations, following periods of volatility in the market price of a company’s securities,could expose us to securities class action litigation, has been initiated against such company. Axogen has experienced such situation and is subject to a class action. Litigation initiated against us, including that which we are currently involved, whether or not successful, could result in substantial costs and diversion of our management’s attention and resources, which could harmadversely impact our business, results of operations, financial condition, and financial condition.
On January 9, 2019, Plaintiff Neil Einhorn, on behalf of himself and others similarly situated, filed a putative class action complaint alleging violations of the federal securities laws against Axogen, Inc., certain of its directors and officers (“Individual Defendants”), and Axogen’s 2017 Offering Underwriters and 2018 Offering Underwriters (collectively, with the Individual Defendants, the “Defendants”), captioned Einhorn v. Axogen, Inc., et al., No. 8:19-cv-00069 (M.D. Fl.). Plaintiff asserts that Defendants made false or misleading statements in connection with the Company’s November 2017 registration statement issued regarding its secondary public offering in November 2017 and May 2018 registration statement issued regarding its secondary public offering in May 2018, and during a class period of August 7, 2017 to December 18, 2018. In particular, Plaintiff asserts that Defendants issued false and misleading statements and failed to disclose to investors: (1) that the Company aggressively increased prices to mask lower sales; (2) that the Company’s pricing alienated customers and threatened the Company’s future growth; (3) that ambulatory surgery centers form a significant part of the market for the Company’s products; (4) that such centers were especially sensitive to price increases; (5) that the Company was dependent on a small number of surgeons whom the Company paid to generate sales; (6) that the Company’s consignment model for inventory was reasonably likely to lead to channel stuffing; (7) that the Company offered purchase incentives to sales representatives to encourage channel stuffing; (8) that the Company’s sales representatives were encouraged to backdate revenue to artificially inflate metrics; (9) that the Company lacked adequate internal controls to prevent such channel stuffing and backdating of revenue; (10) that the Company’s key operating metrics, such as number of active accounts, were overstated; and (11) that, as a result of the foregoing, Defendants’ positive statements about the Company’s business, operations, and prospects, were materially misleading and/or lacked a reasonable basis. Axogen was served on January 15, 2019. On February 4, 2019, the court granted the parties’ stipulated motion which provided that Axogen is not required to file a response to the complaint until thirty days after Plaintiff files a consolidated amended complaint.On June 19, 2019, Plaintiff filed an Amended Class Action Complaint, and on July 22, 2019, Defendants filed a motion to dismiss. Plaintiff filed opposing papers on August 12, 2019. The Court held a status hearing on September 11, 2019 and stayed all deadlines regarding the parties’ obligations to file a case management report. On December 4, 2019 the parties’ presented oral arguments and are currently awaiting the court’s ruling.
prospects.
We do not anticipate paying any cash dividends in the foreseeable future.
The operation and expansion of our business will continue to require funding. We do not anticipate that we will pay any cash dividends on our common stock for the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our Board of Directors and will depend upon results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law, and other factors our board of directors deems relevant. Accordingly, if any investor purchases shares of common stock, realization of a gain on such investment will depend on the appreciation of the price of our common stock, which may never occur. Investors seeking cash dividends in the foreseeable future should not purchase our common stock.
Anti-takeover provisions in Minnesota law may deter acquisition bids for us that you might consider favorable.
We are governed by the provisions of Sections 302A.671, 302A.673 and 302A.675 of the Minnesota Business Corporation Act (the “MBCA”). These provisions may discourage a negotiated acquisition or unsolicited takeover of us and deprive our shareholders of an opportunity to sell their common stock at a premium over the market price.
In general, Section 302A.671 of the MBCA provides that a corporation’s shares acquired in a control share acquisition have no voting rights unless voting rights are approved in a prescribed manner. A “control share acquisition” is a direct or indirect acquisition of beneficial ownership of shares that would, when added to all other shares beneficially owned by the acquiring person, entitle the acquiring person to have voting power of 20% or more in the election of directors.
In general, Section 302A.673 of the MBCA prohibits a public Minnesota corporation from engaging in a business combination with an interested shareholder for a period of four years after the date of the transaction in which the person became an interested shareholder, unless the business combination is approved in a prescribed manner. The term “business combination” includes mergers, asset sales, and other transactions resulting in a financial benefit to the interested shareholder. An “interested shareholder” is a person who is the beneficial owner, directly or indirectly, of 10% or more of a corporation’s voting stock or who is an affiliate or associate of the corporation, and who, at any time within four years before the date in question, was the beneficial owner, directly or indirectly, of 10% or more of the corporation’s voting stock. Section 302A.673 does not apply if a committee of our Board of Directors consisting of all of its disinterested directors (excluding current and former officers) approves the proposed transaction or the interested shareholder’s acquisition of shares before the interested shareholder becomes an interested shareholder.
If a tender offer is made for our common stock, Section 302A.675 of the MBCA precludes the offeror from acquiring additional shares of stock (including in acquisitions pursuant to mergers, consolidations, or statutory share exchanges) within two years following the completion of the tender offer, unless shareholders selling their shares in the later acquisition are given the opportunity to sell their shares on terms that are substantially the same as those contained in the earlier tender offer. Section 302A.675 does not apply if a committee of our Board of Directors consisting of all of its disinterested directors (excluding its current and former officers) approves the proposed acquisition before any shares are acquired pursuant to the earlier tender offer.
Risks Related to Financing Our Business
Our credit facility and payment obligations under the Revenue Participation Agreement with Oberland Capital, contain operating and financial covenants that restrict our business and financing activities, require cash payments over an extended period of time and are subject to acceleration in specified circumstances, which may result in Oberland Capital taking possession and disposing of any collateral.
Our credit facility with Oberland Capital contains restrictions that limit our flexibility in operating our business. Under the terms of the credit facility, we must maintain, and cause our subsidiaries to maintain, certain covenants, including with respect to limitations on new indebtedness, restrictions on the payment of dividends and maintenance of revenue levels. Our credit facility is collateralized by all of our assets including, among other things, our intellectual property.
If we breach certain of our debt covenants and are unable to cure such breach, revert to the provided liquidity covenant or are not granted waivers in relation to such breach, it may constitute an event of default under the credit facility, giving Oberland Capital the right to require us to repay the then-outstanding debt immediately. If we are unable to pay the outstanding debt immediately, Oberland Capital could, among other things, foreclose on the collateral granted to them to collateralize such indebtedness. A breach of the covenants contained in the credit facility documents and the acceleration of its repayment
obligations by Oberland Capital could have a material adverse effect on our business, financial condition, results of operations, and prospects.
In connection with the credit facility, we entered into a Revenue Participation Agreement (“RPA”) with Oberland Capital. Pursuant to the RPA, we agreed to pay an additional quarterly royalty payment as a percentage of our net revenue, up to $70 million in any given fiscal year, subject to certain limitations set forth therein, during the period commencing on the later of (i) April 1, 2021 and (ii) the date of funding of a loan under the credit facility and ending on the date upon which all amounts owed under the Term Loan Agreement have been paid in full. Payments commenced on September 30, 2021 with the royalty structure resulting in approximately 1.0% per year of additional payments on the outstanding principal amount of the loans.
The credit facility and RPA could have important negative consequences to the holders of our securities. For example, a portion of our cash flow from operations will be needed to make payments to Oberland Capital and will not be available to fund future operations. Additionally, we may have increased vulnerability to adverse general economic and industry conditions. Payment requirements under the credit facility and RPA will increase our cash outflows. Additionally, the credit facility and RPA contain complex provisions which, if interpreted differently, could materially increase the amount of the payments due to Oberland Capital. Our future operating performance is subject to market conditions and business factors that are beyond our control. If our cash inflows and capital resources are insufficient to allow us to make required payments, we may have to reduce or delay capital expenditures, sell assets, or seek additional capital. If we raise funds by selling additional equity, such sale would result in dilution to our shareholders. There is no assurance that if we are required to secure funding, we can do so on terms acceptable to us, or at all.
We may need to raise additional funds to finance our future capital or operating needs, which could have adverse impacts on our business, results of operations and the interests of our shareholders.
We may need to seek to raise funds through the issuance of public or private debt or the sale of equity to achieve our business strategy. If we raise funds, this could dilute the interests of our shareholders. Moreover, the availability of additional capital, whether debt or equity from private capital sources (including banks) or the public capital markets, fluctuates as our financial condition and industry or market conditions in general change. There may be times when the private capital markets and the public debt or equity markets lack sufficient liquidity or when our securities cannot be sold at attractive prices, in which case we would not be able to access capital from these sources on favorable terms, if at all. We can give no assurance as to the terms or availability of additional capital.
General Risk Factors
Legal proceedings that we become involved in from time to time could adversely affect our business operations or financial condition.
We are or may become involved in various legal proceedings, including, but not limited to, proceedings related to patent, product liability and shareholder or securities class actions, among other lawsuits. For example, as described in more detail in “Legal Proceedings” included elsewhere in this Annual Report on Form 10-K, we are currently a defendant in several securities class action lawsuits.
Legal proceedings, if decided adversely to or settled by us, and not covered by insurance, could result in liability material to our financial condition, results of operations or cash flows. Likewise, regardless of outcome, legal proceedings could result in substantial costs and expenses, affect the availability or cost of some of our insurance coverage and significantly divert the attention of our management. There can be no assurance that we will be able to prevail in, or achieve a favorable settlement of, any pending or future legal proceedings to which we become subject. Even claims without merit could subject us to adverse publicity and require us to incur significant legal fees.
We may be subject to future product liability litigation which could be expensive, and our insurance coverage may not be adequate.
Although we are not currently subject to any product liability proceedings and have no provision for product liability disbursements, we may incur material liabilities relating to product liability claims in the future, including product liability claims arising out of the usage of our products. Although we currently carry product liability insurance in an amount we believe is consistent with industry averages, our insurance coverage and any provision we may maintain in the future for product related liabilities may not be adequate and our business, results of operations, financial conditions, and prospects could suffer material adverse consequences.
Loss of key members of management, who we need to succeed, could adversely affect our business.
Our future success depends on the continued efforts of the members of our executive management team. Competition for experienced management personnel in the healthcare industry is intense. If one or more of our executives or other key personnel are unable or unwilling to continue in their present positions, or if we are unable to attract and retain high quality executives or key personnel in the future, our business, results of operations, financial conditions, and prospects may be adversely affected.
Our business and financial performance could be adversely affected, directly or indirectly, by natural or man-made disasters or other similar events.
Neither the occurrence nor the potential impact of natural disasters (such as hurricanes and other natural disasters), civil insurrection and social unrest, public health crises, including COVID-19, nuclear disasters, terrorist activities, international hostilities or other criminal activities can be predicted. However, these occurrences could impact us directly as a result of damage to our facilities or by preventing us from conducting our business in the ordinary course, or indirectly as a result of their impact on our customers, suppliers, or other counterparties. We could also suffer adverse consequences to the extent that these disasters affect the financial markets or the economy in general or in any particular region.
Our ability to mitigate the adverse consequences of such occurrences is in part dependent on the quality of our resiliency planning, and our ability, if any, to anticipate the nature of any such event that occurs. The adverse impact of natural or man-made disasters also could be increased to the extent that there is a lack of preparedness on the part of national or regional emergency responders or on the part of other organizations and businesses that we deal with, particularly those that we depend upon but have no control over.
Our business, results of operations, financial condition, and prospects could be adversely affected, directly or indirectly, by the effects of an increased focus on environmental, social and governance issues.
Recently, shareholders have had an increased focus on environmental, social and governance ("ESG") issues, focusing on how companies are addressing climate change, diversity, and human rights, among other ESG-related issues. Our failure to comply with stakeholder expectations and standards regarding ESG issues, which are still evolving and can vary considerably, or the perception that we have not responded appropriately to ESG-related issues, could result in reputational harm, and could have an adverse effect on our business, results of operations, financial condition, and prospects.
Climate change could present immediate and long-term risks to our industry and our customers. The potential for increased severe weather events could have a material adverse effect on our operations and infrastructure or the operations and infrastructure of our suppliers. In addition, the effects of climate change could include long-term changes in temperature levels and water availability, increased energy costs, and increased supply costs impacted by those increasing energy costs. The cost of mitigating or responding to ESG issues could be significant; however, these costs are too uncertain to predict. In addition, the approaches taken by the U.S. or foreign governments to regulate ESG issues, which may include legislative or regulatory changes, could adversely impact our business, results of operations, financial condition, and prospects, and are too uncertain to predict.
Changes in U.S. trade policy, threats of international tariffs, and changes to the U.S. political landscape may adversely affect our business, results of operations, financial condition, and prospects.
Additionally, rising threats of international tariffs, including tariffs applied to goods traded between the U.S. and China, could materially and adversely affect our business, results of operations, financial condition, and prospects. Over the past several years, legislative and executive action from U.S. and foreign leaders has led to both threats of and the imposition of tariffs on certain materials and products. Over the past several years, the U.S. and China imposed tariffs or announced proposed tariffs to be applied in the future to certain of each other’s exports. President Biden has chosen to maintain the tariffs implemented by President Trump on the medical technology industry. We cannot be certain, however, if the Biden administration will choose to have these tariffs remain in place or what impact, if any they may have on our business. Changes in political conditions in China and changes in the state of China-U.S. relations, including the current trade tensions, are difficult to predict and could adversely affect the operations or financial condition of the Company. We cannot predict the extent to which the U.S. or other countries will impose quotas, duties, tariffs, taxes or other similar restrictions upon the import or export of our products in the future, nor can we predict future trade policy or the terms of any renegotiated trade agreements and their impact on our business. The adoption and expansion of trade restrictions, the occurrence of a trade war, or other governmental action related to tariffs or trade agreements or policies has the potential to adversely impact demand for our products, our costs, our customers, our suppliers, and the U.S. economy, which in turn could have a material adverse effect on our business, results of operations, financial condition, and prospects.
The Biden administration continues to contemplate significant policy changes, including healthcare regulatory changes, which may impact our business, results of operation, financial condition, and prospects. These effects could be exacerbated by volatile economic, political and market conditions, such as social unrest, civil insurrection, and political action.
Our results of operations could be negatively affected by potential fluctuations in foreign currency exchange rates.
We are exposed to the effects of changes in foreign currency exchange rates. We are exposed to the risk of an increase or decrease in the value of the foreign currencies relative to the U.S. Dollar, which could increase the value of our expenses and decrease the value of our revenue when measured in U.S. Dollars. As a result, our results of operation may be influenced by the effects of future exchange rate fluctuations and such effects may have an adverse impact on our common stock price. Global markets and foreign currencies, including the Euro and the British Pound, were adversely impacted, as a result of Brexit and volatility in foreign currencies is expected to continue as a result of Brexit. Changes in the relative values of currencies occur regularly and, in some instances, could materially adversely affect our business, results of operations, financial condition or prospects.
Our failure to protect our technology systems and comply with data protection laws and regulations could lead to government enforcement actions and significant penalties against us, and adversely impact our business, results of operations, financial condition, and prospects.
We rely on information technology systems, including technology from third-party vendors, to process, transmit and store electronic information in our day-to-day operations. Similar to other companies, the size and complexity of our information technology systems makes them vulnerable to a cyber-attack, malicious intrusion, breakdown, destruction, loss of data privacy, or other significant disruption. Our information systems require an ongoing commitment of resources to maintain, protect and enhance existing systems and develop new systems to keep pace with continuing changes in information processing technology, evolving systems and regulatory standards and the increasing need to protect patient and customer information. Any failure by us to maintain or protect our information technology systems and data integrity could result in the unauthorized access to patient data and personally identifiable information, theft of intellectual property or other misappropriation of assets, or otherwise compromise our confidential or proprietary information and disrupt our operations. Cyber-attacks, intrusions, or other breaches could adversely impact our business, results of operations, financial condition, and prospects.
In the U.S., federal and state privacy and security laws require certain of our operations to protect the confidentiality of personal information, including patient medical records and other health information. Limiting and/or restricting the use of certain personal data and information, as well as added transparency obligations to data subjects is becoming an increasing focus as evidenced by the implementation of the California Consumer Privacy Act (“CCPA”) which became effective on January 1, 2020. In Europe, E.U. member states and other foreign jurisdictions, including Switzerland, have adopted data protection laws and regulations which impose significant compliance obligations. Moreover, the collection and use of personal health data in the E.U. is governed by the European Union General Data Protection Regulation (“GDPR”). The GDPR imposes several requirements relating to the consent of the individuals to whom the personal data relates, the information provided to the individuals, the security and confidentiality of the personal data, data breach notification and the use of third-party processors in connection with the processing of personal data. The GDPR also imposes strict rules on the transfer of personal data out of the E.U. to the U.S., provides an enforcement authority and imposes large penalties for noncompliance, including the potential for fines of up to 4% of the annual global revenue of the noncompliant company. The recent implementation of the GDPR has increased our responsibility and liability in relation to personal data that we process, including in clinical trials, and we may in the future be required to put in place additional mechanisms to ensure compliance with the GDPR, which could divert management’s attention and increase our cost of doing business.
Compliance with applicable data privacy and security laws and regulations (together with applicable industry standards) may increase our costs of doing business. In this regard and in light of the CCPA’s implementation, we expect that there will be other proposed laws, regulations and industry standards relating to privacy and data protection in the U.S., the E.U. and other jurisdictions, and we cannot determine the impact such future laws, regulations and standards may have on our business results of operations, financial condition, and prospects.
We are dependent on internal information and telecommunications systems, and any failure of these systems, including system security breaches, data protection breaches or other cybersecurity attacks, may negatively impact our business and results of operations.
Cyber-attacks and other tactics designed to gain access to and exploit sensitive information by breaching mission critical systems of large organizations are constantly evolving and have been increasing in sophistication in recent years. High profile security breaches leading to unauthorized release of sensitive information have occurred with increasing frequency at a number of major U.S. companies, despite widespread recognition of the cyber-attack threat and improved data protection methods. While to date we have not experienced a significant data loss, significant compromise or any material financial losses related to
cybersecurity attacks, our systems, those of our customers, and those of our third-party service providers are under constant threat. Cybercrime, including phishing, social engineering, attempts to overload our servers with denial-of-service attacks, or similar disruptions from unauthorized access to our systems, could cause us critical data loss or the disclosure or use of personal or other confidential information. Outside parties may attempt to fraudulently induce employees to disclose personally identifiable information or other confidential information which could expose us to a risk of loss or misuse of this information.
We are dependent on internal information and telecommunications systems, and we are vulnerable to failure of these systems, including through system security breaches, data protection breaches or other cybersecurity attacks. If these events occur, the unauthorized disclosure, loss or unavailability of data and disruption to our business may have a material adverse effect on our reputation and harm our relationships with vendors and customers. Additionally, these events may lead to financial losses from remedial actions, or potential liability from fines, including in relation to noncompliance with the GDPR, as well as possible litigation and punitive damages. Failures of our internal information or telecommunications systems may prevent us from taking customer orders, shipping products and billing customers. Sales may also be impacted if our customers are unable to access our pricing and product availability information. The occurrence of any of these events could have a material adverse impact on our business and results of operations.
Our management has broad discretion in the use of our cash and cash equivalents and, despite management’s efforts, cash and cash equivalents may be used in a manner that does not increase the value of shareholders’ investments.
Our management has broad discretion in the use of our cash and cash equivalents, and investors must rely on the judgment of management regarding the use of such cash and cash equivalents. Management may invest our cash and cash equivalents in short-term or long-term, investment-grade, interest-bearing securities. These investments may not yield favorable returns to shareholders. If we do not invest or apply our cash and cash equivalents in ways that enhance shareholder value, we may fail to achieve expected financial results, which could cause our stock price to decline.
Our business and stock price may be adversely affected if our internal controls are not effective.
Section 404 of the Sarbanes-Oxley Act of 2002 requires that public companies conduct a comprehensive evaluation of their internal control over financial reporting. To comply with this statute, each year we are required to document and test our internal control over financial reporting and our management is required to assess and issue a report concerning it.
Although we have systems in place to strengthen our internal control over financial reporting, we cannot assure you that we will not discover material weaknesses in the future or that no material weakness will result from any difficulties, errors, delays, or disruptions while we implement and transition to new internal systems. The existence of one or more material weaknesses could result in errors in our financial statements, and substantial costs and resources may be required to rectify these or other internal control deficiencies. If we cannot produce reliable financial reports, investors could lose confidence in our reported financial information, the market price of our common stock could decline significantly, we may be unable to obtain additional financing to operate and expand our business and our business, results of operations, financial condition, and prospects could be adversely impacted.
ITEM 1B. UNRESOLVED STAFF COMMENTSCOMMENTS
ITEM 2.
PROPERTIES
The CompanyPROPERTIES
We and Alachua Copeland Park Investments, LLC, a Florida limited liability company (as successor in interest to Ology Bioservices Holdings, LLC, a Delaware limited liability company, who was successor in interest to SNH Medical Office Properties Trust, a Maryland real estate investment trust (“SNH”)Trust), are parties to that certaina lease dated as of February 6, 2007, as amended (the “Primary Lease”), pursuant to which the Company leases itswe lease an approximately nineteen thousand square foot corporate headquarters facility in the Progress Center at 13631 Progress Boulevard, Alachua, Florida 32615 (the “Primary Premises”). The annual cost forFlorida. On July 13, 2021, we entered into a sixth amendment to the Primary Premises ranges from approximately $353Lease to $363 through the end ofextend the term of the lease, which expires onPrimary Lease to October 31, 2021. On January 23, 2017 the Company entered into2026.
We and Cousins Heights Union, LLC, a Georgia limited liability company (as successor in interest to Heights Union, LLC), are parties to a lease
(the “First Expansion Lease”) with SNH for one thousand four hundred square feet at 13709 Progress Boulevard, Alachua, Florida 32615 (this property was purchased by Nucleic Acids Licensing, LLC in February 2019) (the “First Expansion Premises”) adjacentdated September 20, 2018, as amended, pursuant to
the Primary Premises. The Company has entered into the Second Expansion Lease and Third Expansion Lease, as defined below, which
relate to properties that are adjacent to the Primary Premises and First Expansion Premises resulting in the Company havingwe lease approximately
eighteenseventy-five thousand square feet
for its corporate headquartersof office space (the “Tampa Premises”) in a one hundred and
certain research spacefifty thousand square foot office building in
Tampa, Florida. On July 12, 2021, we amended our agreement with Heights Union, LLC to revise the
Progress Center in Alachua, Florida.
On November 19, 2018,commencement date of the Company entered into a Lease (the “Second Expansion Lease”) with SNH for two thousand eight hundred square feet at 13709 Progress Boulevard, Suites S-160, S-162lease to mean October 30, 2020 and S-164, Alachua, Florida 32615 (the “Second Expansion Premises”). Pursuantthe termination date of the lease to the Second Expansion Lease, the Company is tobe October 31, 2034. We use the Second ExpansionTampa Premises for general office, uses. The Second Expansion Lease commenced December 1, 2018medical laboratory, training, and expires November 30, 2020. The annual costmeeting purposes.
We and
$46 for the final twleve months. The Company is also obligatedJa-Cole L.P. are parties to
pay for certain taxes, insurance costs and electricity costs incurred by SNH.
On November 19, 2018, AC entered into a Lease (the “Third Expansion Lease”) with SNH for two thousand square feet at 13709 Progress Boulevard, Suites S-175, S-177 and S-179, Alachua, Florida 32615 (the “Third Expansion Premises”). Pursuant to the Third Expansion Lease, the Company is to use the Third Expansion Premises for general office and biomedical research uses. The Third Expansion Lease commenced December 1, 2018 and its term expires November 30, 2020. The annual cost of the Third Expansion Premises is approximately $37 for the first twelve months of the term and $35 for the final eleven months. The Company is also obligated to pay for certain taxes, insurance costs and electricity costs incurred by SNH.
On November 21, 2018, the Company, entered into Commercial Lease Amendment 3 (the “Burleson Amendment”), to the Commercial Leaselease dated April 21, 2015, as amended with Ja-Cole L.P. Under(the "Primary Lease"), and a lease dated October 1, 2020, pursuant to which we lease approximately 17,500 square feet in total (the “Burleson Facility”) in Burleson, Texas. On January 27, 2022, we amended the termsPrimary Lease for 15,000 square feet of the Burleson Amendment,Facility to revise the Company leased an additional two thousand five hundred square feet of warehouse/office space in Burleson, Texas (collectively with the space leased under the Commercial Lease with Ja-Cole L.P. prior to the effectivenesscommencement date of the Burleson Amendment,lease to mean May 1, 2022 and the “Burleson Facility”). The Burleson Facility will now comprise a totaltermination date of twelve thousand five hundred square feet, all of which, pursuantthe lease to the Burleson Amendment, will be leased until April 30, 2022. The annual rental cost of the entire Burleson Facility is now approximately $113 through December 31, 2020, $116 for the calendar year 2021 and until April 2022.2027. The Burleson Facility houses raw material storage and product distribution while allowing same day order fulfillment for both the east and west coasts of the United States.U.S.
On October 26, 2018 (the “Ashley Avenue Lease Effective Date”), the Company entered into a Lease (the “Ashley Avenue Lease”) with Ashley Avenue Associates I, LLC., a Delaware limited liability company (“Ashley”), for the lease by the Company of approximately fifteen thousand square feet of office space on the second floor of the building located at 1000 N. Ashley Drive, Tampa, Florida 33602 (the “Ashley Avenue Premises”). Pursuant to the Ashley Avenue Lease, the Company will use the Ashley Avenue Premises for general office purposes. The initial term of the Ashley Avenue Lease commenced on December 1, 2018 and expires on November 30, 2020. The Company has an option to terminate the lease after eighteen months by providing Ashley with four months advance written notice. The rental cost for the Ashley Avenue Premises was approximately $381 for the first twelve-month period, and approximately $360 for the final eleven month period. The Company is also obligated to pay for its pro rata share of the building’s property taxes, utilities, administrative costs, common area maintenance and management fees, excluding any capital improvements or any damage due to fire, hurricane or other casualty.
On September 20, 2018, the Company entered into an agreement with Heights Union, LLC, a Florida limited liability company (“Heights Union”), for the lease of seventy-five thousand square feet of office space (the “Heights Union Premises”) in a one hundred and fifty thousand square foot office building that Heights Union intends to construct and complete on or before September 30, 2020, on an area of land in Tampa, Florida. Pursuant to the Heights Union lease, the Company will use the Heights Union Premises for general office, medical laboratory, training and meeting purposes. The annual costs of the Heights Union Premises ranges from approximately $2.4 million to $3.3 million during the term of the lease. Axogen believes it can obtain certain economic incentives from state authorities associated with the employment at the facility; but such incentives are not expected to be a material offset to the expenses of the project as a whole.
On August 6, 2015,
Axogenwe entered into the CTS Agreement with CTS, an FDA registered tissue establishment. Processing of the Avance Nerve Graft pursuant to the CTS Agreement began in February 2016. The CTS Agreement
terminatesinitially had a five-year term ending August 31, 2020. On February 22, 2021, the agreement was amended a seventh time to extend the term through December 31,
2021, subject to earlier termination by either party for cause (subject to the non-terminating party’s right to cure, in certain circumstances), or without cause upon 6 months’ notice whereby notice cannot be provided prior to March 1, 2021.2023. Under the CTS Agreement,
Axogen payswe pay CTS a facility fee for clean room/manufacturing, storage, and office space. CTS also provides services in support of
Axogen’sour manufacturing such as routine sterilization of daily supplies, providing disposable supplies
and microbial services, and office support.
Effective June 8,
On July 31, 2018,
AC entered into an Agreement for Purchase and Sale of Real Property with ARC CRVANOH001, LLC, a Delaware limited liability company (“ARC”), forwe purchased the
acquisition (the “Acquisition”) by AC of certain real property locatedAPC Facility in Vandalia, Ohio,
located near the CTS processing facility where Avance Nerve Graft is currently processed. The APC Facility, when and if operational, will be the new processing facility for Avance Nerve Graft to provide continued capacity for growth and to support the transition of Avance Nerve Graft from a 361 HCT/P tissue product to a biologic product. The APC Facility is comprised of a 70,000107,000 square foot building on approximately 8.6 acres of land. AC thereafter transferred its rights and obligations under the Agreement to Axogen Processing Corporation, incorporated for purposesRenovation of the Acquisition. On July 31, 2018, Axogen Processing Corporation completed the Acquisition pursuantAPC Facility is ongoing until material processing is transitioned to the terms of the Agreement for Purchase and Sale of Real Property.
In addition, Axogen leases space and maintains records at certain other facilities, including Axogen’s prior corporate headquarters at 1407 South Kings Highway, Texarkana, Texas 75501.
The aggregate cost of all of Axogen’s and its subsidiaries’ properties is approximately $1.9 million per year. Axogen believesAPC Facility in early 2023.
We believe that itsour facilities will be sufficient to operate itsour business for the next 12 months and that current lease obligations will not change materially.
ITEM 3. LEGAL PROCEEDINGS
PROCEEDINGS
Except as provided below, Axogen
Information required by this item is set forth in Note 14 - Commitments and
its subsidiaries do not have any active or pending material legal proceedings:
| 1. | On January 9, 2019, Plaintiff Neil Einhorn, on behalf of himself and others similarly situated, filed a putative class action complaint in the United Stated District Court for the Middle District of Florida alleging violations of the federal securities laws against Axogen, Inc., certain of its directors and officers (“Individual Defendants”), and Axogen’s 2017 Offering Underwriters and 2018 Offering Underwriters (collectively, with the Individual Defendants, the “Defendants”), captioned Einhorn v. Axogen, Inc., et al., No. 8:19-cv-00069 (M.D. Fla.). Plaintiff asserts that Defendants made false or misleading statements in connection with the Company’s November 2017 registration statement issued regarding its secondary public offering in November 2017 and May 2018 registration statement issued regarding its secondary public offering in May 2018, and during a class period of August 7, 2017 to December 18, 2018. In particular, Plaintiff asserts that Defendants issued false and misleading statements and failed to disclose to investors: (1) that the Company aggressively increased prices to mask lower sales; (2) that the Company’s pricing alienated customers and threatened the Company’s future growth; (3) that ambulatory surgery centers form a significant part of the market for the Company’s products; (4) that such centers were especially sensitive to price increases; (5) that the Company was dependent on a small number of surgeons whom the Company paid to generate sales; (6) that the Company’s consignment model for inventory was reasonably likely to lead to channel stuffing; (7) that the Company offered purchase incentives to sales representatives to encourage channel stuffing; (8) that the Company’s sales representatives were encouraged to backdate revenue to artificially inflate metrics; (9) that the Company lacked adequate internal controls to prevent such channel stuffing and backdating of revenue; (10) that the Company’s key operating metrics, such as number of active accounts, were overstated; and (11) that, as a result of the foregoing, Defendants’ positive statements about the Company’s business, operations, and prospects, were materially misleading and/or lacked a reasonable basis. Axogen was served on January 15, 2019. On February 4, 2019, the court granted the parties’ stipulated motion which provided that Axogen is not required to file a response to the complaint until thirty days after Plaintiff files a consolidated amended complaint. On June 19, 2019, Plaintiff filed an Amended Class Action Complaint, and on July 22, 2019, Defendants filed a motion to dismiss. Plaintiff filed opposing papers on August 12, 2019. The Court held a status hearing on September 11, 2019 and stayed all deadlines regarding the parties’ obligations to file a case management report. On December 4, 2019 the parties’ presented oral arguments and are currently awaiting the court’s ruling.. Plaintiff is seeking compensatory damages, reimbursement of expenses and costs, including counsel and expert fees and such other relief as the court deems just and proper. The Company and Individual Defendants dispute the allegations and intend to vigorously defend against the Complaint. The amount of loss, if any, cannot be reasonably estimated at this time. |
| 2. | Jackson v. Zaderej, et al., No. 8:19-cv-01976 U.S. District Court (M.D. FL). On August 12, 2019, Plaintiff Harvey Jackson, derivatively on behalf of Axogen, filed a verified shareholder derivative complaint for violations of securities laws, breach of fiduciary duty, waste of corporate assets and unjust enrichment against Quentin S. Blackford, Gregory G. Freitag, Mark Gold, Jamie M. Grooms, Alan M. Levine, Peter J. Mariani, Guido Neels, Robert J. Rudelius, Amy Wendell, and Karen Zaderej (the “Individual Defendants”) and Nominal Defendant Axogen, Inc. (“Axogen”) (collectively, “Defendants”). Plaintiff asserts that the Individual Defendants, who are current or former Axogen officers or directors, issued a false proxy statement for the election of directors in violation of Section 14(a) of the Securities Exchange Act of 1934, breached their fiduciary duties, wasted corporate assets and were unjustly enriched by allowing Axogen to make false public statements to investors based on the same claims in the report issued December 18, 2018 by Seligman Investments (the same allegations that form the basis for the Einhorn matter and the Bussey shareholder demand). Plaintiff demands judgment in the Company’s favor against all Individual Defendants as follows: (A) declaring that Plaintiff may maintain this action on behalf of Axogen, and that Plaintiff is an adequate representative of Company; (B) declaring that the Individual Defendants have breached and/or aided and abetted the breach of their fiduciary duties to Axogen; (C) determining and awarding to Axogen the damages |
Contingencies of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K and is incorporated herein by reference. | | sustained by it because of the violations set forth above from each of the Individual Defendants, jointly and severally, together with pre- and post-judgment interest thereon; (D) directing Axogen and the Individual Defendants to take all necessary actions to reform and improve its corporate governance and internal procedures to comply with applicable laws and protect Axogen and its shareholders from a repeat of the damaging events described therein, including, but not limited to, putting forward for shareholder vote the following resolutions for amendments to the Company’s Bylaws or Articles of Incorporation and the following actions as may be necessary to ensure proper corporate governance policies: (i) a proposal to strengthen the Board’s supervision of operations and develop and implement procedures for greater shareholder input into the policies and guidelines of the Board, (ii) a provision to permit the shareholders of Axogen to nominate at least six candidates for election to the Board; and (iii) a proposal to ensure the establishment of effective oversight of compliance with applicable laws, rules, and regulations; (E) awarding Axogen restitution from Individual Defendants, and each of them; (F) awarding Plaintiff the costs and disbursements of this action, including reasonable attorneys’ and experts’ fees, costs, and expenses; and (G) granting such other and further relief as the Court may deem just and proper. The Defendants filed a motion to dismiss on October 22, 2019. In response, Plaintiffs voluntarily withdrew their complaint and the matter was dismissed without prejudice by the court on November 5, 2019. |
| 3. | Novitzki v. Zaderej, et al, 19-CA-11745 DIV L (13th Judicial Circuit, Hillsborough Cnty., Fl.). On November 11, 2019, Plaintiff Joseph Novitzki, derivatively on behalf of Axogen, filed a verified stockholder derivative complaint for breach of fiduciary duty, waste of corporate assets and unjust enrichment against Karen Zaderej, Gregory G. Freitag, Peter J. Mariani, Amy Wendell, Robert J. Rudelius, Mark Gold, Guido Neels, and Jamie M. Grooms (the “Individual Defendants”) and Nominal Defendant Axogen, Inc. (“Axogen”) (collectively, “Defendants”). Plaintiff asserts that the Individual Defendants, who are current or former Axogen officers or directors, breached their fiduciary duties, wasted corporate assets and were unjustly enriched by allowing Axogen to make false public statements to investors based on the same claims in the report issued December 18, 2018 by Seligman Investments (the same allegations that form the basis for the Einhorn matter and the Bussey shareholder demand). Plaintiff demands judgment in the Company’s favor against all Individual Defendants as follows: (a) against all of the defendants and in favor of the Company for the amount of damages sustained by the Company as a result of the defendants' breaches of fiduciary duties, waste of corporate assets, and unjust enrichment; (B) directing Axogen to take all necessary actions to reform and improve its corporate governance and internal procedures to comply with applicable laws and to protect Axogen and its stockholders from a repeat of the damaging events described herein, including, but not limited to, putting forward for stockholder vote, resolutions for amendments to the Company's Bylaws or Articles of Incorporation and taking such other action as may be necessary to place before stockholders for a vote of the following corporate governance policies: (1) directing Axogen to employ an independent, third-party expert to calculate the Company's market size (including the dollar values of Axogen's total addressable market and portion of the market relating to extremity trauma and OMF); (2) a provision to control insider selling; (3) a proposal to strengthen Axogen's oversight of its disclosure procedures; (4) a proposal to strengthen the Company's controls over financial reporting; (5) a proposal to strengthen the Board's supervision of operations and develop and implement procedures for greater stockholder input into the policies and guidelines of the Board; and (6) a provision to permit the stockholders of Axogen to nominate at least three candidates for election to the Board; (C) extraordinary equitable and/or injunctive relief as permitted by law, equity, and state statutory provisions sued hereunder, including attaching, impounding, imposing a constructive trust on, or otherwise restricting the proceeds of defendants' trading activities or their other assets so as to assure that plaintiff on behalf of Axogen has an effective remedy; (D) Awarding to Axogen restitution from defendants, and each of them, and ordering disgorgement of all profits, benefits, and other compensation obtained by the defendants, including all ill-gotten gains from insider selling by defendants; (E) awarding to plaintiff the costs and disbursements of the action, including reasonable attorneys' fees, accountants' and experts' fees, costs, and expenses; and (F) granting such other and further relief as the Court deems just and proper. After Defendants’ counsel had multiple discussions with Plaintiff’s counsel pointing out that it’s complaint was deficient for the same reasons argued in Jackson, the Plaintiff agreed to voluntarily dismiss the complaint without prejudice, which the court so-ordered on January 24, 2020. |
ITEM 4. MINE SAFETY DISCLOSURES
DISCLOSURES
None.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDERSTOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESSECURITIES
Axogen’s common stock is traded on the Nasdaq Capital Market under the symbol “AXGN.” On February 21, 2020,22, 2022, the last reported closing sale price of the Companyour common stock on the Nasdaq Capital Market was $14.70$7.26 per share.
Shareholders
Shareholders
As of February
21, 2020, the Company22, 2022, we had
39,730,97641,795,240 shares of common stock outstanding, and approximately
240231 common shareholders of record, based upon information received from our stock transfer agent. However, this number does not include beneficial owners whose shares were held of record by nominees or broker dealers.
The Company estimatesWe estimate that there are
more than 9,769approximately 10,686 individual owners. Additional information called for by this item is incorporated herein by reference to the following sections of this Report: Note 11
“Equity Compensation Plans”- Stock-Based Incentive Plans of the Notes to Consolidated Financial Statements included in Item 8; and
Part III, Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters – Equity Compensation Plan Information”.
Stock Performance Graph
The following graph compares the cumulative total shareholder return on our common stock for the period from December 31,
20152016 to December 31,
20192021 with (i) the Nasdaq Stock Market
Composite Index;Biotechnology Index and (ii) the Nasdaq Stock Market
BiotechnologyComposite Index. The graph assumes an investment of $100 in our common stock and the respective indices for the period of December 31,
20142016 to December 31,
2019.2021. The comparisons set forth in the graph are provided pursuant to SEC rules and are not intended to forecast or be indicative of the future performance of our common stock or either of the included indices. The performance graph shall not be deemed incorporated by reference by any general statement incorporating by reference this annual report into any filing under the Securities Act of 1933, as amended, or the Exchange Act of 1934, as amended, except to the extent we specifically incorporate this information by reference and shall not otherwise be deemed filed under such acts.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
We did not repurchase any of our securities in the fourth quarter of
2019.
2021.Recent Sales of Unregistered Securities
We had no sales of unregistered securities in
2019.
2021.
Securities Authorized for Issuance Under Equity Compensation Plans
See Part III, Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”
Dividends
We have never declared or paid and do not anticipate paying or declaring a cash dividend on our common stock. We intend to retain any earnings to finance the growth and development of our business. Our Board of Directors may declare dividends at its discretion.
ITEM 6. RESERVED
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below has been derived from our audited financial statements. This data should be read in conjunction with the financial statements, the notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this report. Dollar amounts are in thousands, except per share amounts.
| | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
Statement of Operations Data: | | | | | | | | | | | | | | | |
Revenues | | $ | 106,712 | | $ | 83,937 | | $ | 60,426 | | $ | 41,108 | | $ | 27,331 |
Cost of goods sold | | | 17,349 | | | 12,923 | | | 9,311 | | | 6,467 | | | 4,848 |
Gross Profit | | | 89,363 | | | 71,014 | | | 51,115 | | | 34,641 | | | 22,483 |
Costs and Expenses: | | | | | | | | | | | | | | | |
Sales and marketing | | | 71,950 | | | 56,617 | | | 37,636 | | | 28,426 | | | 20,089 |
Research and development | | | 17,514 | | | 11,773 | | | 6,699 | | | 4,212 | | | 3,237 |
General and administrative | | | 31,305 | | | 23,124 | | | 14,731 | | | 10,133 | | | 8,423 |
Total costs and expenses | | | 120,769 | | | 91,514 | | | 59,066 | | | 42,771 | | | 31,749 |
Loss from operations | | | (31,406) | | | (20,500) | | | (7,951) | | | (8,130) | | | (9,266) |
Other income (expense): | | | | | | | | | | | | | | | |
Investment income | | | 2,364 | | | 1,525 | | | — | | | — | | | — |
Interest expense | | | (40) | | | (1,127) | | | (2,217) | | | (5,386) | | | (3,989) |
Interest expense - deferred financing costs | | | — | | | (81) | | | (246) | | | (875) | | | (128) |
Loss on extinguishment of debt | | | — | | | (2,186) | | | — | | | — | | | — |
Other (expense) | | | (53) | | | (28) | | | (31) | | | (20) | | | 27 |
Total other income (expense) | | | 2,271 | | | (1,897) | | | (2,494) | | | (6,281) | | | (4,090) |
Net loss | | | (29,135) | | | (22,397) | | | (10,445) | | | (14,411) | | | (13,356) |
Loss per common share - basic and diluted | | | (0.74) | | | (0.60) | | | (0.31) | | | (0.47) | | | (0.51) |
| | | | | | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
Balance Sheet Data: | | | | | | | | | | | | | | | |
Total current assets | | $ | 135,021 | | $ | 150,953 | | $ | 55,741 | | $ | 44,037 | | $ | 35,051 |
Total assets | | | 154,643 | | | 160,173 | | | 58,875 | | | 46,360 | | | 36,700 |
Total current liabilities | | | 20,880 | | | 13,044 | | | 13,719 | | | 11,081 | | | 3,709 |
Total long-term obligations, net of current maturities and deferred financing fees | | | 1,610 | | | 147 | | | 19,974 | | | 20,358 | | | 24,795 |
Total liabilities | | | 22,490 | | | 13,191 | | | 33,693 | | | 31,439 | | | 28,504 |
Total shareholders' equity | | | 132,153 | | | 146,982 | | | 25,182 | | | 14,921 | | | 8,196 |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OPERATIONS
The following information should be read in conjunction with “Selected Financial Data” contained in Item 6 of this Form 10-K, our consolidated financial statements and the notes thereto contained in Item 8 of this Form 10-K, the “Cautionary Notice Regarding Forward-Looking“Forward-Looking Statements” contained in Part 1 of this Form 10-K, “Risk Factors” contained in Item 1A of this Form 10-K, and the other information appearing elsewhere in, or incorporated by reference into, this Form 10-K. Dollar amounts referenced in this Item 7 are in thousands, except per share amounts.
We are the leading company focused specifically on the science, development, and commercialization of technologies for peripheral nerve regeneration and repair. We are passionate about
helpingproviding the opportunity to restore
peripheral nerve function and quality of life
tofor patients with
physical damage or transection to peripheral
nerves providingnerve injuries. We provide innovative, clinically proven, and economically effective repair solutions for surgeons and
health carehealthcare providers. Peripheral nerves provide the pathways for both motor and sensory signals throughout the body. Every day, people suffer traumatic injuries or undergo surgical procedures that impact the function of their peripheral nerves. Physical damage to a peripheral nerve or the inability to properly reconnect peripheral nerves can result in the loss of muscle or organ function, the loss of sensory feeling, or the initiation of pain.
Axogen’s
Our platform for peripheral nerve repair features a comprehensive portfolio of products, including Avance® Nerve Graft, a biologically active off-the-shelf processed human nerve allograft for bridging severed peripheral nerves without the comorbidities associated with a second surgical site,site; Axoguard® Nerve Connector, a porcine (pig) submucosa extracellular matrix (“ECM”)ECM coaptation aid for tensionless repair of severed peripheral nerves,nerves; Axoguard® Nerve Protector, a porcine submucosa ECM product used to wrap and protect injureddamaged peripheral nerves and reinforce the nerve reconstruction while preventing soft tissue attachments,attachments; Axoguard® Nerve Cap, a porcine submucosa ECM product used to protect a peripheral nerve end and separate the nerve from the surrounding environment to reduce the development of symptomatic or painful neuroma andneuroma; Avive® Soft Tissue Membrane, a processed human umbilical cord intended for surgical use as a resorbable soft tissue barrier. Along with these core surgical products, we also offer theconduit; and Axotouch® Two-Point Discriminator, used to measure the inervationinnervation density of any surface area of the skin. Our portfolio of products is available in the United States,U.S., Canada, Germany, the United Kingdom,UK, Spain, South Korea, and several Europeanother countries.
As previously announced, we suspended the market availability of Avive Soft Tissue Membrane ("Avive") effective June 1, 2021 and
other international countries.
we continue discussions with the FDA to determine the appropriate regulatory classification and requirements for Avive. The suspension was not based on any safety or product issues or concerns with Avive. We seek to return Avive to the market, although we are unable to estimate the timeframe or provide any assurances that a return to the market will be achievable. Avive has historically represented approximately 5% of our revenues through the second quarter of 2021, and no Avive revenue was recorded in the third and fourth quarters of 2021.
Revenue from the distribution of
Axogen’s peripheralour nerve repair products,
the Avance Nerve Graft, Axoguard Nerve Connector,
and Axoguard Nerve Protector, and
Avive Soft Tissue Membrane,Axoguard Nerve Cap, in the
United StatesU.S. is the main contributor to
Axogen’sour total reported sales and has been the key component of
itsour growth to date.
Axogen revenues increased in 2019 compared to 2018 primarily as a result of continuing revenue growth through product penetration in, and increases of the number of, active accounts, and to a lesser extent, the development and growth of new accounts.
We have experienced that surgeons initially are cautious adopters for peripheral nerve repair products. Surgeons typically start with a few cases and then wait and see the results of these initial cases. Active accounts are usually past this wait period and have developed some level of product reorder. These active accounts have typically gone through the committee approval process, have at least one surgeon who has converted a portion of his or her treatment algorithms of peripheral nerve repair to
the Axogenour portfolio and have ordered
Axogenour products at least six times in the last twelve months.
As such, revenue growth primarily occurs from increased purchasing fromof December 31, 2021, we had 951 active accounts, followed by revenue growthan increase of 6.5% from new accounts. Each new period893 one year ago. Active accounts are approximately 85% of measurement is thus benefited from growth inour revenue. The top 10% of these active accounts which may include thosecontinue to represent approximately 35% of our revenue. As our business continues to grow, we have transitioned to reporting a new account metric that were new accounts inwe believe demonstrates the prior measurement period. Axogen has continued to broaden its salesstrength of adoption and marketing focus which is expected to have a positive contribution to itspotential revenue growth in the long term. In 2019, the Company continuedaccounts that have developed a more consistent use of our products in their nerve repair algorithm. We refer to investthese as core accounts which we define as accounts that have purchased at least $100,000 in the developmentpast 12 months. As of December 31, 2021, we had 294 core accounts, an increase of 9.3% from 269 one year ago. These core accounts represented approximately 60% of our commercial team, infrastructure capabilities, clinical studies, product developmentrevenue in 2021, which has remained consistent over the past two years.
COVID-19 Impact
In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. The global impact of COVID-19 has had a negative effect on the global economy, disrupting the financial markets and research,significantly impacting the medical industry. In response to COVID-19, our top priority has been the health and safety of those we serve, including healthcare professionals and their patients, as well as surgeon education.our employees, communities, and suppliers. We ensured employee compliance with state and local mandates as well as implemented certain cost mitigation initiatives in 2020 such as a reduction
in pay levels, temporary suspension of tissue processing and deferral of certain projects, among other efforts. As economic activity began to normalize, we lifted these cost mitigation initiatives.
Although COVID-19 had a result, thesignificant impact on our revenue growth in these expenses outpaced2020, we were able to increase revenue in 2021 as compared to 2020. The rapid development and fluidity of the situation surrounding COVID-19 prevent any prediction as to the ultimate impact COVID-19 will have on our revenue growth.
business as new variants continue to spread, causing global supply chain disruptions, labor shortages, and inflationary conditions.Comparison of the Years Ended December 31,
20192021 and
2018
2020
The following table sets forth, for the periods indicated, our results of operations expressed as dollar amounts and as percentages of total revenue:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 |
| | | % of | | | | % of |
| Amount | | Revenue | | Amount | | Revenue |
| (dollars in thousands) |
| Revenues | $ | 127,358 | | | 100.0 | % | | $ | 112,300 | | | 100.0 | % |
| Cost of goods sold | 22,931 | | | 18.0 | | | 21,581 | | | 19.2 | |
| Gross profit | 104,427 | | | 82.0 | | | 90,719 | | | 80.8 | |
| Costs and expenses: | | | | | | | |
| Sales and marketing | 73,328 | | | 57.6 | | | 69,659 | | | 62.0 | |
| Research and development | 24,177 | | | 19.0 | | | 17,846 | | | 15.9 | |
| General and administrative | 32,338 | | | 25.4 | | | 26,396 | | | 23.5 | |
| Total costs and expenses | 129,843 | | | 102.0 | | | 113,901 | | | 101.4 | |
| Loss from operations | (25,416) | | | (20.0) | | | (23,182) | | | (20.6) | |
| Other (expense) income: | | | | | | | |
| Investment income | 93 | | | 0.1 | | | 605 | | | 0.5 | |
| Interest expense | (1,356) | | | (1.1) | | | (1,054) | | | (0.9) | |
| Change in fair value of derivatives | (28) | | | — | | | (117) | | | (0.1) | |
| | | | | | | |
| Other expense | (278) | | | (0.2) | | | (38) | | | — | |
| Total other (expense) income, net | (1,569) | | | (1.2) | | | (604) | | | (0.5) | |
| Net loss | $ | (26,985) | | | (21.2) | % | | $ | (23,786) | | | (21.1) | % |
Revenue | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 |
| | | | | % of | | | | | % of |
| | Amount | | Revenue | | Amount | | Revenue |
| | (dollars in thousands) |
Revenues | | $ | 106,712 | | 100.0 | % | | $ | 83,937 | | 100.0 | % |
Cost of goods sold | | | 17,349 | | 16.3 | | | | 12,923 | | 15.4 | |
Gross profit | | | 89,363 | | 83.7 | | | | 71,014 | | 84.6 | |
Costs and expenses: | | | | | | | | | | | | |
Sales and marketing | | | 71,950 | | 67.4 | | | | 56,617 | | 67.5 | |
Research and development | | | 17,514 | | 16.4 | | | | 11,773 | | 14.0 | |
General and administrative | | | 31,305 | | 29.3 | | | | 23,124 | | 27.5 | |
Total costs and expenses | | | 120,769 | | 113.1 | | | | 91,514 | | 109.0 | |
Loss from operations | | | (31,406) | | (29.4) | | | | (20,500) | | (24.4) | |
Other income (expense): | | | | | | | | | | | | |
Investment income | | | 2,364 | | 2.1 | | | | 1,525 | | 1.8 | |
Interest expense | | | (40) | | 0.0 | | | | (1,127) | | (1.4) | |
Interest expense — deferred financing costs | | | — | | 0.0 | | | | (81) | | 0.0 | |
Loss on extinguishment of debt | | | — | | 0.0 | | | | (2,186) | | (2.7) | |
Other expense | | | (53) | | 0.0 | | | | (28) | | 0.0 | |
Total other expense | | | 2,271 | | 2.1 | | | | (1,897) | | (2.3) | |
Net Loss | | $ | (29,135) | | (27.3) | % | | $ | (22,397) | | (26.7) | % |
Revenuess
Revenues for the year ended December 31,
20192021 increased
27.1%$15,058, or 13.4%, to
$106,712$127,358 as compared to
$83,937$112,300 for the year ended December 31,
2018.2020. In 2021, our revenues continued to recover from the initial phases of the COVID-19 pandemic that began in 2020, however revenues in the second half of 2021 were negatively impacted by lower procedure volume due to the impact of COVID-19 variants and related hospital staffing challenges. Revenue growth
for the year was
primarily the result of increasesdriven by an increase in unit volume of approximately 8%, as well as the net impact of price increases and changes in prices and product mix. Our revenuemix of approximately 5%. The unit volume increase was attributed to growth
was largely driven by increased revenue in
active accounts as well as the addition of newour core and active accounts.
In the fourth quarter As of 2019,December 31, 2021, we had 797951 active accounts, an increase of 12%6.5% from 712 at the end893 one year ago and we had 294 core accounts, an increase of 2018.
9.3% from 269 one year ago.
Gross profit for the year ended December 31,
20192021 increased
25.8%$13,708, or 15.1%, to
$89,363$104,427 as compared to
$71,014$90,719 for the year ended December 31,
2018. The increase was primarily attributable2020. Gross margin increased to
the increased revenue, but slightly offset by increased processing costs, inventory write downs and additional inventory reserves. Gross profit margin in 2019 decreased to 83.7% % as compared to 84.6% in 2018.
Costs and Expenses
Total cost and expenses increased 32.0% to $120,76982.0% for the year ended December 31, 20192021 as compared to $91,514 for the year ended December 31, 2018. The increase was primarily due to variable costs associated with increased sales activity, expansion of our commercial team, expanding product development and clinical study activities, expanded surgeon education programs, and increases in compensation and general expenses associated with ongoing expansions of infrastructure to support the Company’s growth. In addition, general and administrative expenses include approximately $2,467 of litigation expenses and certain expenses associated therewith, as a result of the ongoing
litigation described in Legal Proceedings and other litigation that was dismissed during 2019 (the “Litigation”) in the period ending December 31, 2019 as compared to $0 in the prior year period. As a percentage of revenues, total cost and expenses increased to 113.1% in 2019 compared to 109.0% in 2018.
Sales and marketing expenses increased 27.1% to $71,95080.8% for the year ended December 31, 20192020. In 2021, we recorded a $1,429 charge reflecting the write-down of inventory and related production costs due to the suspension of Avive, which resulted in a 1.1% decrease in our gross margin. Gross margin was negatively impacted during 2020 due to lower revenue, idle facility charges and other increased period costs of
approximately $2,000 in the second and third quarters resulting from our temporary suspension of tissue processing, as comparedwell as approximately $2,242 of inventory write-downs.
Costs and Expenses
Total costs and expenses increased $15,942, or 14.0%, to $56,617$129,843 for the year ended December 31, 2018.2021 as compared to $113,901 for the year ended December 31, 2020. The increase in total costs and expenses over the prior year reflects a return to more normalized spending levels following the steep reduction in spend as a result of our cost mitigation initiatives enacted at the beginning of the COVID-19 pandemic, including increases of $4,129 in professional and consulting fees, $3,127 in occupancy-related expenses primarily attributable to our new lab and office facility in Tampa, $2,700 in general corporate expenses, $2,555 in marketing programs and travel as restrictions were lifted and access to hospitals and surgeons resumed and $1,462 in employee compensation where increases in salaries and non-cash stock compensation were partially offset by decreases in bonus' and commissions. As a percentage of total revenues, total costs and expenses increased slightly to 102.0% for the year ended December 31, 2021 as compared to 101.4% for the year ended December 31, 2020.
Sales and marketing expenses increased $3,669, or 5.3%, to $73,328 for the year ended December 31, 2021 as compared to $69,659 for the year ended December 31, 2020. This increase was primarily due
to: (a) increasedto an increase of $2,459 in marketing programs and travel as restrictions were lifted and access to hospitals and surgeons resumed and an increase of $1,353 in occupancy-related expenses, partially offset by lower employee compensation
expenses relatedof $667 primarily due to
Axogen’s direct sales force as a result of increased sales and hiring of additional personnel; (b) increased travel expenses to support the commercial team’s activities; (c) expansion of the Company’s surgeon education program; and (d) increased marketing activity.lower commissions. As a percentage of
total revenues, sales and marketing expenses were
67.4%57.6% for the year ended December 31,
20192021 as compared to
67.5%62.0% for the year ended December 31,
2018.
General2020. We expect sales and administrativemarketing expenses will increase as pandemic-related restrictions in hospital access and travel normalize.
Research and development expenses increased
35.4%$6,331, or 35.5%, to
$31,305$24,177 for the year ended December 31,
20192021 as compared to
$23,124 for the year ended December 31, 2018. The increase was primarily the result of increased expenses related to infrastructure expansion to support the Company’s growth, including professional fees, salaries, and an increase of $1,982 of non-cash stock compensation. As mentioned above, the Company also recorded $2,467 of legal fees associated the Litigation. As a percentage of revenues, general and administrative expenses increased to 29.3%$17,846 for the year ended December 31, 2019 compared to 27.5% for the year ended December 31, 2018.
Research2020. Product development expenses represented approximately 74% of total research and development expenses increased 48.8% to $17,514 in the year ended December 31, 20192021 as compared to $11,773 for50% in the year ended December 31, 2018. Research and development costs include Axogen’sprior year. The increase in product development and clinicalexpenses reflect increased spending in specific programs, including our efforts substantially focused on its Biologics License Application, orrelated to the BLA for the Avance Nerve Graft the Sensation-NOW and RECON studies and the development of new ora next generation products. The increase in expenses for 2019 relate to expenditures for these activities and hiring additional personnel to support clinical and product development activity.Avance product. It is expected that costs associated with the BLA will continue to increase as we continue to invest in completing the license application. Axogen continuesAdditionally, we continue to conduct product development efforts focused on both new peripheral nerve products and new peripheral nerve applications for our existing products. Axogen pursuesWe pursue research grants to support research and early product development. Axogen’s increased product and clinical pipeline development initiatives contributed to the increase inClinical trial expenses represented approximately 26% of research and development expenses in 2019.the year ended December 31, 2021 as compared to 50% in the prior year. As a result,percentage of total revenues, research and development expenses increased to 16.4% in 2019 from 14.0% in 2018, as a percentage of revenues.
Other Income and Expenses
For the year ended December 31, 2019, we recognized $2,364 of investment income from our asset management and cash investment sweep accounts as compared to $1,52519.0% for the year ended December 31, 2018. Interest expense decreased to $402021 as compared to $1,12715.9% for the year ended December 31, 2018 as a result of the Company paying, in full, the Term Loan2020.
General and Revolving Loan with MidCap, as defined in “Term and Revolving Loan Agreements in the prior year ended December 31, 2018. Foradministrative expenses increased $5,942, or 22.5%, to $32,338 for the year ended December 31, 2018, we incurred2021 as compared to $26,396 for the year ended December 31, 2020. The increase was primarily due to higher professional and consulting fees of $3,120, higher general corporate expenses of $2,057, and higher occupancy-related expenses of $585. Increases in salaries and non-cash stock compensation were partially offset by a lossdecrease in incentive compensation. As a percentage of total revenues, general and administrative expenses increased to 25.4% for the year ended December 31, 2021 as compared to 23.5% for the year ended December 31, 2020.
Other Expense and Income
Total other expense increased $965, or 159.8%, to $1,569 for the year ended December 31, 2021 as compared to $604 for the year ended December 31, 2020. The increase in total other expense was primarily due to a decrease of $512 in investment income due to lower investment balances and falling yields and an increase of $302 in interest expense due to our Oberland debt facility, which began on
the extinguishmentJune 30, 2020, with an additional borrowing on June 30, 2021. We capitalized interest of
the debt of $2,186 for exit, prepayment fees$4,277 and
the amortization of the remaining balance of the deferred financing costs for which there was no such activity in the current year.
$997 during 2021 and 2020, respectively.
We had no income tax expensesexpense or income tax benefit for 2019 or 2018the years ended December 31, 2021 and 2020 due to the incurrence of net operating loss for the year,losses in both years, the benefits of which have been fully value allowed.reserved. We do not believe that there are any additional tax expenses or benefits currently available.
Comparison of the Years Ended December 31, 20182020 and 2017
2019
The following table sets forth, for the periods indicated, our results of operations expressed as dollar amounts and as percentages of total revenue:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 |
| Amount | | % of
Revenue | | Amount | | % of
Revenue |
| (dollars in thousands) |
| Revenues | $ | 112,300 | | | 100.0 | % | | $ | 106,712 | | | 100.0 | % |
| Cost of goods sold | 21,581 | | | 19.2 | | | 17,349 | | | 16.3 | |
| Gross profit | 90,719 | | | 80.8 | | | 89,363 | | | 83.7 | |
| Costs and expenses: | | | | | | | |
| Sales and marketing | 69,659 | | | 62.0 | | | 71,950 | | | 67.4 | |
| Research and development | 17,846 | | | 15.9 | | | 17,514 | | | 16.4 | |
| General and administrative | 26,396 | | | 23.5 | | | 31,305 | | | 29.3 | |
| Total costs and expenses | 113,901 | | | 101.4 | | | 120,769 | | | 113.1 | |
| Loss from operations | (23,182) | | | (20.6) | | | (31,406) | | | (29.4) | |
| Other (expense) income: | | | | | | | |
| Investment income | 605 | | | 0.5 | | | 2,364 | | | 2.1 | |
| Interest expense | (1,054) | | | (0.9) | | | (40) | | | — | |
| | | | | | | |
| Change in fair value of derivatives | (117) | | | (0.1) | | | — | | | — | |
| Other expense | (38) | | | — | | | (53) | | | — | |
| Total other (expense) income, net | (604) | | | (0.5) | | | 2,271 | | | 2.1 | |
| Net loss | $ | (23,786) | | | (21.1) | % | | $ | (29,135) | | | (27.3) | % |
Revenues
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 |
| | | | | % of | | | | | % of |
| | Amount | | Revenue | | Amount | | Revenue |
| | (dollars in thousands) |
Revenues | | $ | 83,937 | | 100.0 | % | | $ | 60,426 | | 100.0 | % |
Cost of goods sold | | | 12,923 | | 15.4 | | | | 9,311 | | 15.4 | |
Gross profit | | | 71,014 | | 84.6 | | | | 51,115 | | 84.6 | |
Costs and expenses: | | | | | | | | | | | | |
Sales and marketing | | | 56,617 | | 67.5 | | | | 37,636 | | 62.3 | |
Research and development | | | 11,773 | | 14.0 | | | | 6,699 | | 11.1 | |
General and administrative | | | 23,124 | | 27.5 | | | | 14,731 | | 24.4 | |
Total costs and expenses | | | 91,514 | | 109.0 | | | | 59,066 | | 97.8 | |
Loss from operations | | | (20,500) | | (24.4) | | | | (7,951) | | (13.2) | |
Other income (expense): | | | | | | | | | | | | |
Investment income | | | 1,525 | | 1.8 | | | | — | | 0.0 | |
Interest expense | | | (1,127) | | (1.4) | | | | (2,217) | | (3.7) | |
Interest expense — deferred financing costs | | | (81) | | 0.0 | | | | (246) | | (0.4) | |
Loss on extinguishment of debt | | | (2,186) | | (2.7) | | | | — | | 0.0 | |
Other expense | | | (28) | | 0.0 | | | | (31) | | 0.0 | |
Total other expense | | | (1,897) | | (2.3) | | | | (2,494) | | (4.1) | |
Net Loss | | $ | (22,397) | | (26.7) | % | | $ | (10,445) | | (17.3) | % |
Revenues
Revenues for the year ended December 31, 20182020 increased 38.9%$5,588, or 5.2%, to $83,937$112,300 as compared to $60,426$106,712 for the year ended December 31, 2017.2019. During the on-set of COVID-19, certain hospitals and surgery centers discontinued elective surgeries and our sales force was not allowed to enter the hospitals. This increase was primarilysignificantly reduced our revenue growth. Once elective surgeries resumed, hospitals allowed our sales representatives to begin entering their facilities once again. As a result, we began to experience a return in revenues as these facilities began scheduling surgeries, although restrictions continued to limit our access in certain accounts as local communities addressed resurgences of continuingCOVID-19. Revenue growth was driven by an increase in active accounts from improved penetration within these active accounts,unit volume of approximately 2%, as well as an increasethe net impact of changes in the numberprices and product mix of approximately 3%. The growth in unit volume was primarily attributed to unit growth in our active accounts. In the fourth quarter of 2018,2020, we had 712893 active accounts, an increase of 20%12% from 591797 at the end of 2017. In addition, the Company received grant revenue of $195 in the year ended December 31, 2018, as compared to grant revenue of $56 in the year ended December 31, 2017.2019.
Gross profit for the year ended December 31,
20182020 increased
38.9%$1,356, or 1.5%, to
$71,014$90,719 as compared to
$51,115 for the year ended December 31, 2017. This increase was consistent with and primarily attributable to the increased revenues in 2018. Gross profit margin in 2018 was unchanged at 84.6% as compared to 84.6% in 2017.
Costs and Expenses
Total cost and expenses increased 54.9% to $91,514$89,363 for the year ended December 31, 20182019. Gross profit increased during 2020 due to an increase in revenue, offset by the impact of COVID-19. Gross profit margin in 2020 decreased to 80.8% as compared to $59,06683.7% in 2019. Gross margin was negatively impacted during 2020 due to idle facility charges and other increased period costs of approximately $2,000 in the second and third quarters resulting from our temporary suspension of tissue processing, as well as approximately $2,242 of inventory write-downs.
Costs and Expenses
Total costs and expenses decreased $6,868, or 5.7%, to $113,901 for the year ended December 31, 2017.2020 as compared to $120,769 for the year ended December 31, 2019. The increasedecrease in operating expenses was primarily dueattributable to variable costs associated with increased sales activity, expansionthe impact of our commercial team, expanding product developmentlower travel and clinical study activities, expandedin-person surgeon education programs and increases in compensation and general expensesof $9,807 as a result of restrictions associated with ongoing expansionsCOVID-19, as well as decreased litigation expenses of
infrastructurereaching deductible limits with respect to support the Company’s growth.certain litigation matters. These decreases were slightly offset by higher sales commissions and other compensation-related costs of $5,519. As a percentage of revenues, total costcosts and expenses increaseddecreased to 109.0%101.4% in 20182020 compared to 97.8%113.1% in 2017.
2019.
Sales and marketing expenses
increased 50.4%decreased $2,291, or 3.2%, to
$56,617$69,659 for the year ended December 31,
20182020 as compared to
$37,636$71,950 for the year ended December
31, 2017. The increase2019. This decrease was primarily due to: (a) increased compensationdriven by lower travel, surgeon education and conference expenses as we cancelled in-person education programs, and experienced restrictions in hospital access and travel directly related to Axogen’s direct sales force as a resultthe impact of COVID-19. The decrease in expenses was slightly offset by salaries and benefits from increased sales and hiring of additional personnel; (b) increased travel expenses to support the commercial team’s activities; (c) expansion of the Company’s surgeon education program; and (d) increased marketing activity.commissions. As a percentage of revenues, sales and marketing expenses were 67.5%62.0% for the year ended December 31, 20182020 compared to 62.3%67.4% for the year ended December 31, 2017.
2019.
General and administrative expenses
increased 57.0%decreased $4,909, or 15.7%, to
$23,124$26,396 for the year ended December 31,
20182020 as compared to
$14,731$31,305 for the year ended December
31, 2017.2019. The increasedecrease was primarily thedue to lower litigation expenses as a result of increased expenses relatedreaching deductible limits with respect to infrastructure expansion to support the Company’s growth, including professional fees, salaries, and $4,007 of non-cashcertain litigation matters as well as a decrease in stock compensation. As a percentage of revenues, general and administrative expenses increaseddecreased to 27.5%23.5% for the year ended December 31, 20182020 compared to 24.4%29.3% for the year ended December 31, 2017.
2019.
Research and development expenses slightly increased 75.7% to $11,773$17,846 for the year ended December 31, 2020 as compared to $17,514 for the year ended December 31, 2019. Research and development costs include our product development efforts as well as non-clinical spend in support of our BLA for Avance Nerve Graft, and clinical trials. Product development expenses represented approximately 50% of total research and development expense in the year ended December 31, 20182020 as compared to $6,699 for52% in the prior year period. Clinical trial expenses represented approximately 50% of research and development expense in the year ended December 31, 2017. Research2020 as compared to 48% in the prior year period. COVID-19 negatively impacted certain of our clinical study programs as certain study sites restricted access and development costs include Axogen’s product development and clinical efforts substantially focusedreallocated their resources to focus on its Biologics License Application, or BLA, for the Avance Nerve Graft and the RECON and RANGER studies. These activities vary from quarter to quarter due to the timing of certain projects. The increase in expenses for 2018 relate to expenditures for these clinical activities, including the pivotalCOVID-19 related care. Included within clinical trial to support the BLA, and hiring additional personal to supportexpenses are clinical and product development activity as well as expenses associated with the new processing facility. It is expected thattrial costs associated with the BLA will continue to increase as we continue to invest in completing the license application. Axogen continues to conduct product developmentBLA. Our continued efforts focused on both new peripheral nerve products and new peripheral nerve applications for our existing products. Axogen pursues research grants to support research and early product development. Axogen’s increased product and clinical pipeline development initiatives contributedrelated to the BLA drove the slight increase in research and development expenses in 2018, with grant revenue offsetting a portion of this activity.year over year. As a result,percentage of revenues, research and development expenses decreased to 15.9% in 2020 from 16.4% in 2019.
Other Expense and Income
Interest expense increased to
14.0%$1,054 for the year ended December 31, 2020 as compared to $40 for the year ended December 31, 2019. The change is primarily due to interest expense from our Oberland debt facility, which began on June 30, 2020. We recognized total interest charges of $1,941 in
2018 from 11.1%connection with the Oberland debt facility in
2017, as a percentagethe current year, but $997 of
revenues.
Other Income and Expenses
this interest was capitalized to the construction costs of the APC Facility. For the year ended December 31, 2018,2020, we recognized $1,525$605 of investment income from our asset management and cash investment sweep accounts that were opened during the second quarter of 2018. As a result of the prepayment in full of the Term Loan and Revolving Loan with MidCap, as defined in “Term and Revolving Loan Agreements” below, during the second quarter of 2018, interest expense decreased 49.2% to $1,127 in 2018 as compared to $2,217$2,364 for the year ended December 31, 2017,2019. The decrease is primarily due to lower investment income from our asset management program as a result of lower interest rates from COVID-19 and interest expense – deferred financing costs decreased 67.1% to $81 for the years ended December 31, 2018 as compared to $246 for the year ended December 31, 2017. For the year ended December 31, 2018, we incurred a loss on the extinguishment of the debt of $2,186 for exit, prepayment feeslowered investment balances and the amortization of the remaining balance of the deferred financing costs. Other expenses decreased 9.7% to $28 for the year ended December 31, 2018, as compared to $31 for the year ended December 31, 2017.
increased cash reserves.
We had no income tax
expensesexpense or
income tax benefit for
20182020 or
20172019 due to
the incurrence of net operating
loss for the year,losses in both years, the benefits of which have been fully
value allowed. Axogen doesreserved. We do not believe
that there are any additional tax expenses or benefits currently available.
Liquidity and Capital Resources
Cash Flow Information
General
As of December 31, 2019, the Company had2021, our principal sources of liquidity were our cash and cash equivalents and investments totaling $84,086. Our cash equivalents are comprised of a money market mutual fund and restrictedour investments are comprised of short-term commercial paper and U.S. Treasuries. Our cash of $102,510, a decrease of $20,095and cash equivalents and investments decreased $19,880 from $122,605$103,966 at December 31, 2018,2020 primarily as a result of renovating the net operatingAPC Facility and increasing the inventory level, partially offset by cash flow of $19,872 and capital outlays of $4,664 for the build out of the Company’s Axogen Processing Center, or APC, in Vandalia, Ohio. These expenditures were offset by proceeds throughout the year from employee stock option exercises and ESPP stock purchases and sales of $4,002.investments. Cash disbursements in 2018 included $25,599 for the prepayment in full of the Term Loan and Revolving Loan with MidCap, as defined in “Term and Revolving Loan Agreements” below, and $5,030 for the acquisition of the APC.
Axogen
We had working capital of approximately $114,141$102,756 and a current ratio of 6.55.2x at December 31, 2019,2021, compared to working capital of $137,909$122,420 and a current ratio of 11.66.4x at December 31, 2018.2020. The decrease in working capital at December 31, 20192021 as compared to December 31, 2018,2020, was primarily due to the usedecrease in cash and cash equivalents used to renovate the APC Facility, which is a non-current asset, and the year over year improvement in the cash collections cycle, as accounts receivable increased 2.2% with revenue growth of working capital13.4%. The decrease in the current ratio at December 31, 2021, as compared to December 31, 2020, was primarily due to a decrease in cash and cash equivalents.
As of December 31, 2021, total current liabilities were $24,293. Based on current estimates, we believe that our existing cash and cash equivalents and investments, as well as cash provided by sales of our products will allow us to fund
our operations
including increased compensation from hiring additional personnel to supportthrough at least the
business, the payment in 2019 of the 2018 performance bonus, 2018 annual sales awards and related costs. In addition, working capital has also been utilized to commence the buildout of our APC facility.
Axogen’snext 12 months. Our future capital requirements depend on a number of factors including, without limitation, revenue increases consistent with its business plan, costour growth rate, the timing and extent of productsspending to support development efforts, the expansion of sales and marketing activities, the acquisition and/or development of new products and the cost of products. AxogenWe could face increasing capital needs. Such capital needs could be substantial depending on the extent to which Axogen iswe are unable to increase revenue.
If Axogen needswe need additional capital in the future, itwe may raise additional funds through public or private equity offerings, debt financings or from other sources. The sale of additional equity would result in dilution to Axogen’sour shareholders. There is no assurance that Axogenwe will be able to secure funding on terms acceptable to it,us, or at all. The increasing need for capital could also make it more difficult to obtain funding through either equity or debt. Should additional capital not become available to Axogenus as needed, Axogenwe may be required to take certain action,actions, such as slowing sales and marketing expansion, delaying regulatory approvals, or reducing headcount.
Cash Flow Information
The following table presents a summary of our cash flows from operating, investing and financing activities:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (in thousands) | | 2021 | | 2020 | | 2019 |
| | |
| Net cash (used in) provided by: | | | | | | |
| Operating activities | | $ | (13,405) | | | $ | (9,626) | | | $ | (19,872) | |
| Investing activities | | (23,649) | | | (16,963) | | | 27,271 | |
| Financing activities | | 20,452 | | | 40,474 | | | 4,031 | |
| Net (decrease) increase in cash and cash equivalents | | $ | (16,602) | | | $ | 13,885 | | | $ | 11,430 | |
Net Cash Used in Operating Activities
Axogen used $19,872 of cash for operatingOperating activities in 2019, as compared to using $17,862 of cash for operating activities in 2018. This increase in cash used in operating activities was primarily attributed to the increase in the net loss, accounts receivable and inventory for the year ended December 31, 2019 as compared to 2018, partially offset by the decrease in accounts payable and accrued expenses and non-cash stock compensation during 2019.
Net Cash Provided by/Used in Investing Activities
Investing activities for 2019 provided $27,2712021 used $13,405 of cash, as compared to using $98,193 during 2018.$9,626 and $19,872 for the years ended December 31, 2020 and 2019, respectively. The Company allowed short term investmentsincrease in operating cash outflows in 2021 was primarily due to mature or sold short term investmentsunfavorable changes in working capital, as well as an increase in the net loss year over year.Net cash used in operations decreased in 2020 as compared to fund2019 due primarily to favorable changes in working capital as well as a decrease in the operations. These inflowsnet loss year over year.
Net Cash Used in/Provided by Investing Activities
Investing activities for the year ended December 31, 2021 used $23,649 of cash, wereas compared to $16,963 for the year ended December 31, 2020 and providing $27,271 of cash for the year ended December 31, 2019. The increase in investing cash outflows in the current year as compared to 2020 is principally attributable to higher levels of capital expenditures related to the renovation of the APC Facility. The increase in investing cash outflows in 2020 as compared to 2019 primarily related to
capital expenditures for the APC Facility and our Tampa facility, partially offset by
higher proceeds from the
increasesale of investments in
purchases of property and equipment, primarily our facility in Vandalia, Ohio.
the prior year.
Net Cash Provided by Financing Activities
Financing activities
in 2019for the year ended December 31, 2021 provided
$4,031$20,452 of cash as compared to
providing $109,842 of cash in 2018.$40,474 and $4,031 for the years ended December 31, 2020 and 2019, respectively. The decrease
in financing cash inflows in the current year as compared to 2020 was
primarily due to the drawdown of the $15,000 second tranche of the long-term debt facility in the second quarter of 2021, as compared to a $35,000 drawdown of the first tranche in the second quarter of 2020, as well as $3,500 of proceeds from the exercise of the stock options related to the long-term debt in 2020. The 2020 improvement over 2019 was primarily the result of
long-term borrowings of $35,000 as well as $3,500 of proceeds from the net proceedsexercise of the May 2018 public stock offeringoptions related to the long-term debt, see "Note 10 - Long-Term Debt, Net of Financing Fees in the prior year. The prior year also included a $25,599 of paymentsNotes to extinguish the Company’s debt, including the prepayment of the Term Loan and Revolving Loan with MidCap, as defined in “Term and Revolving Loan Agreements” below, and related fees.Consolidated Financial Statements" for further discussion. Proceeds from the exercise of stock options and ESPP stock purchases, excluding the stock options exercised related to the long-term debt, provided $4,002, $3,884$5,467, $3,300, and $1,434$4,002 of cash for the years ended December 31, 2021, 2020, and 2019, 2018 and 2017, respectively.
Operating Cash Requirements
On July 9, 2019,
Axogenwe entered into a Standard Form of Agreement Between Owner and Design-Builder (the “Design-Build Agreement”) with CRB Builders, L.L.C., a Missouri limited liability company (“CRB”), pursuant to which CRB will renovate and retrofit the APC
Facility (See
Footnote"Note 14
Commitment- Commitments and Contingencies in the Notes to the
CondensedConsolidated Financial
Statements)Statements").
The Company anticipates spending up to approximately $37,737 for renovations, equipment and furniture over the next twelve months and up to $40,906 over the next 18 months.
As previously disclosed the Company previously entered into an agreement with Heights Union, LLC, a Florida limited liability company (“Heights Union”), for the lease of seventy-five thousand square feet of office space. Pursuant to the Heights Union lease, the Company will use the Heights Union Premises for general office, medical laboratory, training and meeting purposes. The Company anticipates occupying the premises by the second quarter of 2020. Associated with the lease, the Company anticipates spending up to $7,490 for leasehold improvements, equipment and furniture and fixtures over the next twelve months.
As of December 31, 2019, we had cash, cash equivalents, investments and restricted cash totaling $102,510 and total current liabilities of $20,880. Based on current estimates, we believe that our existing cash, cash equivalents and investments will allow us to fund our operations through at least the next 12 months.
Credit Facilities
On October 25, 2016, the Company entered into Term Loan and a Revolving Loan with MidCap Financial Trust (“MidCap”) maturing on May 1, 2021.
The Company had the option at any time to prepay the Term Loan in whole or in part, subject to payment of a prepayment fee and an exit fee. On May 22, 2018, the Company exercised its option and paid $22,599 to prepay the Term Loan in full, which included exit and pre-payment fees totaling $1,470. In addition, on May 22, 2018, the Company charged to interest expense the unamortized deferred financing costs associated with the Term Loan of $473.
The Company also had the option to terminate or permanently reduce the Revolving Loan prior to the maturity date subject to its payment of a deferred origination fee. On May 22, 2018, the Company exercised its option to terminate and paid $2,958 to prepay the Revolving Loan in full, which amount included fees of $236.
Contractual Obligations and Commitments
The following table summarizes our obligations with regard to our contractual obligations as of December 31, 2019, and the expected timing of maturities of these contractual obligations. This table should be read in conjunction with the notes to consolidated financial statements included elsewhere in this annual report on Form 10-K.
| | | | | | | | | | | | | | | |
Contractual Obligations | | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
APC Commitment | | $ | 43,601 | | $ | 37,737 | | $ | 5,864 | | $ | - | | $ | - |
Tampa Commitment | | | 9,833 | | | 7,490 | | | 2,343 | | | - | | | - |
Operating leases | | | 41,720 | | | 2,664 | | | 6,580 | | | 5,225 | | | 27,251 |
Finance Leases | | | 52 | | | 19 | | | 29 | | | 4 | | | - |
| | $ | 95,206 | | | 47,910 | | | 14,816 | | | 5,229 | | | 27,251 |
Service Agreements disclosed in Footnote 14 Commitments and Contingencies do not have annual firm commitments.
As noted above, on July 9, 2019, the Company entered into the Design-Build Agreement with CRB, pursuant to which CRB will renovate and retrofit the property. Once completed, the Company will use the property for material processing, medical laboratory, general office, training and meeting purposes. The Design-Build Agreement contains several design phase milestones beginning in July 2019 and sets the date for Substantial Completion (as defined in the Design-Build Agreement) in the third quarter of 2020, subject to adjustment in accordance with the terms of the Design-
Build Agreement. The estimated cost pursuant to the Design-Build Agreement is $30,400.was $29,300. Additional costs associated with the renovation, purchasing of furniture and equipment, validation and certification of the propertyAPC Facility are estimated to be $14,400. These capital expenditure costs$20,900, plus projected capitalized interest of $11,300. We have recorded $40,544 to date related to this project, including capitalized interest of $5,274. We anticipate spending $19,300, including projected capitalized interest of $6,100 in 2022 and an additional $1,700 in 2023. We anticipate that this building will be incurredcompleted in early 2022, followed by a year-long process to validate and certify the facility by early 2023. We anticipate commencing tissue processing in the facility upon completion of the validation and certification process.
Credit Facilities
On June 30, 2020, we entered into a seven-year financing agreement with Oberland Capital (the “Oberland Facility”) and obtained the first tranche of $35,000 at closing. On June 30, 2021, we drew down the second tranche of $15,000. The financing costs for this facility were $642 and were recorded as
they arise until the anticipated full transition of material processinga contra liability to the
property by early 2022.
debt facility. As of December 31, 2021, we have paid all of the financing costs.
The
Company expects to receive certain economic development grantsOberland Facility requires quarterly interest payments for seven years. Interest is calculated as 7.5% plus the greater of the London Interbank Offered Rate ("LIBOR") or 2.0% (9.5% as of December 31, 2021). Each tranche of the Oberland Facility has a term of seven years from
statethe date of issuance (with the first tranche issued on June 30, 2020, maturing on June 30, 2027 and
local authorities totalingthe second tranche issued on June 30, 2021, maturing on June 30, 2028). In connection with the Oberland Facility, we entered into a revenue participation agreement with Oberland Capital, which provides that, among other things, a quarterly royalty payment as a percentage of our net revenues, up to
approximately $2,685 including $1,250 of cash grants to offset costs to acquire and develop the property. The economic development grants are$70 million in any given year, subject to certain
job creation milestones by 2023limitations set forth therein, during the period commencing on the later of (i) April 1, 2021 and
related contingencies.
Public Offering(ii) the date of Common Stock
On November 16, 2017, Axogen entered intofunding of a certain underwriting agreement (the “Leerink Underwriting Agreement”) with Leerink Partners LLC, as representativetranche of the several underwriters named therein (collectively,loan, and ending on the “2017 Offering Underwriters”) and Essex, pursuant todate upon which (i)all amounts owed under the Company agreed to issue and sell 700,000 sharesOberland Facility have been paid in full (the “Revenue Participation Agreement”). Royalty payments commenced on September 30, 2021. This royalty structure results in approximately 1.0% per year of additional interest payments on the outstanding loan amount. Upon maturity or upon such earlier repayment of the Company’s common stock pursuantOberland Facility, we will repay the principal balance and provide a make-whole payment calculated to a registration statement on Form S-3 (File No. 333-207829), filed with the SEC on November 5, 2015, and declared effective by the SEC on December 11, 2015, and the prospectus contained therein, as supplemented by the prospectus supplement dated November 16, 2017, and (ii) Essex agreedgenerate an internal rate of return to sell 1,000,000 shares of the Company’s common stock pursuantOberland Capital equal to a registration statement on Form S-3 (File No. 333-220770)11.5%, filed with the SEC on October 2, 2017, and declared effective by the SEC on October 11, 2017, and the prospectus contained therein, as supplemented by the Prospectus Supplement, in an underwritten registered public offering at an offering price of $21.00 per share. The Company and Essex granted the 2017 Offering Underwriters a 30-day option to purchase up to an aggregate of 255,000 additional shares of common stock, at the public offering price, less the underwriting discountstotal of all quarterly interest and commissions, which was exercised in full on November 16, 2017. The Company received net proceeds of approximately $15,655 after deducting the underwriting discountsroyalty payments previously paid to Oberland Capital.
Contractual Obligations and commissionsCommitments
See "Note 14 - Commitments and estimated offering expenses.
On May 8, 2018, the Company entered into an underwriting agreement with Jefferies LLC and Leerink Partners LLC, as representatives of the several underwriters named therein (collectively, the “2018 Offering Underwriters”), pursuant to which the Company agreed to issue and sell 3,000,000 shares of the Company’s common stock in an underwritten registered public offering at an offering price of $41.00 per share (the “2018 Offering”). The Company granted the 2018 Offering Underwriters a 30-day option to purchase up to an aggregate of 450,000 additional shares of common stock, at the public offering price, less the underwriting discounts and commissions, which was exercised in full on May 9, 2018. The 2018 Offering closed on May 11, 2018, and the Company received proceeds of approximately $132,707 from the sale of the shares (including the sale of 450,000 additional shares issued upon exercise of the 2018 Offering Underwriters’ overallotment option), after deducting the underwriting discounts and commissions and estimated offering expenses.
Off-Balance Sheet Arrangements
Axogen does not have any off-balance sheet arrangements.
Effect of Inflation
Inflation has not had a significant impact on our historical operations, and we do not expect it to have a significant impact on our results of operations or financial conditionContingencies in the foreseeable future.
Notes to the Consolidated Financial Statements" for further information.
Critical Accounting Policies and Estimates The discussion and analysis of the Company’sour financial condition and results of operations is based upon the Company’sour consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United StatesU.S. (“USGAAP”US GAAP”). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and
reported amount of expenses during the period reported. Management bases its estimates and judgments on historical experience, observance of trends in the industry, information provided by outside sources and on various other factors that are believed to be reasonable under
the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We have described the critical accounting policies regarding inventory, derivative instruments and stock-based compensation and our significant accounting policies in Note 3 –- Summary of Significant Accounting Policies in the Notes to our consolidated financial statementsthe Consolidated Financial Statements included in this Form 10-K.
Recent Accounting Pronouncements
See "Note 3 - Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements" for further information.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We are subject to market risk from exposure to changes in interest rates based upon our investing and cash management activities. For our cash equivalents and investments, a change in interest rates affects the amount of interest income that can be earned.
We have not entered into derivative transactions related to cash and cash equivalents.We do not expect changes in interest rates to have a material adverse effect on our income or our cash flows in 2022. However, we give no assurance that interest rates will not significantly change in the future.
We also have interest rate exposure as a result of the Oberland Facility. As of December 31, 2021, the outstanding principal amount of our loans under the Oberland Facility was $50,000. Interest on our loans under the Oberland Facility is payable quarterly during the term of the loans and is calculated as 7.5% plus the greater of LIBOR or 2.0% (9.5% as of December 31, 2021); provided that the interest rate shall never be less than 9.5%. Changes in the LIBOR rate may therefore affect our interest expense associated with the loans. An increase of 100 basis points in interest rates would increase expense by approximately $500 annually based on the amounts currently outstanding and would not materially affect our results of operations.
Credit Risk
Financial instruments that potentially subject us to credit risk consist of cash and cash equivalent balances, investments in commercial paper and accounts receivable. Certain of our cash and cash equivalents balances exceed Federal Deposit Insurance Corporation ("FDIC") insured limits or are invested in money market accounts with investment banks that are not FDIC-insured. We place our cash and cash equivalents in what we believe to be credit-worthy financial institutions. As of December 31, 2021, $32,238 of the cash and cash equivalents balance was in excess of FDIC limits.
We invest our cash primarily in commercial paper, money market accounts, and U.S. government securities. Although we believe our cash is invested in a conservative manner, with cash preservation being the primary investment objective, the value of the commercial paper held will fluctuate with changes in the financial markets, including, among other things, changes in interest rates, credit quality and general volatility. This risk is managed by investing in high quality investment grade commercial paper with short-term maturities.
With respect to accounts receivable, we perform credit evaluations of our customers and do not require collateral. There have been no material losses on accounts receivable. Concentrations of credit risk with respect to accounts receivable are limited because a large number of geographically diverse customers make up the Company’s customer base, thus spreading the trade credit risk. The Company also controls credit risk through credit approvals and monitoring procedures.
Foreign Currency Exchange Risk
The value of the U.S. dollar compared to the foreign currencies of the countries where we distribute our products has little to no effect on our financial results. In our international markets, we distribute our products and services to independent distributors who, in turn, distribute and market to medical clinics. The revenue from the distribution of our products in our international markets through independent distributors is denominated in U.S. dollars. As a result, the Company has minimal exposure related to foreign exchange rate fluctuations. Our portfolio of products is available in Canada, Germany, the UK, Spain, South Korea, and several other countries.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Axogen, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Axogen, Inc and subsidiaries (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of operations, shareholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2021, and the related notes and the schedule listed in the Index at Item 15(a)(2) (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America, Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the followingreliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical accounting policies affectaudit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our moreopinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Inventory – Valuation Associated with Excess and Obsolete (E&O) Inventory — Refer to Notes 3 and 4 to the financial statements
Critical Audit Matter Description
Inventory is comprised of unprocessed tissue, work-in-process, Avance Nerve Graft, Axoguard Nerve Connector, Axoguard Nerve Protector, Axoguard Nerve Cap, Axotouch Two-Point Discriminator and supplies and are valued at the lower of cost or net realizable value. The Company monitors the shelf life of its products and historical expiration and spoilage trends, and writes down inventory based on the estimated amount of inventory that will not be distributed before expiration or spoilage. To estimate the amount of inventory that will expire prior to being distributed, the Company reviews inventory quantities on hand, historical and projected distribution levels, and historical expiration trends. The Company’s calculation of the amount of inventory that will expire prior to distribution has two components: 1) a demand or consumption based component that compares projected distribution to inventory quantities on hand; and 2) an expiring inventory component that assesses the risk related to inventory that is near expiration by analyzing historical expiration trends to project inventory that will expire prior to being distributed. The Company’s model assumes that inventory will be distributed on a first-in-first-out basis. Due to the nature of the inventory (surgical implants with expiration dates) and the fact that a significant portion of the Company’s inventory is at medical facility consignment locations, estimating the amount of inventory that will expire and the amount of inventory that should be written down involves significant judgments and estimates.
Given the significant judgments associated with evaluating the valuation of E&O inventory, auditing the reasonableness of management’s estimates and assumptions involved especially subjective judgment and an increased extent of effort.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the Company’s valuation of E&O inventory included the following, among others:
•We tested the design, implementation and operating effectiveness of controls over the E&O inventory valuation. The controls we tested included those over the calculation and accuracy and completeness of underlying data used in the preparationcalculation.
•We performed procedures to evaluate management’s ability to accurately forecast by comparing the historical expiring inventory estimates to subsequent inventory destructions and expirations.
•We obtained the Company’s E&O calculation and tested the mathematical accuracy.
•We assessed the reasonableness of the assumptions used in the E&O calculation by developing an independent expectation and comparing our independent expectation to the results of the Company’s calculation.
•We tested the accuracy and completeness of the underlying data used in the calculation of the Company’s expiring inventory model.
•We made inquiries of the Company’s employees outside of the accounting department and evaluated other areas of the audit to identify business, product, or industry changes that may impact the inputs in the inventory valuation calculation.
/s/ Deloitte & Touche LLP
Miami, Florida
February 25, 2022
We have served as the Company's auditor since 2018.
AXOGEN, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2021 and 2020
(In Thousands, Except Share and Per Share Amounts)
| | | | | | | | | | | |
| 2021 | | 2020 |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 32,756 | | | $ | 48,767 | |
| Restricted cash | 6,251 | | | 6,842 | |
| Investments | 51,330 | | | 55,199 | |
| Accounts receivable, net of allowance for doubtful accounts of $276 and $416, respectively | 18,158 | | | 17,618 | |
| Inventory | 16,693 | | | 12,529 | |
| Prepaid expenses and other | 1,861 | | | 4,296 | |
| Total current assets | 127,049 | | | 145,251 | |
| Property and equipment, net | 62,881 | | | 38,398 | |
| Operating lease right-of-use assets | 15,193 | | | 15,614 | |
| Finance lease right-of-use assets | 42 | | | 64 | |
| Intangible assets, net | 2,859 | | | 2,054 | |
| Total assets | $ | 208,024 | | | $ | 201,381 | |
| | | |
| Liabilities and shareholders’ equity | | | |
| Current liabilities: | | | |
| Accounts payable and accrued expenses | $ | 22,459 | | | $ | 21,968 | |
| Current maturities of long-term lease obligations | 1,834 | | | 863 | |
| Total current liabilities | 24,293 | | | 22,831 | |
| | | |
| Long-term debt, net of financing fees | 44,821 | | | 32,027 | |
| Long-term lease obligations | 20,798 | | | 20,874 | |
| Debt derivative liabilities | 5,562 | | | 2,497 | |
| Other long-term liabilities | — | | | 3 | |
| Total liabilities | 95,474 | | | 78,232 | |
| | | |
| Commitments and contingencies - see Note 14 | 0 | | 0 |
| | | |
| Shareholders’ equity: | | | |
| Common stock, $0.01 par value per share; 100,000,000 shares authorized; 41,736,950 and 40,618,766 shares issued and outstanding | 417 | | | 406 | |
| Additional paid-in capital | 342,765 | | | 326,390 | |
| Accumulated deficit | (230,632) | | | (203,647) | |
| Total shareholders’ equity | 112,550 | | | 123,149 | |
| Total liabilities and shareholders’ equity | $ | 208,024 | | | $ | 201,381 | |
The accompanying notes are an integral part of these consolidated financial statements.
AXOGEN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2021, 2020 and 2019
(In Thousands, Except Share and Per Share Amounts)
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Revenues | $ | 127,358 | | | $ | 112,300 | | | $ | 106,712 | |
| Cost of goods sold | 22,931 | | | 21,581 | | | 17,349 | |
| Gross profit | 104,427 | | | 90,719 | | | 89,363 | |
| Costs and expenses: | | | | | |
| Sales and marketing | 73,328 | | | 69,659 | | | 71,950 | |
| Research and development | 24,177 | | | 17,846 | | | 17,514 | |
| General and administrative | 32,338 | | | 26,396 | | | 31,305 | |
| Total costs and expenses | 129,843 | | | 113,901 | | | 120,769 | |
| Loss from operations | (25,416) | | | (23,182) | | | (31,406) | |
| Other (expense) income: | | | | | |
| Investment income | 93 | | | 605 | | | 2,364 | |
| Interest expense | (1,356) | | | (1,054) | | | (40) | |
| Change in fair value of derivatives | (28) | | | (117) | | | — | |
| | | | | |
| Other expense | (278) | | | (38) | | | (53) | |
| Total other (expense) income, net | (1,569) | | | (604) | | | 2,271 | |
| Net loss | $ | (26,985) | | | $ | (23,786) | | | $ | (29,135) | |
| | | | | |
| Weighted average common shares outstanding — basic and diluted | 41,215 | | | 39,967 | | | 39,235 | |
| Loss per common share — basic and diluted | $ | (0.65) | | | $ | (0.60) | | | $ | (0.74) | |
The accompanying notes are an integral part of these consolidated financial statements.
AXOGEN, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Years ended December 31, 2021, 2020 and 2019
(In Thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional
Paid-in
Capital | | Accumulated
Deficit | | Total
Shareholders’
Equity |
| Shares | | Amount | | | |
| Balance, December 31, 2018 | 38,901 | | | $ | 389 | | | $ | 297,319 | | | $ | (150,726) | | | $ | 146,982 | |
| | | | | | | | | |
| Stock-based compensation | — | | | — | | | 10,304 | | | — | | | 10,304 | |
| Exercise of stock options and employee stock purchase plan | 689 | | | 7 | | | 3,995 | | | — | | | 4,002 | |
| | | | | | | | | |
| Net loss | — | | | — | | | — | | | (29,135) | | | (29,135) | |
| | | | | | | | | |
| Balance, December 31, 2019 | 39,590 | | | 396 | | | 311,618 | | | (179,861) | | | 132,153 | |
| | | | | | | | | |
| Stock-based compensation | — | | | — | | | 8,470 | | | — | | | 8,470 | |
| Issuance of restricted and performance stock units | 249 | | | 2 | | | (2) | | | — | | | — | |
| Shares surrendered by employees to pay tax withholdings | (40) | | | — | | | (670) | | | — | | | (670) | |
| Exercise of stock options and employee stock purchase plan | 572 | | | 6 | | | 3,294 | | | — | | | 3,300 | |
| Exercise of Oberland option, net of settlement | 248 | | | 2 | | | 3,680 | | | — | | | 3,682 | |
| Net loss | — | | | — | | | — | | | (23,786) | | | (23,786) | |
| | | | | | | | | |
| Balance, December 31, 2020 | 40,619 | | | 406 | | | 326,390 | | | (203,647) | | | 123,149 | |
| | | | | | | | | |
| Stock-based compensation | — | | | — | | | 10,919 | | | — | | | 10,919 | |
| Issuance of restricted and performance stock units | 254 | | | 2 | | | (2) | | | — | | | — | |
| | | | | | | | | |
| Exercise of stock options and employee stock purchase plan | 864 | | | 9 | | | 5,458 | | | — | | | 5,467 | |
| | | | | | | | | |
| Net loss | — | | | — | | | — | | | (26,985) | | | (26,985) | |
| | | | | | | | | |
| Balance, December 31, 2021 | 41,737 | | | $ | 417 | | | $ | 342,765 | | | $ | (230,632) | | | $ | 112,550 | |
The accompanying notes are an integral part of these consolidated financial statements.
AXOGEN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2021, 2020 and 2019
(In Thousands) | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Cash flows from operating activities: | | | | | |
| Net loss | $ | (26,985) | | | $ | (23,786) | | | $ | (29,135) | |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | | |
| Depreciation and amortization | 2,721 | | | 1,507 | | | 933 | |
| Amortization of right-of-use assets | 1,818 | | | 1,800 | | | 1,821 | |
| Amortization of intangible assets | 202 | | | 153 | | | 123 | |
| Impairment loss on intangible assets | — | | | — | | | 104 | |
| Amortization of debt discount and deferred financing fees | 831 | | | 232 | | | — | |
| Loss on disposal of equipment | — | | | 3 | | | — | |
| | | | | |
| Provision for bad debt | (41) | | | (105) | | | 514 | |
| Provision for inventory write-down | 3,314 | | | 2,242 | | | 1,887 | |
| Investment losses (gains) | 68 | | | (47) | | | (972) | |
| Change in fair value of derivatives | 28 | | | 117 | | | — | |
| Stock-based compensation | 10,919 | | | 8,470 | | | 10,304 | |
| Change in operating assets and liabilities: | | | | | |
| Accounts receivable | (499) | | | (635) | | | (2,136) | |
| Inventory | (7,478) | | | (910) | | | (3,767) | |
| Prepaid expenses and other | 2,435 | | | (2,524) | | | (661) | |
| Accounts payable and accrued expenses | (270) | | | 4,958 | | | 2,920 | |
| Operating lease obligations | (463) | | | (1,086) | | | (1,773) | |
| Cash paid for interest portion of finance leases | (2) | | | (3) | | | (4) | |
| Contract and other liabilities | (3) | | | (12) | | | (30) | |
| Net cash used in operating activities | (13,405) | | | (9,626) | | | (19,872) | |
| | | | | |
| Cash flows from investing activities: | | | | | |
| Purchase of property and equipment | (27,811) | | | (21,905) | | | (4,664) | |
| Economic development grant proceeds | 950 | | | — | | | — | |
| Purchase of investments | (68,699) | | | (77,806) | | | (121,074) | |
| Proceeds from sale of investments | 72,500 | | | 83,440 | | | 153,571 | |
| Cash payments for intangible assets | (589) | | | (692) | | | (562) | |
| Net cash (used in) / provided by investing activities | (23,649) | | | (16,963) | | | 27,271 | |
| | | | | |
| Cash flows from financing activities: | | | | | |
| Proceeds from issuance of long-term debt | 15,000 | | | 35,000 | | | — | |
| Proceeds from the paycheck protection program loan | — | | | 7,820 | | | — | |
| Repayment of the paycheck protection program loan | — | | | (7,820) | | | — | |
| Proceeds from issuance of common stock | — | | | 3,500 | | | — | |
| Payments for debt issuance costs | — | | | (642) | | | — | |
| | | | | |
| | | | | |
| | | | | |
| Cash paid for debt portion of finance leases | (15) | | | (14) | | | 29 | |
| Proceeds from exercise of stock options and ESPP stock purchases | 5,467 | | | 3,300 | | | 4,002 | |
| Payments of employee tax withholdings in exchange of common stock awards | — | | | (670) | | | — | |
| Net cash provided by financing activities | 20,452 | | | 40,474 | | | 4,031 | |
| Net (decrease) increase in cash, cash equivalents, and restricted cash | (16,602) | | | 13,885 | | | 11,430 | |
| Cash, cash equivalents, and restricted cash, beginning of period | 55,609 | | | 41,724 | | | 30,294 | |
| Cash, cash equivalents, and restricted cash, end of period | $ | 39,007 | | | $ | 55,609 | | | $ | 41,724 | |
The accompanying notes are an integral part of these consolidated financial statements.
AXOGEN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2021, 2020 and 2019
(In Thousands)
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Supplemental disclosures of cash flow activity: | | | | | |
| Cash paid for interest, net of capitalized interest | $ | 495 | | | $ | 822 | | | $ | 34 | |
| Supplemental disclosure of non-cash investing and financing activities: | | | | | |
| Acquisition of fixed assets in accounts payable and accrued expenses | $ | 1,420 | | | $ | 1,077 | | | $ | 3,212 | |
| Acquisition of leasehold asset | $ | — | | | $ | 5,250 | | | $ | — | |
| Embedded derivative associated with the long-term debt | $ | 3,037 | | | $ | 2,563 | | | $ | — | |
| Obtaining a right-of-use asset in exchange for a lease liability | $ | 1,375 | | | $ | 14,259 | | | $ | 26 | |
| Conversion of the Oberland option | $ | — | | | $ | 182 | | | $ | — | |
| Acquisition of intangible assets in accounts payable and accrued expenses | $ | 418 | | | $ | — | | | $ | — | |
The accompanying notes are an integral part of these consolidated financial statements.
AXOGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(In Thousands)
1.Basis of Presentation
The accompanying consolidated financial statements include the accounts of Axogen, Inc. (the “Company” or “Axogen”) and its wholly owned subsidiaries, Axogen Corporation (“AC”), Axogen Processing Corporation (“APC”) and Axogen Europe GmbH, as of December 31, 2021 and 2020 and for the three years ended December 31, 2021. The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). All intercompany accounts and transactions have been eliminated in consolidation.
2.Organization and Business
Axogen is the leading company focused specifically on the science, development, and commercialization of the technologies for peripheral nerve regeneration and repair. Axogen is passionate about providing the opportunity to restore nerve function and quality of life for patients with peripheral nerve injuries. Axogen provides innovative, clinically proven, and economically effective repair solutions for surgeons and healthcare providers. Peripheral nerves provide the pathways for both motor and sensory signals throughout the body. Every day, people suffer traumatic injuries or undergo surgical procedures that impact the function of their peripheral nerves. Physical damage to a peripheral nerve or the inability to properly reconnect peripheral nerves can result in the loss of muscle or organ function, the loss of sensory feeling, or the initiation of pain.
Axogen’s platform for peripheral nerve repair features a comprehensive portfolio of products, including Avance® Nerve Graft, a biologically active off-the-shelf processed human nerve allograft for bridging severed peripheral nerves without the comorbidities associated with a second surgical site; Axoguard® Nerve Connector, a porcine (pig) submucosa extracellular matrix (“ECM”) coaptation aid for tensionless repair of severed peripheral nerves; Axoguard® Nerve Protector, a porcine submucosa ECM product used to wrap and protect damaged peripheral nerves and reinforce the nerve reconstruction while preventing soft tissue attachments; Axoguard® Nerve Cap, a porcine submucosa ECM product used to protect a peripheral nerve end and separate the nerve from the surrounding environment to reduce the development of symptomatic or painful neuroma; Avive® Soft Tissue Membrane, a processed human umbilical cord intended for surgical use as a resorbable soft tissue conduit and Axotouch® Two-Point Discriminator, used to measure the innervation density of any surface area of skin. Axogen's portfolio of products is available in the U.S., Canada, Germany, United Kingdom ("UK"), Spain, South Korea, and several other countries.
Axogen suspended the market availability of Avive Soft Tissue Membrane ("Avive") effective June 1, 2021, and management continues discussion with the U.S. Food and Drug Administration (the "FDA") to determine the appropriate regulatory classification and requirements for Avive. The suspension was not based on any safety or product issues or concerns with Avive. Axogen seeks to return Avive to the market, although the Company is unable to estimate the timeframe or provide any assurance that a return to the market will be achievable.
Avance Nerve Graft and Avive Soft Tissue Membrane are processed in the U.S. by Axogen pursuant to a License and Services Agreement, as amended, (the "CTS Agreement') with Community Blood Center (doing business as Community Tissue Services) ("CTS") at the CTS processing facility in Dayton, Ohio. The Axoguard product line is manufactured by Cook Biotech Incorporated ("Cook Biotech"), in West Lafayette, Indiana. The Axotouch Two-Point Discriminator is contract manufactured by Viron Technologies, LLC (doing business as Cybernetics Research Laboratories) (“CRL”) in Tucson, Arizona. CRL supplies the Axotouch Two-Point Discriminator unpackaged, and they are packaged at Axogen’s distribution facility in Burleson, Texas.
In March 2020, the World Health Organization declared the outbreak of the 2019 novel coronavirus and any and all variants thereof ("COVID-19") a pandemic. The global impact of COVID-19 has had a negative effect on the global economy, disrupting the financial markets and significantly impacting the medical industry. The Company implemented certain cost mitigation initiatives in 2020 such as a reduction in pay levels, temporary suspension of tissue processing and deferral of certain projects, among other efforts. As economic activity began to normalize, the Company lifted these cost mitigation initiatives.
Although COVID-19 had a significant impact on the Company's revenue growth in 2020, the Company was able to increase revenue in 2021 as compared to 2020. The rapid development and fluidity of the situation surrounding COVID-19 prevent any prediction as to the ultimate impact COVID-19 will have on the Company's business as new variants continue to spread, causing global supply chain disruptions, labor shortages, and inflationary conditions.
3.Summary of Significant Accounting Policies
Cash and Cash Equivalents and Concentration
The Company considers highly liquid investments with maturities of three months or less at the date of acquisition as cash equivalents in the accompanying consolidated financial statements. The Company has not experienced any losses related to these balances; however, as of December 31, 2021, $32,238 of the cash and cash equivalents balance was in excess of Federal Deposit Insurance Corporation limits. As of December 31, 2021 and 2020, the Company had restricted cash balances of $6,251 and $6,842, respectively. The December 31, 2021 and 2020 balances both include $6,000, which represents collateral for an irrevocable standby letter of credit. Additionally, the December 31, 2021 balance includes an additional irrevocable standby letter of credit in the amount of $250 (See "Note 10 - Long-Term Debt, Net of Financing Fees").
The following table provides a reconciliation of cash and cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same amounts shown in the consolidated statements of cash flows:
| | | | | | | | | | | |
| (in thousands) | December 31,
2021 | | December 31,
2020 |
| Cash and cash equivalents | $ | 32,756 | | | $ | 48,767 | |
| Restricted cash | 6,251 | | | 6,842 | |
| Total cash and cash equivalents, and restricted cash shown in the consolidated statements of cash flows | $ | 39,007 | | | $ | 55,609 | |
Inventory
Inventory is comprised of unprocessed tissue, work-in-process, Avance Nerve Graft, Axoguard Nerve Connector, Axoguard Nerve Protector, Axoguard Nerve Cap, and Axotouch Two-Point Discriminator finished goods and supplies. Inventory is valued at the lower of cost (first-in, first-out) or net realizable value. Included within Inventory at December 31, 2020 is Avive Soft Tissue Membrane ("Avive"). On May 17, 2021, the Company announced that it would suspend market availability of Avive effective June 1, 2021 pending ongoing discussions with the FDA regarding the regulatory classification of Avive. The Company recorded a write-down of Avive inventory for an amount of $1,251 recorded in cost of goods sold in the consolidated statement of operations for the year ended December 31, 2021 related to this announcement.
The Company monitors the shelf life of its products and historical expiration and spoilage trends and writes down inventory based on the estimated amount of inventory that may not be distributed before expiration or spoilage. To estimate the amount of inventory that will expire prior to being distributed, the Company reviews inventory quantities on hand, historical and projected distribution levels, and historical expiration trends. The Company’s calculation of the amount of inventory that will expire prior to distribution has two components: 1) a demand or consumption-based component that compares projected distribution to inventory quantities on hand; and 2) an expiring inventory component that assesses the risk related to inventory that is near expiration by analyzing historical expiration trends to project inventory that will expire prior to being distributed. The Company’s model assumes that inventory will be distributed on a first-in, first-out basis. Due to the nature of the inventory (surgical implants with expiration dates) and the fact that significant portions of the Company’s inventory is at medical facility consignment locations, estimating the amount of inventory that will expire and the amount of inventory that should be written down involves significant judgments and estimates.
Investments
The Company invests primarily in commercial paper and U.S. government securities and classifies all investments as available-for-sale. Investments are recorded at fair value. The Company elected the fair value option ("FVO") for all of its available-for-sale investments. The FVO election results in all changes in unrealized gains and losses being included in investment income in the consolidated statements of operations.
Derivative Instruments
The Company reviews debt agreements for embedded features. If these features are not clearly and closely related to the debt host, they meet the definition of a derivative and require bifurcation from the host. All derivative instruments are recorded on the consolidated balance sheet at their respective fair values. The Company adjusts the carrying value of the derivative liability to fair value at each reporting date. The changes in the fair value of the derivatives are recorded in the consolidated statement of operations in the period in which they occur. The fair value of embedded derivatives are measured based on equity markets and interest rates, as well as an estimate of the Company's nonperformance risk adjustment. This estimate includes an option adjusted spread and an estimate of the Company's risk-free rate.
The fair value of the embedded derivative features was determined using a probability-weighted expected return model based on 4 potential settlement scenarios due to (a) a 5% probability of a mandatory prepayment event of the Oberland Facility on December 31, 2023; (b) a 15% probability of a mandatory prepayment event of the Oberland Facility on March 31, 2026; (c) a 5% probability of the prepayment of the Oberland Facility at the Company’s option on December 31, 2025; and (d) a 75% probability that the Oberland Facility will be held to its scheduled maturity dates in accordance with the terms of the debt agreement. The estimated settlement value of each scenario, which would include any required make-whole payment, is then discounted to present value using a discount rate that is derived based on the initial terms of the Oberland Facility at issuance and corroborated utilizing a synthetic credit rating analysis. The calculated fair values under these 4 scenarios is then compared to the fair value of a plain vanilla note, with the difference reflecting the fair value of the embedded derivatives.
Property and Equipment
Property and equipment are stated at cost. Additions and improvements that extend the lives of the assets are capitalized, while expenditures for repairs and maintenance are expensed as incurred. Leasehold improvements are amortized on a straight-line basis over the shorter of the asset’s estimated useful life or the remaining lease term. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets ranging from three to seven years.
When depreciable assets are retired or sold, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in operations.
Intangible Assets
Intangible assets are recorded at cost and include patents and patent application costs, licenses, and trademarks. Intangible assets are amortized on a straight-line basis over their estimated useful lives of seventeen to twenty years. Trademarks are indefinite lived intangible assets.
The Company enters into contracts to sell and distribute products and services to hospitals and surgical facilities for use in caring for patients with peripheral nerve damage or transection. Revenue is recognized when the Company has met its performance obligations pursuant to its
customer 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 and services to the Company’s customers.
In the case of products or services sold to a customer under a distribution or purchase agreement, the customers are granted exclusive distribution rights to sell the implants internationally in a territory defined by the contract. These international distributor agreements contain provisions that allow the Company to terminate the distribution agreement with the distributor, and upon termination, the right to repurchase inventory from the distributor at the distributor’s cost. The Company has determined that its contractual rights to repurchase distributor inventory upon termination of the distributor agreement are not substantive and do not impact the timing of when control transfers; and therefore, the Company has determined it is appropriate to recognize revenue when: i) the product is shipped via common carrier; or ii) the product is delivered to the customer or distributor, depending on the terms of the agreement. Determining the timing of revenue recognition for such contracts is subject to
significant judgment, because an evaluation must be made regarding the distributor’s ability to direct the use of, and obtain substantially all of the remaining benefits from, the implants received from the Company. Changes in these assessments could have
a significantan impact on the timing of revenue recognition from sales to distributors.
A portion of the Company's product revenue is generated from consigned inventory maintained at hospitals and independent sales agencies, and also from inventory physically held by field sales representatives. For these types of
productsproduct sales, the Company retains control until the product has been used or implanted, at which time revenue is recognized.
The Company
elected to accountaccounts 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 cost of
sales.
goods sold.
The Company operates in a single reportable segment of peripheral nerve repair, offers similar products to its customers, and enters into consistently structured arrangements with similar types of customers. As such, the Company does not disaggregate revenue from contracts with customers as the nature, amount, timing, and uncertainty of revenue and cash flows does not materially differ within and among the contracts with customers.
The contract with the customer states 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 30thirty to 60sixty days of delivery. Since the customer agrees to a stated price in the contract that does not vary over the contract term, the contracts do not contain any material types of variable consideration, and contractual rights of return are not material. The Company has several contracts with distributors in international markets whichthat include consideration paid to the customer in exchange for distinct marketing and other services. The Company records such consideration paid to the customer as a reduction to revenue from the contracts with those distributor customers.
Allowance for Doubtful Accounts Receivable
We evaluateTo pursue its mission most effectively, the collectability of accounts receivableCompany made a strategic decision to determine the appropriate allowance for doubtful accounts. In determining the amountplace its full focus on innovations within its surgical solutions portfolio. Effective November 2019, Axogen discontinued all sales of the allowance, we consider the aging of account balances, historical credit losses, customer-specific information and other relevant factors. We review accounts receivable and adjust the allowance based on current circumstances and charge off uncollectible receivables against the allowance when all attempts to collect the receivable have failed. Our history of write-offs against the allowance has not been significant. The allowance for doubtful accounts balance was $1,092 and $1,117 at December 31, 2019 and 2018, respectively.
Investments
The Company invests primarily in U.S. Government securities, corporate bonds, commercial paper and asset-backed securities and classifies all investments as available-for-sale. Investments are recorded at fair value. The Company has elected the fair value option (“FVO”) for all of its available-for-sale investments. The FVO election results in all changes in unrealized gains and losses being included in investment income in the Consolidated Statements of Operations.
Inventories
Inventories are comprised of unprocessed tissue, work-in-process, Avance Nerve Graft, Axoguard Nerve Connector, Axoguard Nerve Protector, Axoguard Nerve Cap, Avive Soft Tissue Membrane, Acroval Neurosensory and Motor Testing System, Axotouch Two-Point DiscriminatorSystem. Axogen continues to provide service and supplies and are valued atsupport for the lower of cost (first-in, first-out) or net realizable value.
The Company monitors the shelf life of its products and historical expiration and spoilage trends, and writes-off inventory based on the estimated amount of inventory that will not be distributed before expiration or spoilage. To estimate the amount of inventory that will expire prior to being sold, the Company reviews inventory quantities on hand, historical and projected sales, and historical expiration trends. The Company’s calculation of the amount of inventory that will expire prior to sale has two components: 1) a demand or consumption based component that compares projected sales to inventory quantities on hand; and 2) an expiring inventory component that assesses the risk related to inventory that is near expiration by analyzing historical expiration trends to project inventory that will expire prior to being sold. The Company’s model assumes that inventory will be sold on a first-in-first-out basis. Due to the nature of the inventory (surgical implants with expiration dates) and the fact that a significant portion of the Company’s inventory is at medical facility consignment locations, estimating the amount of inventory that will expire and the amount of inventory that should be written-down involves significant judgments and estimates.
Share-Based Compensation
The Company account for share-based compensation for all share-based payment awards, including stock options, restricted stock units, performance stock units and stock purchases related to an employee stock purchase plan, based on their estimated fair values. We estimate the fair value of time-based options on the date of grant using the multi-point Black-Scholes option pricing model (Black-Scholes model). Our determination of fair value of share-based payment awards is affected by our stock price, as well as assumptions regarding a number of subjective variables. These variables include but are not limited to our expected stock price volatility over the term of the awards. The value of the portion of the awards that are ultimately expected to vest is recognized as expense over the requisite service periods in our Consolidated Statements of Operations.
The Company estimate the fair value of restricted stock unit and performance stock unit awards based upon the grant date closing market price of our common stock.
The Company also have an employee stock purchase plan (ESPP) which is available to all eligible employees as defined by the plan document. Under the ESPP, shares of our common stock may be purchased at a discount, currently fifteen percent (15%). We estimate the number of shares to be purchased under the ESPP at the beginning of the purchase period and calculate estimated compensation expense using the Black-Scholes model based upon the fair value
of the stock at the beginning of the purchase period. Compensation expense is recognized over each purchase period, and expense is adjusted at the time of stock purchase.
The Company believes our critical accounting policies regarding revenue recognition, allowance for uncollectible accounts receivable, investments, inventories and share-based employee compensation affect our more significant judgments and estimates usedexisting systems in the preparation of our consolidated financial statements. The Company bases our judgments and estimates on historical experience, current conditions and other reasonable factors.
Leases
The Company adopted ASU No. 2016-02—Leases (Topic 842), as of January 1, 2019, (the “Application Date”) using the modified retrospective approach. The Company will continue to report financial information for fiscal years prior to 2019 under the previous lease accounting standards. The modified retrospective approach provides a method for recording on the balance sheet as of January 1, 2019, leases that have commenced on or before the Application Date.
The Company elected the package of practical expedients permitted under the transition guidance, which allowed us to not reassess whether any existing contracts contain a lease, to not reassess historical lease classification as operating or finance leases, and to not reassess initial direct costs. The Company also elected the practical expedient allowing us to not separate the lease and non-lease components for all classes of underlying assets, apart from equipment. The Company did not elect the practical expedient to use hindsight to determine the lease term for leases at January 1, 2019.
The Company made an accounting policy election to not recognize right-to-use assets and lease liabilities that arise from short term leases, which are defined as leases with a lease term of 12 months or less at the lease commencement date.
Adoption of the new standard resulted in the recording of right-to-use assets and lease liabilities of approximately $3,786 and $3,823, respectively, and the derecognition of capital lease assets, capital lease liabilities, and operating lease deferred rent of $96, $63, and $70, respectively, as of January 1, 2019 with zero cumulative-effect adjustment to retained earnings. The new standard did not materially impact our consolidated net earnings.
Recent Accounting Pronouncements
See Note 3 – Summary of Significant Accounting Policies to our Consolidated Financial Statements for further information.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The Company is exposed to market risk from interest rates. For our cash, cash equivalents and investments, a change in interest rates affects the amount of interest income that can be earned.
The Company invests its cash primarily in money market accounts, U.S. government agencies and securities, corporate bonds and commercial paper. Although the Company believes its cash to be invested in a conservative manner, with cash preservation being the primary investment objective, the value of the securities held will fluctuate with changes in the financial markets including, among other things, changes in interest rates, credit quality and general volatility. This risk is managed by investing in high quality investment grade securities with short-term maturities.
Financial instruments that potentially subject the Company to credit risk consist of cash and cash equivalent balances and investments in corporate bonds. Certain of Axogen’s cash and cash equivalents balances exceed FDIC insured limits or are invested in money market accounts with investment banks that are not FDIC-insured. The Company places its cash and cash equivalents in what it believes to be credit-worthy financial institutions. As of December 31, 2019, $35,224 of the cash and cash equivalents balance was in excess of FDIC limits.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Axogen, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Axogen, Inc. and subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations, shareholders’ equity, and cash flows, for the years ended December 31, 2019 and 2018, and the related notes and the schedule listed in the Index at Item 15(a)(2) (collectively referred to as the “financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for the years ended December 31, 2019 and 2018, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audit of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Inventory – Valuation Associated with Excess and Obsolete (E&O) Inventory — Refer to Notes 3 and 4 to the financial statements
Critical Audit Matter Description
Inventories are comprised of unprocessed tissue, work-in-process, and implantable tissue and devices (finished goods) and are valued at the lower of cost or net realizable value. The Company reviews inventory quantities to assess whether inventory will expire prior to being sold. To estimate the amount of inventory that will expire prior to being sold, the Company reviews inventory quantities on hand, historical and projected sales, and historical expiration trends. The Company’s calculation of the amount of inventory that will expire prior to sale has two components: 1) a demand or consumption based component that compares projected sales to inventory quantities on hand; and 2) an expiring inventory component that assesses the risk related to inventory that is near expiration by analyzing historical expiration trends to project inventory that will expire prior to being sold. The Company’s model assumes that inventory will be sold on a first-in-first-out basis. Due to the nature of the inventory (surgical implants with expiration dates) and the fact that a significant portion of the Company’s inventory is at medical facility consignment locations, estimating the amount of inventory that will expire and the amount of inventory that should be written-down involves significant judgments and estimates.
Given the significant judgments associated with evaluating the valuation of E&O inventory, auditing the reasonableness of management’s estimates and assumptions involved especially subjective judgment and an increased extent of effort.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the Company’s valuation of E&O inventory included the following, among others:
| o | We tested the effectiveness of controls over the E&O inventory valuation. The controls we tested included those over the calculation and accuracy and completeness of underlying data used in the calculation. |
| o | We performed procedures to evaluate management’s ability to accurately forecast by comparing the historical expiring inventory estimates to subsequent inventory destructions and expirations. |
| o | We obtained the Company’s E&O calculation and tested the mathematical accuracy. |
| o | We assessed the reasonableness of the assumptions used in the E&O calculation by developing an independent expectation and comparing our independent expectation to the results of the Company’s calculation. |
| o | We tested the accuracy and completeness of the underlying data used in the calculation of the Company’s expiring inventory model. |
| o | We made inquiries of the Company’s employees outside of the accounting department and evaluated other areas of the audit to identify business, product, or industry changes that may impact the inputs in the inventory valuation calculation. |
/s/ Deloitte & Touche LLP
Miami, Florida
February 24, 2020
We have served as the Company's auditor since 2018.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 2017
To the Shareholders and
Board of Directors of
Axogen, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of operations, shareholders’ equity and cash flows for the year ended December 31, 2017 of Axogen, Inc. and Subsidiaries (the "Company”), and the related notes and financial statement schedules listed in the index appearing under item 15(a)(2) (collectively referred to as the "consolidated financial statements").
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the Company’s results of operations and cash flows for the year ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audit of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ Lurie, LLP
Minneapolis, Minnesota
February 28, 2018
We served as the Company’s auditor from 2004 to 2018
AXOGEN, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2019 and 2018
(In Thousands, Except Share Amounts)
| | | | | | | |
| | | | | |
| | December 31, | | December 31, | |
| | 2019 | | 2018 | |
Assets | | | | | | | |
Current assets: | | | | | | | |
Cash and cash equivalents | | $ | 35,724 | | $ | 24,294 | |
Restricted cash | | | 6,000 | | | 6,000 | |
Investments | | | 60,786 | | | 92,311 | |
Accounts receivable, net of allowance for doubtful accounts of $1,092 and $1,117, respectively | | | 16,944 | | | 15,321 | |
Inventory | | | 13,861 | | | 11,982 | |
Prepaid expenses and other | | | 1,706 | | | 1,045 | |
Total current assets | | | 135,021 | | | 150,953 | |
Property and equipment, net | | | 14,887 | | | 8,039 | |
Operating lease right-of-use assets | | | 3,133 | | | — | |
Finance lease right-of-use assets | | | 87 | | | — | |
Intangible assets | | | 1,515 | | | 1,181 | |
Total assets | | $ | 154,643 | | $ | 160,173 | |
| | | | | | | |
Liabilities and Shareholders’ Equity | | | | | | | |
Current liabilities: | | | | | | | |
Accounts payable and accrued expenses | | | 19,130 | | | 12,998 | |
Current maturities of long term obligations | | | 1,736 | | | 28 | |
Contract liabilities, current | | | 14 | | | 18 | |
Total current liabilities | | | 20,880 | | | 13,044 | |
| | | | | | | |
Long Term Obligations, net of current maturities | | | 1,595 | | | 35 | |
Other long-term liabilities | | | — | | | 70 | |
Contract liabilities | | | 15 | | | 42 | |
Total liabilities | | | 22,490 | | | 13,191 | |
| | | | | | | |
Commitments and contingencies - see Note 14 | | | | | | | |
| | | | | | | |
Shareholders’ equity: | | | | | | | |
Common stock, $0.01 par value per share; 100,000,000 shares authorized; 39,589,755 and 38,900,875 shares issued and outstanding | | | 396 | | | 389 | |
Additional paid-in capital | | | 311,618 | | | 297,319 | |
Accumulated deficit | | | (179,861) | | | (150,726) | |
Total shareholders’ equity | | | 132,153 | | | 146,982 | |
Total liabilities and shareholders’ equity | | $ | 154,643 | | $ | 160,173 | |
The accompanying notes are an integral part of these consolidated financial statements.
AXOGEN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2019, 2018 and 2017
(In Thousands, Except Per Share Amounts)
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | 2019 | | 2018 | | 2017 | |
| | | | | | | | | | |
Revenues | | $ | 106,712 | | $ | 83,937 | | $ | 60,426 | |
Cost of goods sold | | | 17,349 | | | 12,923 | | | 9,311 | |
Gross profit | | | 89,363 | | | 71,014 | | | 51,115 | |
Costs and expenses: | | | | | | | | | | |
Sales and marketing | | | 71,950 | | | 56,617 | | | 37,636 | |
Research and development | | | 17,514 | | | 11,773 | | | 6,699 | |
General and administrative | | | 31,305 | | | 23,124 | | | 14,731 | |
Total costs and expenses | | | 120,769 | | | 91,514 | | | 59,066 | |
Loss from operations | | | (31,406) | | | (20,500) | | | (7,951) | |
Other income (expense): | | | | | | | | | | |
Investment income | | | 2,364 | | | 1,525 | | | — | |
Interest expense | | | (40) | | | (1,127) | | | (2,217) | |
Interest expense — deferred financing costs | | | — | | | (81) | | | (246) | |
Loss on extinguishment of debt | | | — | | | (2,186) | | | — | |
Other expense | | | (53) | | | (28) | | | (31) | |
Total other income (expense), net | | | 2,271 | | | (1,897) | | | (2,494) | |
Net Loss | | | (29,135) | | | (22,397) | | | (10,445) | |
Weighted average common shares outstanding — basic and diluted | | | 39,235 | | | 37,127 | | | 33,323 | |
Loss per common share — basic and diluted | | $ | (0.74) | | $ | (0.60) | | $ | (0.31) | |
The accompanying notes are an integral part of these consolidated financial statements.
AXOGEN, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Years ended December 31, 2019, 2018 and 2017
(In Thousands)
| | | | | | | | | | | | | | | |
| | | | | | | Additional | | | | | Total | |
| | Common Stock | | Paid-in | | Accumulated | | Shareholders’ | |
| | Shares | | Amount | | Capital | | Deficit | | Equity/(Deficit) | |
Balance, December 31, 2016 | | 33,009 | | $ | 330 | | $ | 132,475 | | $ | (117,884) | | $ | 14,921 | |
| | | | | | | | | | | | | | | |
Stock-based compensation | | — | | | — | | | 3,609 | | | — | | | 3,609 | |
Exercise of stock options | | 536 | | | 5 | | | 1,429 | | | — | | | 1,434 | |
Issuance of common shares | | 805 | | | 8 | | | 15,655 | | | — | | | 15,663 | |
Net loss | | — | | | — | | | — | | | (10,445) | | | (10,445) | |
| | | | | | | | | | | | | | | |
Balance, December 31, 2017 | | 34,350 | | $ | 343 | | $ | 153,168 | | $ | (128,329) | | $ | 25,182 | |
�� | | | | | | | | | | | | | | | |
Stock-based compensation | | — | | | — | | | 7,606 | | | — | | | 7,606 | |
Exercise of stock options | | 1,101 | | | 11 | | | 3,873 | | | — | | | 3,884 | |
Issuance of common shares | | 3,450 | | | 35 | | | 132,672 | | | — | | | 132,707 | |
Net loss | | — | | | — | | | — | | | (22,397) | | | (22,397) | |
| | | | | | | | | | | | | | | |
Balance, December 31, 2018 | | 38,901 | | $ | 389 | | $ | 297,319 | | $ | (150,726) | | $ | 146,982 | |
| | | | | | | | | | | | | | | |
Stock-based compensation | | — | | | — | | | 10,304 | | | — | | | 10,304 | |
Exercise of stock options and employee stock purchase plan | | 689 | | | 7 | | | 3,995 | | | — | | | 4,002 | |
Net loss | | — | | | — | | | — | | | (29,135) | | | (29,135) | |
| | | | | | | | | | | | | | | |
Balance, December 31, 2019 | | 39,590 | | $ | 396 | | $ | 311,618 | | $ | (179,861) | | $ | 132,153 | |
The accompanying notes are an integral part of these consolidated financial statements.
AXOGEN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2019, 2018 and 2017
(In Thousands)
| | | | | | | | | |
| | Year Ended |
| | December 31, | | December 31, | | December 31, |
| | 2019 | | 2018 | | 2017 |
Cash flows from operating activities: | | | | | | | | | |
Net loss | | $ | (29,135) | | $ | (22,397) | | $ | (10,445) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | | |
Depreciation | | | 933 | | | 774 | | | 488 |
Amortization of right-of-use assets | | | 1,821 | | | — | | | — |
Amortization of intangible assets | | | 123 | | | 77 | | | 79 |
Impairment loss on intangible assets | | | 104 | | | — | | | — |
Amortization of deferred financing costs | | | — | | | 81 | | | 246 |
Loss on disposal of equipment | | | — | | | 1 | | | — |
Loss on extinguishment of debt | | | — | | | 2,186 | | | — |
Provision for bad debt | | | 514 | | | 852 | | | 223 |
Provision for inventory writedown | | | 1,887 | | | 1,343 | | | 1,438 |
Changes in investment gains and losses | | | (972) | | | (721) | | | — |
Share-based compensation | | | 10,304 | | | 7,606 | | | 3,609 |
Change in operating assets and liabilities: | | | | | | | | | |
Accounts receivable | | | (2,136) | | | (5,108) | | | (3,236) |
Inventory | | | (3,767) | | | (6,009) | | | (3,295) |
Prepaid expenses and other | | | (661) | | | (192) | | | (342) |
Accounts payable and accrued expenses | | | 2,920 | | | 3,711 | | | 1,927 |
Operating lease obligations | | | (1,773) | | | — | | | — |
Cash paid for interest portion of finance leases | | | (4) | | | — | | | — |
Contract and other liabilities | | | (30) | | | (66) | | | 70 |
Net cash used in operating activities | | | (19,872) | | | (17,862) | | | (9,238) |
| | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | |
Purchase of property and equipment | | | (4,664) | | | (6,282) | | | (1,105) |
Purchase of investments | | | (121,074) | | | (114,736) | | | — |
Proceeds from sale of investments | | | 153,571 | | | 23,146 | | | — |
Cash payments for intangible assets | | | (562) | | | (321) | | | (187) |
Net cash provided by / (used for) investing activities | | | 27,271 | | | (98,193) | | | (1,292) |
| | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | |
Proceeds from issuance of common stock | | | — | | | 132,964 | | | 15,891 |
Cash paid for equity offering | | | — | | | (257) | | | (228) |
Borrowing on revolving loan | | | — | | | 26,253 | | | 57,599 |
Payments on revolving loan and prepayment penalties | | | — | | | (30,489) | | | (57,624) |
Repayments of long-term debt and prepayment penalties | | | — | | | (22,513) | | | (21) |
Cash paid for debt portion of finance leases | | | 29 | | | — | | | — |
Proceeds from exercise of stock options | | | 4,002 | | | 3,884 | | | 1,434 |
Net cash provided by financing activities | | | 4,031 | | | 109,842 | | | 17,022 |
Net increase in cash, cash equivalents, and restricted cash | | | 11,430 | | | (6,213) | | | 6,492 |
Cash, cash equivalents, and restricted cash, beginning of period | | | 30,294 | | | 36,507 | | | 30,015 |
Cash, cash equivalents and restricted cash, end of period | | $ | 41,724 | | $ | 30,294 | | $ | 36,507 |
| | | | | | | | | |
Supplemental disclosures of cash flow activity: | | | | | | | | | |
Cash paid for interest | | $ | 34 | | $ | 1,325 | | $ | 2,198 |
Supplemental disclosure of non-cash investing and financing activities: | | | | | | | | | |
Acquisition of fixed assets in accounts payable and accrued expenses | | $ | 3,212 | | $ | 335 | | $ | 55 |
Capital lease additions | | $ | — | | $ | — | | $ | 62 |
Right-of-use asset and operating lease liability (Adoption of ASC 842) | | $ | 26 | | $ | — | | $ | — |
The accompanying notes are an integral part of these consolidated financial statements.
AXOGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018 and 2017
(In Thousands, Except Per Share Amounts)
1.Basis of Presentation
The accompanying consolidated financial statements include the accounts of Axogen, Inc. (the “Company” or “Axogen”) and its wholly owned subsidiaries, Axogen Corporation (“AC”), Axogen Processing Corporation (“APC”) and Axogen Europe GmbH, as of December 31, 2019 and December 31, 2018 and for the three years ended December 31, 2019. The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. All intercompany accounts and transactions have been eliminated in consolidation.
2.Organization and Business
Axogen is a global provider of innovative surgical solutions for physical damage or transection to peripheral nerves. Axogen is focused specifically on the science, development and commercialization of technologies for peripheral nerve regeneration and repair. Axogen’s products are designed to restore nerve function and are used to treat patients with physical damage or transection to peripheral nerves by providing innovative, clinically proven and economically effective repair solutions for surgeons and health care providers. Peripheral nerves provide the pathways for both motor and sensory signals throughout the body. Physical damage to a peripheral nerve or the inability to properly reconnect peripheral nerves can result in the loss of muscle or organ function, the loss of sensory feeling, or the initiation of pain.
Axogen’s portfolio of products includes Avance Nerve Graft, an off-the-shelf processed human nerve allograft for bridging severed peripheral nerves without the comorbidities associated with a second surgical site, Axoguard Nerve Connector, a porcine submucosa extracellular matrix (“ECM”) coaptation aid for tensionless repair of severed peripheral nerves, Axoguard Nerve Protector, a porcine submucosa ECM product used to wrap and protect injured peripheral nerves and reinforce the nerve reconstruction while preventing soft tissue attachments, Axoguard® Nerve Cap, a porcine submucosa ECM product used to protect a peripheral nerve end and separate the nerve from the surrounding environment to reduce the development of symptomatic or painful neuroma and Avive Soft Tissue Membrane, a processed human umbilical cord membrane that may be used as a resorbable soft tissue covering to separate tissues in the surgical bed. Along with these core surgical products, Axogen also offers the Axotouch Two-Point Discriminator a measurement tool for use by healthcare professionals detect changes in sensation. The Company’s portfolio of products is available in the United States, Canada, Germany, South Korea and other European and international countries.
Avance Nerve Graft and Avive Soft Tissue Membrane are processed in the United States by Axogen at its processing facility in Dayton, Ohio. Axoguard Nerve Cap is manufactured by Cook Biotech in the United States for sale by Axogen and Axoguard Nerve Connector and Axoguard Nerve Protector are manufactured in the United States by Cook Biotech and are distributed worldwide exclusively by Axogen. The Axotouch Two Point Discriminator is contract manufactured by Viron Technologies, LLC (formerly Cybernetics Research Laboratories) (“Viron”) Tucson, Arizona. Viron supplies the Axotouch unpackaged and they are packaged at Axogen’s distribution facility in Burleson, Texas. Axogen maintains its corporate offices in Alachua, Florida and is the parent company of its wholly owned operating subsidiaries, AC, APC and Axogen Europe GmbH.
3.Summary of Significant Accounting Policies
Cash and Cash Equivalents and Concentration
The Company considers highly liquid investments with maturities of three months or less at the date of acquisition as cash equivalents in the accompanying consolidated financial statements. The Company has not experienced any losses related to these balances; however, as of December 31, 2019, $35,224 of the cash and cash equivalents balance was in excess of FDIC limits. As of December 31, 2019 and 2018, the Company had restricted cash balances of $6,000 as collateral for an irrevocable standby letter of credit.
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheet that sum to the total of the same amounts shown in the statement of cash flows:
| | | | | | |
| | December 31, | | December 31, |
| | 2019 | | 2018 |
Cash and cash equivalents | | $ | 35,724 | | $ | 24,294 |
Restricted cash | | | 6,000 | | | 6,000 |
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows | | $ | 41,724 | | $ | 30,294 |
Investments
The Company invests primarily in U.S. Government securities, corporate bonds, commercial paper and asset-backed securities and classifies all investments as available-for-sale. Investments are recorded at fair value. The Company has elected the fair value option (FVO) for all of its available-for-sale investments. The FVO election results in all changes in unrealized gains and losses being included in investment income in the Consolidated Statements of Operations.
Revenue Recognition
On January 1, 2018, the Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) No. 606, “Revenue from Contracts with Customers”, utilizing the modified retrospective method applied to contracts that were not completed. The adoption of the standard did not have a material impact on the timing and amounts of the Company’s revenue, processes or internal controls. Upon adoption, the Company did not have any material remaining performance obligations, significant judgements, or material costs to obtain or fulfill contracts with its customers.
The Company enters into contracts to sell and distribute products and services to hospitals and surgical facilities for use in caring for patients with peripheral nerve damage or transection. 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 and services to the Company’s customers.
In the case of products or services sold to a customer under a distribution or purchase agreement, the customers are granted exclusive distribution rights to sell the implants internationally in a territory defined by the contract. These international distributor agreements contain provisions that allow the Company to terminate the distribution agreement with the distributor, and upon termination, the right to repurchase inventory from the distributor at the distributor’s cost. The Company has determined that its contractual rights to repurchase distributor inventory upon termination of the distributor agreement are not substantive and do not impact the timing of when control transfers; and, therefore, the Company has determined it is appropriate to recognize revenue when: i) the product is shipped via common carrier; or ii) the product is delivered to the customer or distributor, depending on the terms of the agreement. Determining the timing of revenue recognition for such contracts is subject to significant judgment, because an evaluation must be made regarding the distributor’s ability to direct the use of, and obtain substantially all of the remaining benefits from, the implants received from the Company. Changes in these assessments could have a significant impact on the timing of revenue recognition from sales to distributors.
A portion of the Company's product revenue is generated from consigned inventory maintained at hospitals and independent sales agencies, and also from inventory physically held by field sales representatives. For these types of products sales, the Company retains control until the product has been used or implanted, at which time revenue is recognized.
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 cost of sales.
The Company operates in a single reportable segment of peripheral nerve repair, offers similar products to its customers, and enters into consistently structured arrangements with similar types of customers. As such, the Company does not disaggregate revenue from contracts with customers as the nature, amount, timing and uncertainty of revenue and cash flows does not materially differ within and among the contracts with customers.
The contract with the customer states 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. Since the customer agrees to a stated price in the contract that does not vary over the contract term, the contracts do not contain any material types of variable consideration, and contractual rights of return are not material. The Company has several contracts with distributors in international markets which include consideration paid to the customer in exchange for distinct marketing and other services. The Company records such consideration paid to the customer as a reduction to revenue from the contracts with those distributor customers.
marketplace. In connection with the Acroval Neurosensory and Motor Testing System, the Company sold extended warranty and service packages to some of its customers who purchasepurchased this evaluation and measurement tool, and the prepayment of these extended warranties represent contract liabilities until the performance obligations are satisfied ratably over the term of the contract. The sale of the aforementioned extended warranty represents the only performance obligation the Company satisfies over time and creates the contract liability disclosed below.
The opening and closing balances of the Company’s contract receivables and liabilities are as follows:
| | | | | | | | | | | |
| (in thousands) | Net Receivables | Contract Liabilities, Current | Contract Liabilities, Long-Term |
| Opening January 1, 2020 | $ | 16,944 | | $ | 14 | | $ | 15 | |
| Closing, December 31, 2020 | 17,618 | | 14 | | 3 | |
| Increase (decrease) | 674 | | — | | (12) | |
| | | |
| Opening January 1, 2021 | $ | 17,618 | | $ | 14 | | $ | 3 | |
| Closing, December 31, 2021 | 18,158 | | 14 | | — | |
| Increase (decrease) | 540 | | — | | (3) | |
| | | | | | | | | |
Contract Balances | | | |
| | Net Receivables | | Contract Liabilities, Current | | Contract Liabilities, Long-Term |
Opening, January 1, 2018 | | $ | 11,065 | | | 32 | | | 69 |
Closing, December 31, 2018 | | | 15,321 | | | 18 | | | 42 |
Increase (decrease) | | | 4,256 | | | (14) | | | (27) |
| | | | | | | | | |
Opening, January 1, 2019 | | $ | 15,321 | | | 18 | | | 42 |
Closing, December 31, 2019 | | | 16,944 | | | 14 | | | 15 |
Increase (decrease) | | | 1,623 | | | (4) | | | (27) |
| | | | | | | | | |
Allowance for Doubtful Accounts Receivable and Concentration of Credit Risk
The Company evaluates the collectability of accounts receivable to determine the appropriate allowance for doubtful accounts. In determining the amount of the allowance, the Company considers aging of account balances, historical credit losses, customer-specific information, the current economic environment, supportable forecasts, and other relevant factors. An increase to the allowance for doubtful accounts results in a corresponding increase in general and administrative expense. The Company reviews accounts receivable and adjusts the allowance based on current circumstances and charges off uncollectible receivables against the allowance when all attempts to collect the receivable have failed. The Company’s history of write-offs has not been significant. The allowance for doubtful accounts balance was approximately $1,092$276 and $1,117$416 at December 31, 20192021 and 2018,2020, respectively.
Concentrations of credit risk with respect to accounts receivable are limited because a large number of geographically diverse customers make up the Company’s customer base, thus spreading the trade credit risk. The Company also controls credit risk through credit approvals and monitoring procedures.
Inventories
Inventories are comprised of unprocessed tissue, work-in-process, Avance Nerve Graft, Axoguard Nerve Connector, Axoguard Nerve Protector, Axoguard Nerve Cap, Avive Soft Tissue Membrane, Acroval Neurosensory and Motor Testing System, Axotouch Two-Point Discriminator and supplies and are valued at the lower of cost (first-in, first-out) or net realizable value.
The Company monitors the shelf life of its products and historical expiration and spoilage trends, and writes-off inventory based on the estimated amount of inventory that will not be distributed before expiration or spoilage. To estimate the amount of inventory that will expire prior to being sold, the Company reviews inventory quantities on hand, historical and projected sales, and historical expiration trends. The Company’s calculation of the amount of inventory that will expire prior to sale has two components: 1) a demand or consumption based component that compares projected sales to inventory quantities on hand; and 2) an expiring inventory component that assesses the risk related to inventory that is near expiration by analyzing historical expiration trends to project inventory that will expire prior to being sold. The Company’s model assumes that inventory will be sold on a first-in-first-out basis. Due to the nature of the inventory (surgical implants with expiration dates) and the fact that a significant portion of the Company’s inventory is at medical facility consignment locations, estimating the amount of inventory that will expire and the amount of inventory that should be written-down involves significant judgments and estimates.
The Company adopted Accounting Standards Update (“ASU”) No. 2016-02—2016-2—Leases (Topic 842) (“ASU 2016.02”), as ofeffective January 1, 2019, (the “Application Date”) using the modified retrospective approach.
The Company
will continue to report financial information for fiscal years prior to 2019 underdetermines whether or not a contract contains a lease at the
previousinception date and determines the lease
accounting standards. The modified retrospective approach provides a method for recording on the balance sheet as of January 1, 2019, leases that have commenced on or before the Application Date.
classification, recognition, and measurement at commencement date. The Company elected the package of practical expedients permitted under the transition guidance, which allowed us to not reassess whether any existing contracts containclassifies a lease to not reassess historical lease classificationbased on whether the arrangement is effectively a purchase of the underlying asset. Leases that transfer the control of the underlying asset are classified as operating or finance leases and to not reassess initial direct costs. The Company also elected the practical expedient allowing us to not separate the leaseall others are classified as operating leases. Interest and non-lease componentsamortization expense are recognized for all classes of underlying assets, apart from equipment. The Company did not elect the practical expedientoperating leases on a straight-line basis. If a change to use hindsight to determine the lease term for leases at January 1, 2019.
leads to a reassessment of the lease classification and remeasurement, assumptions such as the discount rate and variable rents based on a rate or index will be updated as of the remeasurement date. If an arrangement is modified, the Company will reassess whether the arrangement contains a lease. Any subsequent changes in lease payments are recognized when incurred, unless the change requires a remeasurement of the lease liability.
The Company made an accounting policy election to not recognize
right-to-useright-of-use assets and lease
liabilitiesobligations that arise from
short termshort-term leases, which are defined as leases with a lease term of 12 months or less at the lease commencement date.
Adoption The Company recognizes lease expense for these leases on a straight-line basis over the lease term.
The Company leases office space, medical lab and research space, a distribution center, a tissue processing center, and equipment. Certain of the
new standard resultedCompany's leases include options for the Company to extend the lease term. None of the options were reasonably certain of exercise, and therefore are not included in the
recordingmeasurement of
right-to-use assetslease obligations and
right-of-use assets. Certain of the Company's lease
liabilities of approximately $3,786agreements include provisions for the Company to reimburse the lessor for common area maintenance, real estate taxes, and
$3,823, respectively, andinsurance, which the
derecognition of capitalCompany accounts for as variable lease
assets, capitalcosts. The Company's lease
liabilities, and operating lease deferred rent of $96, $63, and $70, respectively, as of January 1, 2019 with zero cumulative-effect adjustment to retained earnings. The new standard didagreements do not
materially impact our consolidated net earnings.
contain any material residual value guarantees or material restrictive covenants. Basic and diluted net loss per share is computed in accordance with FASB ASC 260, “Earnings Per Share” (ASC 260), by dividing thereported net loss by the weighted average number of common shares outstanding for the reported period. Diluted net loss per share reflects the potential dilution that could occur if contracts to issue common stock were exercised or converted into common stock of the Company during the reporting period. Diluted net loss per share is computed by dividing net loss by the sum of the weighted average number of common shares and the number of potential dilutive common share equivalents outstanding during the period. SincePotential dilutive common share equivalents consist of the Company has experiencedincremental common shares issuable upon the exercise of vested stock options, restricted stock units (“RSUs”), and performance stock units (“PSUs”).
Due to net losses for
all periods presented, options and awards of 1,556,818, 2,621,440 and 2,253,399 which were outstanding as ofthe years ended December 31,
2021, 2020 and 2019,
2018basic and
2017, respectively, were not included in the computation of diluted net loss per
shares becauseshare were the same, as the effect of potentially dilutive
shares are not factored into the calculation of net loss per share when a loss applicable to common shares as theysecurities would
behave been anti-dilutive.
See additional outstanding shares as disclosed in Note 11, “Equity Compensation Plans” that could potentially be dilutive.
Research and Development Costs
Research and development costs are expensed as incurred and were $17,514, $11,773$24,177, $17,846 and $6,699$17,514 for the years ended December 31, 2021, 2020 and 2019, 2018 and 2017, respectively.
Stock-Based Compensation
The Company measures all
employee stock-based compensation awards,
using the fair value, including stock options,
restricted stock, performance stockRSUs, and
stock purchases related to an employee stock purchase plan. The share-based compensation recognized under ASC 718 for years ended December 31, 2019, 2018 and 2017 was $10,304, $7,606,and $3,609, respectively.
ASC 718 requires companies to estimatePSUs at, or above, the fair market value of share-based payment awardsthe Company's common stock on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s consolidated statements of operations. The expense has been reduced for forfeitures as they occur.
grant.
The Company estimates the fair value of
time-based optionseach option award on the date of grant using
the Multi-Pointa multiple-point Black-Scholes option-pricing model
(Black-Scholes model).("Black-Scholes") which uses a weighted average of historical volatility and peer company volatility. The Company’s determination of fair value is affected by the Company’s stock price, as well as assumptions regarding several subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the term of the awards.
The Company determines the expected life of each award giving consideration to the contractual terms, vesting schedules, and post-vesting forfeitures. The Company uses the risk-free interest rate on the implied yield currently available on U.S. Treasury issues with an equivalent remaining term approximately equal to the expected life of the award. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s consolidated statements of operations. The expense has been reduced for forfeitures as they occur.
The Company estimates the fair value of
restricted stockRSUs based upon the grant date closing market price of the Company’s common stock.
The Company also has an employee stock purchase plan (ESPP) which is available to all eligible employees as defined by the plan document. Under the ESPP, shares of the Company’s common stock may be purchased at a discount. The Company estimates the number of shares to be purchased under the ESPP at the beginning of each purchase period based upon the fair value of the stock at the beginning of the purchase period using the Black-Scholes model and records estimated compensation expense during the period. Expense is adjusted at the time of stock purchase.
With respect to
performance stock units (“PSUs”),PSUs, the number of shares that vest and are issued to the recipient is based upon the Company’s performance as measured against specified targets over the measurement period. The fair value of the PSUs is based on the Company’s closing stock price on the grant date and its estimate of achieving such performance targets. For further discussion and disclosures, see
Note"Note 11
– Equity Compensation- Stock-Based Incentive Plans.
"
The Company also has an employee stock purchase plan that is available to all eligible employees as defined by the plan document. Under the Axogen 2017 Employee Stock Purchase Plan ("2017 ESPP"), eligible employees may acquire shares of the Company’s common stock through payroll deductions at a discount to market price. The Company estimates the number of shares to be purchased under the 2017 ESPP at the beginning of each purchase period based upon the fair value of the stock at the beginning of the purchase period using the Black-Scholes model and records estimated compensation expense during the period. Expense is adjusted at the time of stock purchase.
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of AmericaUS GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenuesrevenue and expenses during the reporting period. Management believes the critical accounting policies regarding revenue recognition, allowance for uncollectible accounts receivable, investments, inventoriesestimates relating to inventory, derivative instruments, and share-based employeestock-based compensation affect ourthe Company's more significant judgments and estimates used in the
preparation of the Company’s consolidated financial statements. Actual results could differ materially from those estimates.
Recent Accounting Pronouncements In February 2016,November 2021, the FASB issued ASU 2016-02. This update will increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This update is effective for annual and interim reporting periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. In July 2018, the FASBFinancial Accounting Standards Board ("FASB") issued ASU No. 2018-11, Targeted Improvements2021-10, Government Assistance (Topic 832), Disclosures by Business Entities about Government Assistance, which requires business entities to ASC 842, Leases (“ASU 2018-11”provide certain annual disclosures when they have received government assistance and use a grant or contribution accounting model by analogy to other accounting guidance (e.g., a grant model under International Accounting Standards 20, Accounting for Government Grants and Disclosure of Government Assistance). ASU 2018-11 provided entities with an alternative modified transition method to elect not to recastThe disclosures should provide the comparative periods presented when adopting ASC 842. The impactnature of the adoption is disclosed intransaction, including the Leases sectionsignificant terms and conditions of Note 3, Summary of Significant Accounting Policies.
In August 2018, the FASB issued ASU No. 2018-15, Guidance on Cloud Computing Arrangements (“ASU 2018-15”). ASU 2018-15 provides guidance on implementation costs incurred in a cloud computing arrangement (CCA) that is a service contract and alignstransaction, the accounting policies used to account for such coststhe transaction, and the dollar amounts by line item on the financial statements that are affected by the transaction. The adoption of this ASU will be required beginning with the guidanceCompany's Annual Report on capitalizing costs associated with developingForm 10-K for the year ending December 31, 2022, on either a prospective basis or obtaining internal-use software. Specifically, the ASU amends ASC 350 to include in its scope implementation costs of a CCA that is a service contract and clarifies that a customer should apply ASC 350-40 to determine which implementation costs should be capitalized. This update is effective for annual and interim reporting periods beginning after December 15, 2019, including interim periods within those fiscal years.retrospective basis. Early adoption is permitted. The Companyadoption of this guidance is currently evaluating thenot expected to have a material impact this standard will have on the Company’s consolidated financial statements.
Recently Adopted Accounting PronouncementsIn June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. We will adopt ASU 2016-13 as of
Effective January 1, 2020. We are currently evaluating the impact the standard may have on our consolidated financial statements.
In May 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging and Topic 825, Financial Instruments (“ASU 2019-04”). ASU 2019-04 clarifies certain aspects of accounting for credit losses, hedging activities, and financial instruments. This update is effective fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the impact the guidance will have on its consolidated financial statements.
In May 2019, the FASB issued ASU No. 2019-05, Targeted Transition Relief (“ASU 2019-05”). ASU 2019-05 provides transition relief for entities adopting ASU 2016-13, Measurement of Credit Losses on Financial Instruments. The amendment allows entities to irrevocably elect, upon adoption of ASU 2016-13, the fair value option on financial instruments that (1) were previously recorded at amortized costs and (2) are within the scope of ASC 326-20, Financial Instruments – Credit Losses: Measured at Amortized Costs, if the instruments are eligible for the fair value option under ASC 825-10, Financial Instruments: Overall. This update is effective fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the impact the guidance will have on its consolidated financial statements.
In November 2019, the FASB issued ASU No. 2019-11, Credit Losses (Topic 326), Codification Improvements to Topic 326, Financial Instruments – Credit Losses. This amendment amends certain aspects of the new credit loss standard, ASU 2016-13 (ASC 326). As2021, the Company has not adopted ASU 2016-13, the effective date of this amendment is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. We will adopt ASU 2016-13 as of January 1, 2020. The Company is currently assessing the impact the guidance will have on its consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) (“ASU 2019-12”), Simplifying the Accounting for Income Taxes. This amendment simplifiesTaxes, which was intended to simplify the accounting for income taxes by removing certain exceptions to the general principles and improve consistent application or and simplify accordance with accounting principles generally acceptedrules found in the United States for other areas of Topic 740 - Income Taxesby clarifying and amending existing guidance. This update is effective for annual and interim reporting periods beginning after. December 15, 2020. Early adoption is permitted but requires simultaneousThe adoption of all provisions of ASU 2019-12. The Company doesthis guidance did not expect this standard will have a material impact on the Company’s consolidated financial statements.
Effective January 1, 2021, the Company adopted ASU 2020-08, Codification Improvements to Subtopic 310-20, Receivables-Nonrefundable Fees and Other Costs. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
The Company’s management has reviewed and considered all other recent accounting pronouncements and believe there are none that could potentially have a material impact on the Company’s consolidated financial condition, results of operations, or disclosures.
4.4. InventoryInventories
Inventories are comprised of unprocessed tissue, work-in-process, Avance Nerve Graft, Axoguard Nerve Connector, Axoguard Nerve Protector, Avive Soft Tissue Membrane, Axoguard Nerve Cap, Acroval Neurosensory and Motor Testing System, Axotouch Two-Point Discriminator and supplies and are valued at the lower of cost (first-in, first-out) or net realizable value and consist
Inventory consists of the following:
| | | | | | | |
| | December 31, | | December 31, | |
| | 2019 | | 2018 | |
| | | | | |
Finished goods | | $ | 10,403 | | $ | 9,194 | |
Work in process | | | 730 | | | 454 | |
Raw materials | | | 2,728 | | | 2,334 | |
Inventories | | $ | 13,861 | | $ | 11,982 | |
For
| | | | | | | | | | | |
| (in thousands) | December 31,
2021 | | December 31,
2020 |
| Finished goods | $ | 11,011 | | | $ | 8,876 | |
| Work in process | 813 | | | 751 | |
| Raw materials | 4,869 | | | 2,902 | |
| Inventory | $ | 16,693 | | | $ | 12,529 | |
The provision for inventory write-down was $3,314, $2,242 and $1,887 for the years ended December 31,
2021, 2020 and 2019,
2018 and 2017, the Company had recorded arespectively. The provision for inventory
write-downswrite-down for the year ended December 31, 2021 includes the Avive write-down of
$1,887, $1,343 and $1,438, respectively, primarily relating to product expiration.$1,251.
5.5.Fair Value of Investments
Measurement
The Company has elected the FVO for alluses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Cash equivalents, investments in debt securities.and derivative instruments are recorded at fair value on a recurring basis. Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy defines a three-level valuation hierarchy for classification and disclosure of fair value measurements as follows:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The Company has elected the FVO for its investments. Unrealized gains and losses on investments have been reported in investment income in the consolidated statements of operations at each reporting date. The Company classifies cash equivalents (consisting of money market funds) and investments in U.S. government securities as Level 1 within the fair value hierarchy. Accounts receivable, short-term other assets, accounts payable and accrued liabilities are also classified as Level 1. The carrying amounts of these assets and liabilities approximate their fair values due to their relatively short-term nature. Investments in commercial paper and corporate bonds and commercial paper are classified as Level 2 within the fair value hierarchy.
On June 30, 2020, the Company entered into the Oberland Facility (see "Note 10 - Long-Term Debt, Net of Financing Fees") and obtained the first tranche of $35,000 at closing. On June 30, 2021, the second tranche of $15,000 was drawn down by the Company. The Company determined that the term debt instrument included certain embedded features that required separate accounting identified as the Debt Derivative Liabilities and that the equity contract (the “Common Stock Derivative Option Liability”) entered into concurrently were required to be classified as liabilities and recorded at fair value, requiring Level 3 fair value measurements. The Common Stock Derivative Option Liability was settled on December 10, 2020 (see "Note 10 - Long-Term Debt, Net of Financing Fees"). The Debt Derivative Liabilities are measured using a ‘with and without’ valuation model to compare the fair value of the Oberland Facility including the identified embedded derivative features and the fair value of a plain vanilla note with the same terms. The fair value of
long-termthe Oberland Facility including the embedded derivative features was determined using a probability-weighted expected return model based on 4 potential settlement scenarios for the Oberland Facility due to (a) a 5% probability of a mandatory prepayment event of the Oberland Facility on December 31, 2023; (b) a 15% probability of a mandatory prepayment event of the Oberland Facility on March 31, 2026; (c) a 5% probability of the prepayment of the Oberland Facility at the Company’s option on December 31, 2025; and (d) a 75% probability that the Oberland Facility will be held to its scheduled maturity dates in accordance with the terms of the debt
agreement. The estimated settlement value of each scenario, which would include any required make-whole payment (see "Note 10 - Long-Term Debt, Net of Financing Fees"), is
estimated by calculating the netthen discounted to present value
using a discount rate that is derived based on the initial terms of
future debt paymentsthe Oberland Facility at
current market interest ratesissuance and
is classified as Level 2.
corroborated utilizing a synthetic credit rating analysis. 96
The significant inputs that are included in the valuation of the Debt Derivative Liability - first tranche include: | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| Input | | | | |
| Remaining term (years) | 5.5 | | 6.5 | |
| Maturity date | June 30, 2027 | | June 30, 2027 | |
| Coupon rate | 9.50% | | | 9.50% | | |
| Revenue participation payments | Maximum each year | | Maximum each year | |
| Discount rate | 10.72% | | 1 | 8.70 | % | 1 |
| Probability of mandatory prepayment before 2024 | 5.0% | | 1 | 5.0% | | 1 |
| Estimated timing of mandatory prepayment event before 2024 | December 31, 2023 | 1 | December 31, 2023 | 1 |
| Probability of mandatory prepayment 2024 or after | 15.0% | | 1 | 15.0% | | 1 |
| Estimated timing of mandatory prepayment event 2024 or after | March 31, 2026 | 1 | March 31, 2026 | 1 |
| Probability of optional prepayment event | 5.0% | | 1 | 5.0% | | 1 |
| Estimated timing of optional prepayment event | December 31, 2025 | 1 | December 31, 2025 | 1 |
1 Represents a significant unobservable input.
The significant inputs that are included in the valuation of the Debt Derivative Liability - second tranche include:
Table of Contents
| | | | | | | | |
| December 31, 2021 |
| Input | | |
| Remaining term (years) | 6.5 | |
| Maturity date | June 30, 2028 | |
| Coupon rate | 9.50% | | |
| Revenue participation payments | Maximum each year | |
| Discount rate | 13.21 | % | (1) |
| Probability of mandatory prepayment before 2024 | 5.0% | | (1) |
| Estimated timing of mandatory prepayment event before 2024 | December 31, 2023 | (1) |
| Probability of mandatory prepayment 2024 or after | 15.0% | | (1) |
| Estimated timing of mandatory prepayment event 2024 or after | March 31, 2026 | (1) |
| Probability of optional prepayment event | 5.0% | | (1) |
| Estimated timing of optional prepayment event | December 31, 2025 | (1) |
1 Represents a significant unobservable input.
The following table representstables represent the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2019:2021 and 2020:
| | | | | | | | | | | | |
| | (Level 1) | | (Level 2) | | (Level 3) | | Total |
December 31, 2019 | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | |
Money market funds | | $ | 26,812 | | $ | — | | $ | — | | $ | 26,812 |
U.S. government securities | | | 4,544 | | | — | | | — | | | 4,544 |
Corporate bonds | | | — | | | 17,754 | | | — | | | 17,754 |
Commercial paper | | | — | | | 24,679 | | | — | | | 24,679 |
Asset-backed securities | | | — | | | 13,808 | | | — | | | 13,808 |
Total assets | | $ | 31,356 | | $ | 56,241 | | $ | — | | $ | 87,597 |
| | | | | | | | | | | | |
| | (Level 1) | | (Level 2) | | (Level 3) | | Total |
December 31, 2018 | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | |
Money market funds | | $ | 12,947 | | $ | — | | $ | — | | $ | 12,947 |
U.S. government securities | | | 15,923 | | | — | | | — | | | 15,923 |
Corporate bonds | | | — | | | 31,495 | | | — | | | 31,495 |
Commercial paper | | | — | | | 27,869 | | | — | | | 27,869 |
Asset-backed securities | | | — | | | 17,025 | | | — | | | 17,025 |
Total assets | | $ | 28,870 | | $ | 76,389 | | $ | — | | $ | 105,259 |
| | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | Level 1 | | Level 2 | | Level 3 | | Total |
| December 31, 2021 | | | | | | | |
| Assets: | | | | | | | |
| Money market funds | $ | 22,012 | | | $ | — | | | $ | — | | | $ | 22,012 | |
| U.S. government securities | 12,081 | | | — | | | — | | | 12,081 | |
| | | | | | | |
| Commercial paper | — | | | 39,249 | | | — | | | 39,249 | |
| Total assets | $ | 34,093 | | | $ | 39,249 | | | $ | — | | | $ | 73,342 | |
| | | | | | | |
| Liabilities: | | | | | | | |
| | | | | | | |
| Debt derivative liabilities | $ | — | | | $ | — | | | $ | 5,562 | | | $ | 5,562 | |
| Total liabilities | $ | — | | | $ | — | | | $ | 5,562 | | | $ | 5,562 | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| December 31, 2020 | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | |
| Money market funds | $ | 23,044 | | | $ | — | | | $ | — | | | $ | 23,044 | |
| U.S. government securities | 12,123 | | | — | | | — | | | 12,123 | |
| Corporate bonds | — | | | 6,408 | | | — | | | 6,408 | |
| Commercial paper | — | | | 36,668 | | | — | | | 36,668 | |
| Total assets | $ | 35,167 | | | $ | 43,076 | | | $ | — | | | $ | 78,243 | |
| | | | | | | |
| Liabilities: | | | | | | | |
| | | | | | | |
| Debt derivative liability | $ | — | | | $ | — | | | $ | 2,497 | | | $ | 2,497 | |
| Total liabilities | $ | — | | | $ | — | | | $ | 2,497 | | | $ | 2,497 | |
| | | | | | | |
The changes in Level 3 liabilities measured at fair value on a recurring basis were as follows:
| | | | | | | | | | | | | | |
| (in thousands) | | Common Stock Derivative Option Liability | | Debt Derivative Liabilities |
| Balance, December 31, 2019 | | $ | — | | | $ | — | |
| Acquired | | 175 | | 2,387 | |
| Change in fair value included in net loss | | 7 | | 110 | |
| Settlement | | (182) | | — | |
| Balance, December 31, 2020 | | — | | 2,497 | |
| Acquired | | — | | 3,037 | |
| Change in fair value included in net loss | | — | | 28 | |
| Balance, December 31, 2021 | | $ | — | | $ | 5,562 | |
The fair value of cash, restricted cash, accounts receivable, accounts payable and accrued expenses approximates the carrying values because of the short-term nature of these instruments. The Oberland Facility is classified as Level 3 within the fair value hierarchy. The carrying value and fair value of the Oberland Facility were $45,325 and $52,605 at December 31, 2021, respectively, and $32,623 and $36,855 at December 31, 2020, respectively.
There were no changes in the levels or methodology of the measurement of financial assets or liabilities during the years ended December 31, 2021 and 2020.
6.Prepaid Expenses and Other
Prepaid expenses and other consist of the following:
| | | | | | | | | | | |
| (in thousands) | December 31, 2021 | | December 31, 2020 |
| Prepaid insurance | $ | — | | | $ | 2,596 | |
| Stock option receivable | 3 | | 2 |
| Litigation receivable | 23 | | 23 |
| Prepaid events | 54 | | 203 |
| Prepaid marketing | 620 | | 587 |
| Prepaid software license | 215 | | 220 |
| Prepaid professional fees | 207 | | 251 |
| Other prepaid items | 739 | | 414 |
| Prepaid expenses and other | $ | 1,861 | | | $ | 4,296 | |
The policy year for the Company's insurance runs on a calendar year and as such, a significant portion of the policy payment is made at the beginning of the new year and amortized to expense throughout the remaining year. For the year ended December 31, 2019 and December 31, 2018. The maturity date2020, the insurance premium was paid prior to year-end, resulting in a prepaid balance of all$2,596.
6.7.Property and Equipment
, Net
Property and equipment,
net consist of the following:
| | | | | | | |
| | December 31, | | December 31, | |
| | 2019 | | 2018 | |
| | | | | | |
Furniture and equipment | | $ | 2,059 | | $ | 1,763 | |
Leasehold improvements | | | 2,203 | | | 1,151 | |
Processing equipment | | | 2,772 | | | 2,349 | |
Land | | | 731 | | | 731 | |
Projects in process | | | 10,886 | | | 4,906 | |
Property and equipment, at cost | | | 18,651 | | | 10,900 | |
Less: accumulated depreciation and amortization | | | (3,764) | | | (2,861) | |
Property and equipment, net | | $ | 14,887 | | $ | 8,039 | |
| | | | | | | | | | | |
| (in thousands) | December 31,
2021 | | December 31,
2020 |
| Furniture and equipment | $ | 5,100 | | | $ | 2,334 | |
| Leasehold improvements | 14,952 | | | 12,983 | |
| Processing equipment | 3,984 | | | 2,634 | |
| Land | 731 | | | 731 | |
| Projects in process | 45,660 | | | 24,541 | |
| Property and equipment, at cost | 70,427 | | | 43,223 | |
| Less: accumulated depreciation and amortization | (7,546) | | | (4,825) | |
| Property and equipment, net | $ | 62,881 | | | $ | 38,398 | |
Depreciation expense
was $2,721, $1,507 and $933 for the years ended December 31,
2021, 2020 and 2019,
2018respectively. The significant increase in projects in process is related to the Company's Axogen Processing Center ("APC Facility") (See "Note 14 - Commitments and
2017 was $933, $774 and $488, respectively.
7.Intangible Assets,
Net
The Company’s intangible
Intangible assets consist of the following:
| | | | | | | |
| | December 31, | | December 31, | |
| | 2019 | | 2018 | |
| | | | | | |
License agreements | | $ | 1,067 | | $ | 1,034 | |
Less: accumulated amortization | | | (647) | | | (553) | |
License agreements, net | | $ | 420 | | $ | 481 | |
| | | | | | | |
Trademarks | | | 334 | | | 255 | |
| | | | | | | |
Patents | | | 845 | | | 500 | |
Less: accumulated amortization | | | (84) | | | (55) | |
Patents, net | | $ | 761 | | $ | 445 | |
Intangible assets, net | | $ | 1,515 | | $ | 1,181 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| (in thousands) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Amortizable intangible assets: | | | | | | | | | | | | |
| Patents | | $ | 2,469 | | | $ | (234) | | | $ | 2,235 | | | $ | 1,496 | | | $ | (139) | | | $ | 1,357 | |
| License agreements | | 1,101 | | | (852) | | | 249 | | | 1,093 | | | (745) | | | 348 | |
| Total amortizable intangible assets | | 3,570 | | | (1,086) | | | 2,484 | | | 2,589 | | | (884) | | | 1,705 | |
| | | | | | | | | | | | |
| Unamortized intangible assets: | | | | | | | | | | | | |
| Trademarks | | 375 | | | — | | | 375 | | | 349 | | | — | | | 349 | |
| Total intangible assets | | $ | 3,945 | | | $ | (1,086) | | | $ | 2,859 | | | $ | 2,938 | | | $ | (884) | | | $ | 2,054 | |
License agreements are being amortized over periods ranging from seventeen to twenty years. Patents are being amortized over periods up to twenty years.years. Amortization expense was $202, $153 and $123 for 2019, 2018the years ended December 31, 2021, 2020 and 2017 was approximately $123, $77 and $79,2019, respectively. In January 2019, the Company rebranded its logo and product name designs, and as a result the Company recorded a $104 impairment charge related to the previous logo and product design names. This charge is recorded in the “Generalgeneral and Administrative”administrative expense in the Statementaccompanying consolidated statement of Operations. operations.
As of December 31, 2019,2021, future amortization of patents and license agreements are as follows:
| | | | | |
| Year Ending December 31, | (in thousands) |
| 2022 | $ | 233 | |
| 2023 | 207 | |
| 2024 | 130 | |
| 2025 | 130 | |
| 2026 | 129 | |
| Thereafter | 1,655 | |
| Total | $ | 2,484 | |
| |
Year Ending December 31, | |
2020 | 137 |
2021 | 137 |
2022 | 138 |
2023 | 119 |
2024 | 47 |
Thereafter | 603 |
TOTAL | 1,181 |
License Agreements
The Company has entered into multiple license agreements with the University of Florida Research Foundation and the University of Texas at Austin (together, the “License Agreements”). Under the terms of the License Agreements, the Company acquired exclusive worldwide licenses for underlying technology used in repairing and regenerating nerves. The licensed technologies include the rights to issued patents and patents pending in the
United StatesU.S. and international markets. The effective term of the License Agreements extends through the term of the related patents and the agreements may be terminated by the Company with 60 days prior written notice. Additionally, in the event of default, licensors may terminate an agreement if the Company fails to cure a breach after written notice. The License Agreements contain the key terms listed below:
| ● | Axogen pays royalty fees ranging from 1% to 3% under the License Agreements based on net sales of licensed products. One of the agreements also contains a minimum royalty of $13 per quarter, which may include a credit in future quarters in the same calendar year for the amount the minimum royalty exceeds the royalty fees. Also, when Axogen pays royalties to more than one licensor for sales of the same product, a royalty stack cap applies, capping total royalties at 3.75%; |
| ● | If Axogen sublicenses technologies covered by the License Agreements to third parties, Axogen would pay a percentage of sublicense fees received from the third party to the licensor. Currently, Axogen does not sublicense any technologies covered by License Agreements. The Company is not considered a sub- |
•If the Company sub-licenses technologies covered by the License Agreements to third parties, the Company would pay a percentage of sub-license fees received from the third party to the licensor. Currently, the Company does not sub-license any technologies covered by the License Agreements. The Company is not considered a sub-licensee under the License Agreements and does not owe any sub-licensee fees for its own use of the technologies;
| | licensee under the License Agreements and does not owe any sub-licensee fees for its own use of the technologies; |
•
| ● | Axogen reimburses the licensors for certain legal expenses incurred for patent prosecution and defense of the technologies covered by the License Agreements; and |
Currently, under the University of Texas at Austin’s agreement, the Company would owe a $15 milestone fee upon receiving a Phase II Small Business Innovation Research or Phase II Small Business Technology Transfer grant involving the licensed technology. The Company has not received either grant and does not owe such a milestone fee. A milestone fee to the University of Florida Research Foundation of $2 is due if the Company receives FDA approval of its Avance Nerve Graft, a milestone fee of $25 is due upon the first commercial use of certain licensed technology to provide services to manufacture products for third parties and a milestone fee of $10 is due upon the first use to manufacture products that utilize certain technology that is not currently incorporated into the Company's products.
| ● | Currently, under the University of Texas at Austin’s agreement, Axogen would owe a $15 milestone fee upon receiving a Phase II Small Business Innovation Research or Phase II Small Business Technology Transfer grant involving the licensed technology. The Company has not received either grant and does not owe such a milestone fee. A milestone fee to the University of Florida Research Foundation of $2 is due if Axogen receives FDA approval of its Avance Nerve Graft, a milestone fee of $25 is due upon the first commercial use of certain licensed technology to provide services to manufacture products for third parties and a milestone fee of $10 is due upon the first use to manufacture products that utilize certain technology that is not currently incorporated into Axogen products. |
Royalty fees were
$2,119, $1,661$2,715, $2,289 and
$1,195$2,119 for the years ended December 31,
2019, 20182021, 2020 and
2017,2019, respectively, and are included in sales and marketing expense
onin the accompanying consolidated statements of operations.
8.
9.Accounts Payable and Accrued Expenses Accounts payable and accrued expenses consist of the following:
| | | | | | | | | | | |
| (in thousands) | December 31,
2021 | | December 31,
2020 |
| Accounts payable | $ | 5,923 | | | $ | 4,597 | |
| Accrued expenses | 6,863 | | | 3,778 | |
| Accrued compensation | 9,673 | | | 13,593 | |
| Accounts payable and accrued expenses | $ | 22,459 | | | $ | 21,968 | |
10.Long-Term Debt, Net of Financing Fees
Long-term debt, net of financing fees consists of the following:
| | | | | | | |
| | December 31, | | December 31, | |
| | 2019 | | 2018 | |
| | | | | | | |
Accounts payable | | $ | 8,262 | | $ | 4,517 | |
Accrued expenses | | | 3,237 | | | 2,004 | |
Accrued compensation | | | 7,631 | | | 6,477 | |
Accounts Payable and Accrued Expenses | | $ | 19,130 | | $ | 12,998 | |
| | | | | | | | | | | | | |
| (in thousands) | December 31, 2021 | | December 31, 2020 | | |
| Oberland Facility - first tranche | $ | 35,000 | | | $ | 35,000 | | | |
| Oberland Facility - second tranche | 15,000 | | | — | | | |
| Less - unamortized debt discount and deferred financing fees | (5,179) | | | (2,973) | | | |
| Long-term debt, net of financing fees | $ | 44,821 | | | $ | 32,027 | | | |
9.
Term Loan Agreements and Long-Term Debt
Term Loan Agreement and Long-Term Debt consist of the following:
| | | | | | | |
| | December 31, | | December 31, | |
| | 2019 | | 2018 | |
| | | | | | | |
| | | | | | | |
Equipment Lease Agreement with Cisco Capital for a total lease amount of $59 which has a 36 month term and requires no lease payments for the first three months of the lease and 33 equal payments of principal and interest until the end of the term. Interest on the lease is payable monthly at 3.5% per annum. | | | — | | | 15 | |
| | | | | | | |
Equipment Lease Agreement with Raymond Leasing Corporation for a total lease amount of $30 which has a 48 month term with equal payments for principal and interest until the end of the term. Interest on the lease is payable monthly at 6.7% per annum. | | | — | | | 22 | |
| | | | | | | |
Equipment Lease Agreement with B&B Office Systems for a total lease amount of $32 which has a 60 month term with equal payments for principal and interest until the end of the term. Interest on the lease is payable monthly at 8.5% per annum. | | | — | | | 26 | |
Total | | | — | | | 63 | |
Less current revolving loan | | | — | | | — | |
Less current maturities of long-term debt | | | — | | | (28) | |
Long-term portion | | $ | — | | $ | 35 | |
Credit Facilities
MidCap Term Loan Agreement
On October 25, 2016,June 30, 2020, the Company entered into Term Loana seven-year financing agreement with Oberland Capital (the “Oberland Facility”) and obtained the first tranche of $35,000 at closing. On June 30, 2021, the second tranche of $15,000 was drawn down by the Company. The financing costs for this facility were $642 and were recorded as a Revolving Loan with MidCap Financial Trust (“MidCap”contra liability to the debt facility. As of December 31, 2021, the Company has paid all of the financing costs.
The Oberland Facility requires quarterly interest payments for seven years. Interest is calculated as 7.5% plus the greater of the London Interbank Offered Rate ("LIBOR")
or 2.0% (9.5% as of December 31, 2021). Each tranche of the Oberland Facility has a term of seven years from the date of issuance (with the first tranche issued on June 30, 2020 maturing on
MayJune 30, 2027 and the second tranche issued on June 30, 2021 maturing on June 30, 2028). In connection with the Oberland Facility, the Company entered into a revenue participation agreement with Oberland Capital, which provides that, among other things, a quarterly royalty payment as a percentage of the Company’s net revenues, up to $70 million in any given year, subject to certain limitations set forth therein, during the period commencing on the later of (i) April 1,
2021 and (ii) the date of funding of a tranche of the loan, and ending on the date upon which all amounts owed under the Oberland Facility have been paid in full (the “Revenue Participation Agreement”). Royalty payments commenced on September 30, 2021.
This royalty structure results in approximately 1.0% per year of additional interest payments on the outstanding loan amount. The Company recorded $646 as interest expense for this Revenue Participation Agreement for the year ended December 31, 2021. The Company pays the quarterly debt interest on the last day of the quarter, and for the years ended December 31, 2021 and 2020, paid $4,103 and $1,709, respectively, to Oberland Capital. The Company capitalized interest of $4,277 and $997 for the years ended December 31, 2021 and 2020, respectively, towards the costs to construct and retrofit its APC Facility in Vandalia, OH (See "Note 14 - Commitments and Contingencies"). To date, the Company has capitalized interest of $5,274 related to this project. The capitalized interest is recorded as part of property and equipment in the consolidated balance sheets.
Additionally, Oberland Capital had the optionright to purchase up to $3,500 worth of the Company's common stock from the Company in one transaction at any time after closing of the Oberland Facility until the later of (i) the date all amounts due under the Oberland Facility are repaid and (ii) June 30, 2027 (the “Oberland Option”). The purchase price of the common stock was calculated based on the 45-day moving average of the closing stock price on the day prior to prepay the Term Loanpurchase. On December 10, 2020, Oberland Capital exercised in wholefull its option under the Oberland Option. The exercise price was determined to be $14.13, resulting in gross proceeds to the Company of $3,500 and the issuance of 247,699 shares to TPC Investments II LP, a wholly owned subsidiary of Oberland Capital. In conjunction with the issuance of the shares, Oberland Capital received certain protective rights (including protection from down-round stock issuances) for a period of one year subsequent to the issuance. These rights expired on December 10, 2021.
The amounts outstanding under the Oberland Facility may be accelerated upon certain events, including: (a) required mandatory prepayments upon an asset sale; (b) in the event the Company is subject to (i) any litigation brought by a Governmental Authority (as defined in the Oberland Facility) including intervention after litigation is commenced by a Person (as defined in the Oberland Facility), or (ii) any final administrative action by a Governmental Authority, in each case arising out of or in part, subjectconnection with any of the Company’s registry studies, payments made to paymentdoctors or training activities with respect to healthcare professionals (excluding certain final administrative actions that have been fully and finally resolved by the parties pursuant to a settlement agreement) or (c) upon the occurrence of a prepayment fee and an exit fee. On May 22, 2018,event of default (either automatically or at the Company exercised its option and paid $22,599 to prepayof Oberland Capital depending on the Term Loan in full, which included exit and pre-payment fees totaling $1,470nature of the event). In addition, the Company has the right to prepay any amounts outstanding under the Oberland Facility. Upon maturity or upon such earlier repayment of the Oberland Facility, the Company will repay the principal balance and provide a make-whole payment calculated to generate an internal rate of return to Oberland Capital equal to 11.5%, less the total of all quarterly interest and royalty payments previously paid to Oberland Capital. See Note 14 - Commitments and Contingencies for further information.
Upon the occurrence of an event of default, the interest rate incurred on amounts outstanding under the Oberland Facility will be increased by 4%. The Oberland Facility includes a financial covenant requiring the Company to achieve revenue targets of $8,750 for the third and four quarters of 2020, $17,500 for the first and second quarters of 2021 and $20,000 for each quarter thereafter. As of December 31, 2021, the Company was in compliance with all the covenants. In the event of a failure to meet such covenant the Company may avoid a default by electing to be subject to a liquidity covenant and meeting all of the obligations required by such covenant. Specifically, the liquidity covenant provides that the Company must maintain on deposit in a cash collateral account an amount not less than 1.1 times the aggregate outstanding principal balance of all outstanding loan amounts. The borrowings under the Oberland Facility are secured by substantially all of the assets of the Company.
Accounting Considerations
The Company assessed the accounting impact of the Oberland Facility and the related agreements entered into with Oberland Capital. The Company concluded that the Oberland Facility and the Revenue Participation Agreement should be assessed on a combined unit of account basis (with the Revenue Participation Agreement being considered as an embedded feature with the Oberland Facility), and that the Oberland Option should be considered as a separate freestanding instrument for analysis purposes.
In relation to the Oberland Facility and Revenue Participation Agreement, the Company assessed the identified embedded features to determine if they would require separate accounting. In performing this assessment, the Company concluded the following embedded features met the definition of a derivative and would not be considered clearly and closely related to the debt instrument, requiring separate accounting as bifurcated derivatives:
•Mandatory prepayments upon an asset sale or litigation involving the government, including the make-whole payment (put rights)
•Optional or automatic prepayment upon an event of default (put rights)
•Payments under the Revenue Participation Agreement (contingent interest feature)
•Additional interest upon events of default (contingent interest feature)
The Company considered these separable embedded features on a combined basis as a single derivative feature. The Company estimated the fair value of these features as $2,387 as of the date of issuance of the Oberland Facility (see "Note 5 - Fair Value Measurement") and recorded this value as a debt derivative liability. As a result of the second tranche draw on June 30, 2021, the Company recorded an additional derivative and estimated the fair value to be $1,961, along with an increase of $1,076 related to the first tranche derivative.
In relation to the Oberland Option, the Company concluded that the equity contract met the definition of a derivative and did not qualify for an exception from derivative accounting. As such, the Company concluded that the Oberland Option should be classified as a liability. The Company estimated the fair value of the Common Stock Derivative Option Liability as $175 as of the date of issuance of the Oberland Facility (see "Note 5 - Fair Value Measurement") and recorded this value as the Common Stock Derivative Option Liability. The Common Stock Derivative Option Liability was settled on December 10, 2020.
Other Long-Term Debt
On April 23, 2020, the Company received a Small Business Administration (“SBA”) loan under the Paycheck Protection Program (“PPP”) in the amount of $7,820. The loan was obtained pursuant to the original guidance of the SBA to preserve positions in the Company by providing necessary economic relief during this period of reduced surgical procedures because of the negative business effects of COVID-19. The Company believed it correctly applied for the loan, met the initial intent of the PPP program to preserve jobs and believed it complied with the representations provided in the loan documents. However,
subsequent to obtaining the loan, the U.S. Treasury Department issued guidance, which the Company believed contradicted the original intent and language of the PPP, providing that public companies are unlikely to be able to meet the standards for receiving the PPP loan. As a result of this change, the Company believed it was in its best business interests to repay the loan and did so on May 22, 2018, the Company charged to interest expense the unamortized deferred financing costs associated with the Term Loan of 5, 2020.
Other Credit Facilities
The Company
also had the option to terminate or permanently reduce the Revolving Loan prior to the maturity date subject to its paymentmaintains restricted cash of
a deferred origination fee. On May 22, 2018, the Company exercised its option to terminate$6,251 and
paid $2,958 to prepay the Revolving Loan in full,$6,842 at December 31, 2021 and 2020, respectively. The December 31, 2021 and 2020 balances both include $6,000, which
amount included feesrepresents collateral for an irrevocable standby letter of
$236.
10.Public Offering of Common Stock
Axogen, Inc. Classes of Stock
Axogen, Inc.’s authorized capital stock consists of 100,000,000 shares of common stock, par value $0.01 per share. The authorized capital stock is divisible into the classes and series, has the designation, voting rights, and other rights and preferences and is subject to the restrictions that the Axogen Board of Directors may establish from time to time. Unless otherwise designated by the Axogen Board of Directors, all shares are common stock. Axogen has not designated any shares other than common stock.
Public Offerings
On May 8, 2018,credit. In March 2021, the Company entered into an underwriting agreement with Jefferies LLC and Leerink Partners LLC, as representativeswhich required an additional irrevocable standby letter of credit in the several underwriters named therein (collectively, the “2018 Offering Underwriters”), pursuant to which the Company agreed to issue and sell 3,000,000 sharesamount of the Company’s common stock in an underwritten registered public offering at an offering price of $41.00 per share (the “2018 Offering”). The Company granted the 2018 Offering Underwriters a 30-day option to purchase up to an aggregate of 450,000 additional shares of common stock, at the public offering price, less the underwriting discounts and commissions, which was exercised in full on May 9, 2018. The 2018 Offering closed on May 11, 2018, and the Company received proceeds of approximately $132,707 from the sale of the shares (including the sale of 450,000 additional shares issued upon exercise of the 2018 Offering Underwriters’ overallotment option), after deducting the underwriting discounts and commissions and estimated offering expenses.
$250.
11.
Equity Compensation Stock-Based Incentive Plans
The Company maintains
two share-based2 stock-based incentive plans: the Axogen,
2017 StockInc. 2019 Amended and Restated Long-Term Incentive Plan, as amended
(“2017 Plan”("2019 Plan")
, and the Axogen 2017 Employee Stock Purchase Plan (“2017 ESPP”).
Stock
Long-Term Incentive Plan
At the 2019 Annual Meeting of Shareholders held on August 14, 2019, the shareholders approved the
Axogen 2019
Long-Term Incentive Plan,
(the “New Axogen Plan”), which allows for
issuancethe award of incentive stock options, non-qualified stock options,
performance stock units (“PSUs”)PSUs and
restricted stock units (“RSUs”)RSUs to employees, directors, and
consultantsconsultants. Awards under the 2019 Plan are priced at,
exercise prices not less thanor above, the fair market value
atof the Company's common stock on the date of grant.
At the 2021 Annual Meeting of Shareholders held on May 10, 2021, the shareholders approved an additional 2,500,000 shares to be allocated for issuance under the 2019 Plan. The number of shares of common stock authorized for issuance under the
New Axogen2019 Plan is
(A) 3,385,482(a) 5,885,482 shares, comprised of (i)
3,000,0005,500,000 new authorized shares and (ii) 385,482
unallocated shares of common stock available for issuance as of August 14, 2019 pursuant to the Company’s 2010 Stock Incentive Plan, as amended and restated (the “Prior Axogen“2010 Plan”), that were not then subject to outstanding awards; plus (B)(b) shares under the Prior Axogen2010 Plan and the New Axogen2019 Plan that are cancelled, forfeited, expired, unearned or settled in cash, in any such case that does not result in the issuance of common stock. Following shareholder approval of the New Axogen Plan, noNo future awards will be made under the Prior Axogen2010 Plan. As of December 31, 2019, 3,265,1882021, 3,630,823 shares of common stock were available for issuance under the
New Axogen2019 Plan.
The Company recognized stock-based compensation expense, which consisted of compensation expense related to employee stock options, PSUs and RSUs based on the value of stock-based payment awards that are ultimately expected to vest during the period and stock-based compensation expense related to the 2017 ESPP of $10,919, $8,470 and $10,304 for the years ended December 31, 2021, 2020 and 2019, respectively.
As of December 31, 2021, there was $19,502 of unrecognized compensation costs related to non-vested stock options and restricted stock awards. This cost is expected to be recognized over a weighted-average period of 2.09 years for stock options and 2.04 years for restricted stock awards.
Stock Options
The options granted to employees prior to July 1, 2017 typically vest 25% one year after the grant date and 12.5% every six months thereafter for the remaining three-year period until fully vested after four years. The options granted to employees after July 1, 2017 typically vest 50% two years after the grant date and 12.5% every six months thereafter for the remaining two-year period until fully vested after four years.years. The options granted to directors and certain options granted from time to time to certain executive officers have vested ratably over three years or 25% per quarter over one year or had no vesting period.year. Options typically have terms ranging from seven to ten years.
The Company recognized stock-based compensation expense, which consistedTable of compensation expense related to employee stock options, PSUs, RSUs and the 2017 ESPP based on the value of share-based payment awards that are ultimately expected to vest during the period, of approximately $10,304, $7,606 and $3,609 for the fiscal year ended December 31, 2019, 2018, and 2017, respectively.Contents
The Company estimates the fair value of each option award issued under such plans on the date of grant using a Multiple Point Black-Scholes option-pricing model which uses a weighted average of historical volatility and peer company volatility. The Company determines the expected life of each award giving consideration to the contractual terms, vesting schedules and post-vesting forfeitures. The Company uses the risk-free interest rate on the implied yield currently available on U.S. Treasury issues with an equivalent remaining term approximately equal to the expected life
Activity under the Prior Axogen Plan and the New Axogen Plan during 2019 and 2018 wasstock option activity is as follows:
| | | | | | | | | | |
| | | | | | | Weighted | | | |
| | | | Weighted | | Average | | | |
| | Number of | | Average | | Remaining | | Aggregate |
| | Shares | | Exercise | | Contractual | | Intrinsic |
Time-Based Stock Options | | Outstanding | | Price | | Term(Years) | | Value |
Outstanding at December 31, 2017: | | 4,304,201 | | $ | 7.28 | | 5.39 | | $ | 90,473 |
Granted | | 656,250 | | | 29.48 | | | | | |
Forfeited | | (40,473) | | | 9.56 | | | | | |
Exercised | | (1,026,807) | | | 3.72 | | | | | |
Outstanding at December 31, 2018: | | 3,893,171 | | $ | 11.94 | | 5.95 | | $ | 41,020 |
Granted | | 344,176 | | | 18.07 | | | | | |
Forfeited | | (287,609) | | | 22.75 | | | | | |
Exercised | | (529,557) | | | 5.21 | | | | | |
Outstanding at December 31, 2019 | | 3,420,181 | | $ | 12.69 | | 5.70 | | $ | 26,074 |
Vested and expected to vest | | 3,420,181 | | $ | 12.69 | | 5.68 | | $ | 26,074 |
Exercisable at December 31, 2019 | | 2,099,616 | | $ | 7.90 | | 4.10 | | $ | 22,712 |
| | | | | |
| | | | Weighted |
| | Number of | | Average |
| | Shares | | Grant Date |
Restricted and Performance Stock Units | | Outstanding | | Fair Value |
Outstanding at December 31, 2017: | | 610,730 | | $ | 21.14 |
Granted | | 516,433 | | | 23.34 |
Released | | (7,150) | | | 8.95 |
Forfeited | | (13,650) | | | 25.89 |
Outstanding at December 31, 2018: | | 1,106,363 | | | 22.18 |
Granted | | 217,146 | | | 17.60 |
Released | | (86,405) | | | 16.77 |
Forfeited | | (123,407) | | | 22.97 |
Outstanding at December 31, 2019 | | 1,113,697 | | | 21.62 |
The intrinsic value of equity awards exercised during the years ended December 31, 2019, 2018 and 2017 was $9,553, $34,229 and $7,783, respectively. As a result of the Company’s full valuation allowance on its net deferred tax assets, no tax benefit was recognized related to the exercises of stock options.
| | | | | | | | | | | | | | | | | | | | | | | |
| Options | | Weighted
Average
Exercise
Price | | Weighted
Average
Remaining
Contractual
Life (Years) | | Aggregate
Intrinsic
Value (in thousands) |
| Outstanding at December 31, 2019 | 3,420,181 | | | $ | 12.69 | | | 5.70 | | $ | 26,074 | |
| Granted | 663,098 | | | $ | 9.29 | | | | | |
| Forfeited | (107,541) | | | $ | 19.71 | | | | | |
| Exercised | (459,254) | | | $ | 5.36 | | | | | |
| Outstanding at December 31, 2020 | 3,516,484 | | | $ | 12.79 | | | 5.93 | | $ | 25,718 | |
| Granted | 656,398 | | | $ | 20.00 | | | | | |
| Forfeited | (194,301) | | | $ | 17.02 | | | | | |
| Exercised | (783,843) | | | $ | 5.89 | | | | | |
| Outstanding at December 31, 2021 | 3,194,738 | | | $ | 15.65 | | | 6.45 | | $ | 2,236 | |
| | | | | | | |
| Exercisable at December 31, 2021 | 1,865,381 | | | $ | 15.08 | | | 4.95 | | $ | 1,932 | |
The exercise price per share of each option is equal to the fair market value of the underlying share on the date of grant. For the years ended December 31, 2021, 2020 and 2019, 2018$5,467, $3,300 and 2017, $4,002, $3,884 and $1,434,$4,002, respectively, in cash proceeds were included in the Company’s Consolidated Statementsconsolidated statements of Cash Flowscash flows as a result of the exercise of stock options. options and Employee Stock Purchase Plan stock purchases. The intrinsic value of equity awards exercised during the years ended December 31, 2021, 2020 and 2019 was $14,167, $5,595 and $9,553, respectively.
The following weighted-average assumptions were used for stock options granted during the years ended December 31:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Expected term (in years) | | 5.88 | | 5.88 | | 5.76 |
| Expected volatility | | 58.38 | % | | 58.46 | % | | 54.97 | % |
| Risk free rate | | 1.02 | % | | 0.49 | % | | 1.71 | % |
| Expected dividends | | — | % | | — | % | | — | % |
Restricted and Performance Stock Units
RSUs granted to employees have a requisite service period of four years. The RSUs granted to directors and certain RSUs granted from time to time to certain executive officers have a requisite service period of three years, while certain of these RSUs have a requisite service period of one year. The Company expenses the fair value of RSUs on a straight-line basis over the requisite service period.
A summary of the status of non-vested RSUs and PSUs as of December 31, 2021 and 2020 and the changes during the years then ended are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Outstanding Restricted and Performance Stock Units |
| Stock Units | | Weighted
Average Fair Value at Date of Grant per Share | | Weighted Average Remaining Vesting Life (Years) | | Aggregate Intrinsic Value (in thousands) |
| Outstanding at December 31, 2019 | 1,113,697 | | | $ | 21.62 | | | 2.26 | | $ | 19,800 | |
| Granted | 1,008,869 | | | $ | 9.57 | | | | | |
| Released | (247,333) | | | $ | 19.66 | | | | | |
| Forfeited | (92,328) | | | $ | 18.64 | | | | | |
| Outstanding at December 31, 2020 | 1,782,905 | | | $ | 15.23 | | | 1.83 | | $ | 31,825 | |
| Granted | 898,264 | | | $ | 20.35 | | | | | |
| Released | (253,881) | | | $ | 17.50 | | | | | |
| Forfeited | (696,513) | | | $ | 13.00 | | | | | |
| Outstanding at December 31, 2021 | 1,730,775 | | | $ | 18.45 | | | 1.51 | | $ | 19,633 | |
The total fair value of restricted stock vested during
the years ended December 31, 2021, 2020 and 2019
2018was $4,481, $3,811 and
2017 was $1,467, $196 and $108.$1,467, respectively. The Company issues registered shares of common stock to satisfy stock option exercises and restricted stock grants.
As of December 31, 2019, there was $19,460 of unrecognized compensation costs related to non-vested stock options and restricted stock awards. This cost is expected to be recognized over a weighted-average period of 2.14 years for stock options and 2.63 years for restricted stock awards.
On December 18, 2017, December 27, 2018 and December 17, 2019, the Compensation Committee of the Board of Directors also approved PSU awards to certain employees related to their work on the Company’s BLA. The PSU awards consist of a targeted total award of 200,000 shares. The number of shares are allocated to certain milestones related to the BLA submission to and approval by the FDA. The performance measure is based upon achieving each of the specific milestones and will vest 50% upon achieving each of the milestones and 50% one year later.
Performance Stock Units
The Company estimatedestimates the fair value of the PSUs based on its closing stock price at the time of grant and its estimate of achieving such performance target and will recordrecords compensation expense as the milestones are achieved. PSUs generally have a requisite service period of three years and are subject to graded vesting conditions based on revenue goals of the Company. The Company expenses their fair value over the requisite service period. Over the performance period, the number of shares of common stock that will ultimately vest and be issued and the related compensation
expense will be adjusted based upon the Company’s estimate of achieving such performance target. The number of shares delivered to recipients and the related compensation cost recognized as an expense will be based on the actual performance metrics as set forth in the applicable PSU award agreement. The amount actually awarded will be based upon achievement of the performance measures and can range from 0 to 200,000 shares. The fair value of the common stock on the grant date was $16.88 onmeasures.
On December 17, 2019, $19.17 on18, 2017, December 27, 2018 and $27.00December 17, 2019, the Compensation Committee of the Board of Directors approved PSU awards to certain employees related to their work on the Company’s Biologics License Application ("BLA"). The PSU awards consist of a targeted total award of 378,863 shares, of which 298,587 shares remain available as of December 31, 2021. The number of shares is allocated to certain milestones related to the BLA submission to and approval by the FDA. These awards are expected to vest beginning when the BLA is submitted to the FDA, which is not expected to be until 2023. The performance measure is based upon achieving each of the specific milestones and will vest 50% upon achieving each of the milestones and 50% one year later. No expense has been recognized on these awards yet.
On December 18, 2017.2017, the Compensation Committee of the Board of Directors approved PSU awards of 114,700 shares tied to 2019 revenue. The total unrecognized futureaward was issued at 72.3% of achievement and therefore, 27.7% of the stock compensation expense or $536 relating to this grant, was forfeited or reversed in the first quarter of 2020.
On December 27, 2018, the Compensation Committee of the Board of Directors approved PSU awards of 130,400 tied to 2020 revenue. As a result of COVID-19, it was determined these PSU awards would not be granted and therefore stock compensation related to these awards of $1,161 was forfeited in 2020. No expense related to these awards was recorded in 2021 and the awards were forfeited.
On March 16, 2020, the Compensation Committee of the Board of Directors approved PSU awards of 357,000 shares tied to 2021 revenue. In June 2020, the Company concluded that the performance metrics relating to these awards with performance metrics tied to 2021 revenue were no longer probable and therefore stock compensation expense related to this PSU, assuming achievementthese awards of 100%$340 was reversed in 2020. Subsequently, in the fourth quarter of 2020, it became probable that the target award is $17,682. AssumingCompany would achieve 50% of these performance metrics and therefore adjusted stock compensation expense. In the minimumthird quarter of 0% and2021, it was determined that the maximum of 100% payout opportunity for the PSU, the range of total futureperformance metrics tied to 2021 revenue were no longer probable; therefore, stock compensation expense related to thisthese awards of $804 was reversed in 2021 and the awards were forfeited.
On July 17, 2020, the Compensation Committee of the Board of Directors approved PSU award is between $0 and $17,682 asawards of 144,300 shares tied to 2020 revenue. These awards were granted in mid-year with certain revenue targets adjusted for the impact of COVID-19. These 2020 awards granted in July reached 110% achievement of revenue targets.
On March 16, 2021, the Compensation Committee of the Board of Directors approved PSU awards of 332,200 shares tied to 2022 revenue, with a payout ranging from 0% to 200% upon achievement of specific revenue goals. In the fourth quarter of 2021, it was determined that the performance metrics tied to 2022 revenue were no longer probable; therefore, stock compensation expense related to these awards of $1,831 was reversed in 2021.
At December 31,
2019.2021, the total future stock compensation expense related to non-vested performance awards is expected to be $484 for those awards issued on December 18, 2017 and July 17, 2020. Future stock compensation expense has not been calculated on those awards for which expensing has not yet begun which include the BLA awards and the awards tied to 2022 revenue.
Employee Stock Purchase Plan
The 2017 ESPP which was effective as of January 1, 2018, allows for eligible employees to acquire shares of ourthe Company's common stock through payroll deductions at a discount fromto market value (currently 15%price (currently15.00%) of the lesser of the closing price of the Company’s common stock on the first day or last day of the offering period. The offering period is currently six6 months, and the offering prices are subject to change. Participants may not purchase more than $25$25 of the Company’s common stock in a calendar year. Stock-based compensation expense related to the 2017 ESPP, included in total stock-based compensation expense, was $401, $493 and $744 for the years ended December 31, 2021, 2020 and 2019, respectively. As of December 31, 2019 ,2021, there were 600,000 shares of the Company's common stock authorized for issuance under the 2017 ESPP and 450,305 were223,678 shares remain available for future issuance.
12. Income Taxes
Valuation
Deferred income taxes are accounted for using the balance sheet approach, which requires recognition of deferred tax assets and
Expense Information Under FASB ASC 718
The Company estimates the fair value of each option grant using a Multiple Point Black-Scholes option-pricing model which uses a weighted average of historical volatility and peer company volatility. The Company determinesliabilities for the expected life giving consideration to the contractual terms, vesting schedules and post-vesting forfeitures. The Company uses the risk-free interest rate on the implied yield currently available on U.S. Treasury issues with an equivalent remaining term approximately equal to the expected lifefuture consequences of the award.
The Company used the following weighted-average assumptions for stock options granted during the year ended December 31:
| | | | | | | |
Year ended December 31, | | 2019 | | 2018 | | 2017 | |
| | | |
Expected term (in years) | | 5.76 | | 6.22 | | 6.16 | |
Expected volatility | | 54.97 | % | 50.99 | % | 50.43 | % |
Risk free rate | | 1.71 | % | 2.70 | % | 2.12 | % |
Expected dividends | | — | % | — | % | — | % |
The fair value of restricted stock awards is based on the market value of the Company’s common stock on the date of the awards.
Based on the assumptions noted above, the weighted average estimated grant date fair value per share of the stock options and restricted stock granted for the years ended December 31, 2019, 2018 and 2017, respectively, was as follows:
| | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
Stock options | | $ | 18.07 | | $ | 15.05 | | $ | 8.41 |
Restricted and performance stock units | | | 17.60 | | | 23.34 | | | 26.24 |
12. Income Taxes
The Company has temporary differences between the carrying amountfinancial reporting basis and the tax basis of assets and liabilities, for financial reporting purposes and their respective income tax basis, as measured by enacted state and federal ratestax rates. Deferred tax assets and deferred tax liabilities are as follows:
| | | | | | | | | | | |
| (in thousands) | December 31,
2021 | | December 31,
2020 |
| Deferred tax assets: | | | |
| Net operating loss carryforwards | $ | 47,021 | | | $ | 42,317 | |
| Inventory write-down | 653 | | | 397 | |
| Depreciation | 0 | | — | |
| | | |
| Interest limitation | 453 | | | 115 | |
| Allowance for doubtful accounts | 70 | | | 106 | |
| Lease obligations | 5,736 | | | 5,551 | |
| Stock-based compensation | 3,985 | | | 3,218 | |
| Research and development credit | 6 | | | — | |
| Total deferred tax assets | 57,924 | | | 51,704 | |
| Deferred tax liabilities: | | | |
| Depreciation | (692) | | | (1,145) | |
| Amortization | (116) | | | (34) | |
| Right-of-use assets | (3,861) | | | (4,004) | |
| Contract liabilities | (4) | | | (4) | |
| Total deferred tax liabilities | (4,673) | | | (5,187) | |
| Net deferred tax assets | $ | 53,251 | | | $ | 46,517 | |
| Valuation allowance | $ | (53,251) | | | $ | (46,517) | |
| | | | | | | | | | |
December 31 | | 2019 | | 2018 | | 2017 | |
| | | | | | | | | | |
Deferred tax assets: | | | | | | | | | | |
Net operating loss carryforwards | | $ | 36,250 | | $ | 30,588 | | $ | 27,578 | |
Inventory write down | | | 317 | | | 273 | | | 206 | |
Depreciation | | | 136 | | | 117 | | | — | |
Amortization | | | — | | | — | | | 23 | |
Interest limitation | | | — | | | 336 | | | — | |
Allowance for doubtful accounts | | | 274 | | | 285 | | | 117 | |
Right-of-use liability | | | 837 | | | — | | | — | |
Stock-based compensation | | | 3,140 | | | 2,335 | | | 520 | |
Total deferred tax assets | | | 40,954 | | | 33,934 | | | 28,444 | |
Deferred tax liabilities: | | | | | | | | | | |
Depreciation | | | — | | | — | | | (81) | |
Amortization | | | (206) | | | (43) | | | — | |
Right-of-use asset | | | (809) | | | — | | | — | |
Contract liabilities | | | (7) | | | (15) | | | (6) | |
Net deferred tax assets | | | 39,932 | | | 33,876 | | | 28,357 | |
Valuation allowance | | $ | (39,932) | | $ | (33,876) | | $ | (28,357) | |
A valuation allowance is provided to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more-likely-than-not that a portion or none of the deferred tax assets will be realized. As of December 31, 2021 and 2020, management assessed the realizability of deferred tax assets. After consideration of all the evidence, including reversal of
deferred tax liabilities, future taxable income and other factors, management determined that a full valuation allowance was necessary as of December 31, 2021 and 2020. The valuation allowance increased by $6,734 and $6,585 during 2021 and 2020, respectively, primarily as a result of the increase in the net operating loss carryforward in each year.
The difference between the financial statement income tax
benefit and the income tax benefit using statutory rates is primarily due to the
increase in the valuation allowance.
The Company’s effective income tax rate differs from the statutory federal income tax rate as follows for the years ended December 31, 2021, 2020 and 2019 as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Federal tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
| State taxes - net of Federal benefit | 5.1 | | | 7.3 | | | 4.1 | |
| Permanent items and other deductions | (1.4) | | | (0.6) | | | (4.3) | |
| Valuation allowance | (24.7) | | | (27.7) | | | (20.8) | |
| Effective income tax rate | — | % | | — | % | | — | % |
The Company identifies and
2018:
evaluates uncertain tax positions, if any, and recognizes the impact of uncertain tax positions for which there is a less than more-likely-than-not probability of the position being upheld when reviewed by the relevant taxing authority. Such positions are deemed to be unrecognized tax benefits and a corresponding liability is established on the consolidated balance sheet. The Company has not recognized a liability for uncertain tax positions. If there were an unrecognized tax benefit, the Company would recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. | | | | | | | |
| | Year Ended December 31, | |
| | | 2019 | | | 2018 | |
Federal tax rate | | | 21.0 | % | | 21.0 | % |
State Taxes - Net of Federal Benefit | | | 4.1 | | | 4.1 | |
Permanent items and other deductions | | | (4.3) | | | (0.5) | |
Valuation allowance | | | (20.8) | | | (24.6) | |
Effective income tax rate | | | — | % | | — | % |
| | | | | | | |
As of December 31, 2019 and 2018, management assessed the realizability of deferred tax assets. Management evaluated the need for an amount of any valuation allowance for deferred tax assets on a jurisdictional basis. This evaluation utilizes the framework contained in ASC 740, Income Taxes, wherein management analyzes all positive and negative evidence available at the balance sheet date to determine whether all or some portion of the Company’s deferred tax assets will not be realized. Under this guidance, a valuation allowance must be established for deferred tax assets when it is more likely than not (a probability level of more than 50%) that the Company may not realize the benefit of its deferred tax assets. In assessing the realization of the Company’s deferred tax assets, the Company considers all available evidence, both positive and negative.
In concluding on the evaluation, management placed significant emphasis on guidance in ASC 740, which states that “a cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome.” Based upon available evidence, it was concluded on a more-likely-than-not basis that all deferred tax assets were not realizable as of December 31, 2019. The valuation allowance increased by $6,056 and 5,519 during 2019 and 2018, primarily as a result of current year increase in the net operating loss carry forward. During 2017, the valuation allowance decreased by $10,754, primarily due to the remeasurement of the Company’s deferred tax assets and liabilities as a result of the Tax Reform enacted on December 22, 2017.
As of December 31, 2019,2021, the Company had tax-effected net operating loss carry forwardscarryforwards of approximately $36,250$47,021 to offset future taxable income which expire in various years through 2039. Federal netincome. Net operating losses incurred in tax years beginning on or after January 1, 2018 are carried forward indefinitely. Net operating losses incurred in tax years prior to January 1, 2018 are subject to a twenty year carryforward before expiring. A portion of the net operating loss carry forwardscarryforwards may expire due to limitations imposed by sectionSection 382 of the Internal Revenue Code.
Future utilization of the available net operating loss carryforward may be limited under Internal Revenue Code Section 382 as a result of changes in ownership.
The Company files U.S. federal and state income tax returns in jurisdictions with varying statutes of limitations. In the normal course of business, the Company is subject to examination by taxing authorities throughout the
country.U.S. These
auditsexaminations could include examining the timing and amount of deductions, the allocation of income among various tax jurisdictions and compliance with federal, state, and local laws. The Company’s
remaining open tax years
since 2017 remain subject to examination by federal
tax authorities include the years ended December 31, 2018 through 2021. The Company's remaining open tax years subject to examination by state and foreign tax
authorities.The Company adopted Accounting Standards Codification (“ASC”) Topic 842 – Leases, on January 1, 2019. Under Topic 842,authorities include the Company is required to recognizeyears ended December 31, 2017 through 2021. However, for tax years 2004-2017, federal and state taxing authorities may examine and adjust loss carryforwards in the assets and liabilities that arise from most operating leases on the balance sheet. Upon adoption, 0 changeyears in retained earnings was recorded related to income taxes as the Company maintains a full valuation allowance. As of the implementation date, an adjustment of $951 was recorded as a deferred tax liability and an adjustment of $961 was recorded as a deferred tax asset. See above for more information about the non-income tax impact of the adoption of the new leasing standard.
which those loss carryforwards are ultimately utilized.
Legislation enacted in 2017, informally2018, titled the Tax Cuts and Jobs Act of 2017, subjects a U.S. shareholder to tax on global intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. The Company has elected to account for GILTI in the year the tax is incurred.
The Company had 0has no recorded income tax expense or income tax benefit for 2017, 2018the years ended December 31, 2021, 2020 and 2019 due to incurrencethe generation of net operating losses.losses, the benefits of which have been fully reserved. The Company does not believe there are any additional tax refund opportunities currently available.
13. Employee BenefitRetirement Plan
The Company sponsors the Axogen 401(k) plan (the 401(k) Plan)"401(k) Plan"), a defined contribution plan covering substantially all employees of the Company. All full-time employees who have attained the age of 2118 are eligible to participate in the 401(k) Plan. Eligibility is immediate upon employment and enrollment is available any time during employment. Participating employees may make annual pretax contributions to their accounts up to a maximum amount as limited by law. The 401(k) Plan requires the Company to make matching contributions of 3% on the first 3% of the employee’s annual salary and 1% ofon the next 2% of the employee’s annual salary as long as the employee participates in the 401(k) Plan. Both employee
contributions and Company contributions vest immediately.
The Company contributed $988, $650Employer contributions to the 401(k) Plan were $1,346, $1,141 and
$439 in matching funds during$988 for the years ended December 31,
2021, 2020 and 2019,
2018 and 2017, respectively.
14. Commitments and Contingencies
Leases
We lease office space, medical lab and research space, a distribution center, a tissue processing center and equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.
Certain of our leases include options for the Company to extend the lease term. None of the options were reasonably certain of exercise and therefore are not included in the measure of our lease obligations and right-to-use assets.
Certain of our lease agreements include provisions for the Company to reimburse the lessor for common area maintenance, real estate taxes, and insurance, which the Company accounts for as variable lease costs. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The Company and Alachua Copeland Park Investments, LLC, a Florida limited liability company (as successor in interest to Ology Bioservices Holdings, LLC, a Delaware limited liability company, who was successor in interest to SNH Medical Office Properties Trust, a Maryland real estate investment trust (“SNH”)Trust), are parties to that certaina lease dated as of February 6, 2007, as amended (the “Primary Lease”). Pursuant to the Primary Lease, the Company leases an approximately 19,000 square foot corporate headquarters facility in Alachua, Florida. On July 13, 2021, the Company entered into a sixth amendment to the Primary Lease to extend the term of the Primary Lease to October 31, 2026. The Company recorded a right-of-use asset of $1,335 and a lease liability of $1,370 related to this extension.
The Company and Cousins Heights Union, LLC, a Georgia limited liability company (as successor in interest to Heights Union, LLC), are parties to a lease of 75,000 square feet of office and lab space in Tampa, Florida (the "Heights Agreement"). Pursuant to the Heights Agreement, the Company uses the leased premises for general office, medical laboratory, training, and meeting purposes. In September 2020, the Company began occupying the space. The lease includes a $5,250 lessor allowance to be used towards the hard and soft costs of the tenant improvements and has been treated as an incentive. The Company incurred the cost of any tenant improvement in excess of this allowance. The Company concluded that it is the accounting owner of the tenant improvements and therefore, the lease incentive is accounted for as a reduction of the right-of-use asset and is recognized on the consolidated balance sheet separate from the right-of-use asset as leasehold improvements. The improvements will be amortized over the life of the lease, which was determined to be the shorter of the useful life of the improvements or the lease term. The Company determined the commencement date of the lease was August 28, 2020 and valued the lease using a 10.6% incremental borrowing rate. The Company recorded a right-of-use asset of $13,323 and a lease liability of $18,573 for this lease as of the commencement date.
On July 12, 2021, the Company entered into the first amendment (the "First Amendment") to the Heights Agreement. The First Amendment revises the commencement date of the Heights Agreement to mean October 30, 2020 and revises the termination date of the Heights Agreement to be October 31, 2034. Pursuant to the First Amendment, the Company was entitled to an additional 1.5 months of free rent periods.
The Company and Ja-Cole L.P. are parties to a lease dated April 21, 2015, as amended (the "Primary Lease"), and a lease dated October 1, 2020, pursuant to which the Company leases
its approximately
nineteen thousand17,500 square foot corporate headquarters facilityfeet in total (the “Burleson Facility”) in Burleson, Texas. On January 27, 2022, the Progress Center at 13631 Progress Boulevard, Alachua, Florida 32615 (the “Primary Premises”). The annual cost forCompany and Ja-Cole L.P. amended the Primary Premises ranges from $353 to $363 through the endLease for 15,000 square feet of the termBurleson Facility to revise the commencement date of the lease which expires on October 31, 2021. On January 23, 2017to mean May 1, 2022 and the Company entered into a lease (the “First Expansion Lease”) with SNH for one thousand four hundred square feet at 13709 Progress Boulevard, Alachua, Florida 32615 (this property was purchased by Nucleic Acids Licensing, LLC in February 2019) (the “First Expansion Premises”) adjacent to the Primary Premises. The Company has entered into the Second Expansion Lease and Third Expansion Lease, as defined below, which relate to properties that are adjacent to the Primary Premises and First Expansion Premises resulting in the Company having approximately 20 thousand square feet for its corporate headquarters and certain research space in the Progress Center in Alachua, Florida.
On November 19, 2018, the Company entered into a Lease (the “Second Expansion Lease”) with SNH for two thousand eight hundred square feet at 13709 Progress Boulevard, Suites S-160, S-162 and S-164, Alachua, Florida 32615 (the “Second Expansion Premises”). Pursuant to the Second Expansion Lease, AC is to use the Second Expansion Premises for general office uses. The Second Expansion Lease commenced December 1, 2018 and expires November 30, 2020. The annual costtermination date of the Second Expansion Premises is approximately $45 for the first twelve months of the term and $46 for the final twelve months. The Company is also obligatedlease to pay for certain taxes, insurance costs and electricity costs incurred by SNH.
On November 19, 2018, AC entered into a Lease (the “Third Expansion Lease”) with SNH for 2 thousand square feet at 13709 Progress Boulevard, Suites S-175, S-177 and S-179, Alachua, Florida 32615 (the “Third Expansion Premises”). Pursuant to the Third Expansion Lease, the Company is to use the Third Expansion Premises for general office and biomedical research uses. The Third Expansion Lease commenced December 1, 2018 and its term expires November 30, 2020. The annual cost of the Third Expansion Premises is approximately $37 for the first twelve months of the term and $35 for the final eleven months. The Company is also obligated to pay for certain taxes, insurance costs and electricity costs incurred by SNH.
On November 21, 2018, the Company, entered into Commercial Lease Amendment 3 (the “Burleson Amendment”), to the Commercial Lease dated April 21, 2015, as amended, with Ja-Cole L.P. Under the terms of the Burleson Amendment, the Company leased an additional two thousand five hundred square feet of warehouse/office space in Burleson, Texas (collectively with the space leased under the Commercial Lease with Ja-Cole L.P. prior to the effectiveness of the Burleson Amendment, the “Burleson Facility”). The Burleson Facility will now comprise a total of twelve thousand five hundred square feet, all of which, pursuant to the Burleson Amendment, will be leased until April 30, 2022. The annual rental cost of the entire Burleson Facility is now approximately $113 through December 31, 2020, $116 for the calendar year 2021 and until April 2022.2027. The Burleson Facility houses raw material storage and product distribution while allowing same day order fulfillment for both the east and west coasts of the United States.
U.S.
On October 26, 2018,August 6, 2015, the Company entered into a Lease (the “Ashley Avenue Lease”)the CTS Agreement with Ashley Avenue Associates I, LLC., a Delaware limited liability companyCommunity Blood Center (doing business as Community Tissue Services) (“Ashley”CTS”), for the lease by the Company of approximately 15 thousand square feet of office space on the second floorin Dayton, Ohio, an FDA registered tissue establishment. Processing of the building located at 1000 N. Ashley Drive, Tampa, Florida 33602 (the “Ashley Avenue Premises”). PursuantAvance Nerve Graft pursuant to the Ashley Avenue Lease,CTS Agreement began in February 2016. The CTS Agreement initially had a five-year term ending August 31, 2020. After three previous term extensions, on February 22, 2021, the Company will use the Ashley Avenue Premises for general office purposes. The initial term of the Ashley Avenue Lease commenced on December 1, 2018 and expires on November 30, 2020. The Company has an optionCTS Agreement was further amended to terminate the lease after eighteen months by providing Ashley with four months advance written notice. The rental cost for the Ashley Avenue Premises will be $381 for the first twelve month period, and $360 for the final eleven month period. The Company will also be obligated to pay for its pro rata share of the building’s property taxes, utilities, administrative costs, common area maintenance and management fees, excluding any capital improvements or any damage due to fire, hurricane or other casualty.
On September 20, 2018, the Company entered into an agreement with Heights Union, LLC, a Florida limited liability company (“Heights Union”), for the lease of NaN thousand square feet of office space (the “Heights Union Premises”) in a one hundred and fifty thousand square foot office building that Heights Union intends to construct and complete on or before September 30, 2020, on an area of land in Tampa, Florida. Pursuant to the Heights Union lease, the Company will use the Heights Union Premises for general office, medical laboratory, training and meeting purposes. The annual costs of the Heights Union Premises ranges from $2,400 to $3,308 duringextend the term of the lease. Axogen believes it can obtain certain economic incentives from state authorities associatedagreement to December 31, 2023. Under the CTS Agreement, the Company pays CTS a facility fee for use of clean room/manufacturing, storage, and office space, which the Company accounts for as an embedded lease in accordance with the employment at the facility; such incentives are not expected to be Accounting Standards Codification 842, Leases.
The components of total lease expense for the
yearyears ended December 31,
2021, 2020 and 2019 were as follows:
| | | |
| | Amount |
For the Fiscal Year Ended December 31, 2019: | | | |
Finance lease costs | | | |
Amortization of right-to-use assets | | $ | 22 |
Interest on lease liabilities | | | 4 |
Operating lease costs | | | 1,910 |
Short term lease costs | | | 41 |
Variable lease costs | | | 17 |
Total lease cost | | $ | 1,994 |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| (in thousands) | 2021 | | 2020 | | 2019 |
| Finance lease costs | | | | | |
| Amortization of right-of-use assets | $ | 22 | | | $ | 22 | | | $ | 22 | |
| Interest on lease obligations | 2 | | | 3 | | | 4 |
| Operating lease costs | | | | | |
| Operating lease costs | 4,326 | | | 2,777 | | | 1,910 | |
| Short-term lease costs | 10 | | | 116 | | | 41 |
| Variable lease costs | 744 | | | 18 | | | 17 |
| Total lease expense | $ | 5,104 | | | $ | 2,936 | | | $ | 1,994 | |
The short-term lease
costcosts shown above reasonably
reflectsreflect the Company’s ongoing short-term lease
commitment.
commitments. No new short-term leases were entered into in 2021. The increase in variable lease costs is due to additional rent comprised primarily of operating costs related to the Tampa office and lab space.
Supplemental balance sheet information related to leases as of December 31,
20192021 and 2020 was as follows:
| | | |
| | Amount |
Operating Leases | | | |
Operating lease right-of-use assets | | $ | 3,133 |
| | | | | | | | | | | |
| (in thousands) | December 31,
2021 | | December 31,
2020 |
| Operating Leases | | | |
| Operating lease right-of-use assets | $ | 15,193 | | | $ | 15,614 | |
| Current maturities of long-term lease obligations | $ | 1,825 | | | $ | 846 | |
| Long-term lease obligations | $ | 20,794 | | | $ | 20,864 | |
| Finance Leases | | | |
| Finance lease right-of-use assets | $ | 42 | | | $ | 64 | |
| Current maturities of long-term lease obligations | $ | 9 | | | $ | 17 | |
| Long-term lease obligations | $ | 4 | | | $ | 13 | |
Current maturities of long-term obligations | | $ | 1,719 |
Long term obligations | | $ | 1,565 |
Finance Leases | | | |
Finance lease right-of-use assets | | $ | 87 |
Current maturities of long-term obligations | | $ | 17 |
Long term obligations | | $ | 30 |
Other information related to leases was as follows:
| | | |
| | Amount |
Cash paid for amounts included in the measurement of operating lease liabilities | | $ | 1,773 |
Right-to-use assets obtained in exchange for new finance lease liabilities | | $ | 16 |
Weighted-average remaining lease term - finance leases | | | 3 |
Weighted-average remaining lease term - operating leases | | | 2 |
Weighted-average discount rate - finance leases | | | 7.28% |
Weighted-average discount rate - operating leases | | | 6.28% |
follows ($ in thousands):
| | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 |
| Cash paid for amounts included in the measurement of operating lease obligations | $ | 1,537 | | | $ | 1,913 | |
| Right-of-use assets obtained in exchange for new finance lease obligations | $ | — | | | $ | 16 | |
| Weighted-average remaining lease term - finance leases (in years) | 2 | | 2 |
| Weighted-average remaining lease term - operating leases (in years) | 12 | | 12 |
| Weighted-average discount rate - finance leases | 7.23 | % | | 7.28 | % |
| Weighted-average discount rate - operating leases | 10.32 | % | | 9.44 | % |
The weighted-average discount rate for the majority of the Company’s leases is based on the Company’s estimated incremental borrowing rate since the rates implicit in the leases were not determinable. The Company’s incremental borrowing rate is based on
Management’smanagement’s estimate of the rate of interest the Company would have to pay to borrow on a fully collateralized basis over a similar term
anand amount equal to the lease payments.
Future minimum lease payments under non-cancellable leases as of December 31,
20192021 were as
follows:
| | | | | | |
| | Operating | | Finance |
Year Ending December 31, | | Leases | | Leases |
2020 | | | 2,664 | | | 19 |
2021 | | | 4,007 | | | 19 |
2022 | | | 2,573 | | | 10 |
2023 | | | 2,581 | | | 3 |
2024 | | | 2,644 | | | 1 |
Thereafter | | | 27,251 | | | — |
Total Future Minimum Lease Payments | | $ | 41,720 | | $ | 52 |
Less future payments for leases that have not yet commenced | | | (38,246) | | | — |
Less imputed interest on commenced leases | | | (190) | | | (5) |
Total Lease Liability | | $ | 3,284 | | $ | 47 |
follows (in thousands):
| | | | | | | | | | | | | | |
| Year ending December 31, | | Operating
Leases | | Finance
Leases |
| 2022 | | $ | 4,068 | | | $ | 10 | |
| 2023 | | 3,247 | | | 3 | |
| 2024 | | 3,013 | | | — | |
| 2025 | | 3,091 | | | — | |
| 2026 | | 3,097 | | | — | |
| Thereafter | | 23,935 | | | — | |
| Total future minimum lease payments | | 40,451 | | | 13 | |
| Less imputed interest on commenced leases | | (17,832) | | | — | |
| Total lease obligations | | $ | 22,619 | | | $ | 13 | |
Service Agreements
The
leaseCompany pays CTS a facility fee for
the use of clean room/manufacturing, storage, and office space
and for services in
Tampa, Florida with Heights Union, LLC, a Florida limited liability company, has not commencedsupport of its manufacturing process including for routine sterilization of daily supplies, providing disposable supplies and
is therefore not included inmicrobial services, and office support. Pursuant to the
measurementCTS Agreement, the Company recorded expenses of
right-to-use assets$2,466, $1,739 and
lease liabilities.
As previously disclosed in our 2018 Annual Report on Form 10-K, which followed the lease accounting guidance prior to our adoption of ASC 842, future commitments relating to noncancelable operating and capital leases as of December 31, 2018 were as follows:
| | | | | | |
| | | | | | |
Year Ending December 31, | | Operating | | Capital |
2019 | | | 1,866 | | | 28 |
2020 | | | 2,540 | | | 13 |
2021 | | | 3,970 | | | 15 |
2022 | | | 2,518 | | | 7 |
2023 | | | 2,574 | | | — |
Thereafter | | | 30,111 | | | — |
Total | | $ | 43,579 | | $ | 63 |
Total rent expense for the Company’s leased office and lab space$2,148 for the years ended December 31, 2021, 2020 and 2019, 2018respectively, in sales and 2017 was $516, $484 and $494, respectively.
Service Agreements
On August 6, 2015, Axogen entered into a License and Servicesmarketing expenses. The CTS Agreement with Community Blood Center (d/b/a Community Tissue Services) (“CTS”), Dayton, Ohio, an FDA registered tissue establishment. Processing of the Avance Nerve Graft pursuant to the CTS agreement began in February 2016. Subsequent to the year endedterminates December 31, 2018, on February 22, 2019, Axogen Corporation and CTS entered into a fourth amendment to the License and Services Agreement wherein the term of the agreement was extended such that the Occupancy Date in section 12.01 of the agreement shall end on December 31, 2021,2023, subject to earlier termination by either party at any time for cause (subject to the non-terminating party’s right to cure, in certain circumstances), or by Axogen without cause upon six months’6 months prior notice, whereby notice cannot be provided prior to March 1, 2021. Under the CTS agreement Axogen pays CTS a facility fee for clean room/manufacturing, storage and office space, which has been determined to be an embedded operating lease. CTS also provides services in support of Axogen’s manufacturing such as routine sterilization of daily supplies, providing disposable supplies, microbial services and office support. Pursuant to the CTS Agreement, Axogen pays license fees and the operating lease amounts, on a monthly basis to CTS which total an annual amount of approximately $2,148 for the year ended December 31, 2019, $1,931 for the year ended December 31, 2018 and $1,409 for the year ended December 31, 2017.
notice.
In December 2011, the Company also entered into a Master Services Agreement for Clinical Research and Related Services. The Company was required to pay $151$151 upon execution of this agreement and the remainder monthly based on activities associated with the execution of Axogen’s phase 3 pivotal clinical trial to support athe BLA for Avance Nerve Graft. Payments made under this agreement were $1,100, $1,136 and $1,056 for the years ended December 31, 2021, 2020 and 2019, respectively.
Distribution and Supply Agreements
In August 2008, the Company entered into an exclusive distribution agreement with Cook Biotech to distribute the Axoguard Nerve Connector and Axoguard Nerve Protector products worldwide in the field of peripheral nerve repair, and the parties subsequently amended the agreement on February 26, 2018. Pursuant to the February 2018 amendment, the agreement expires on June 30, 2027. The Cook Biotech Distribution Agreement alsoagreement establishes a formula for the transfer cost of the Axoguard products and requires certain minimum purchases by the Company, although, through mutual agreement, the parties have not established such minimumsminimums; and, to date, have not enforced such provision, and establishes a formula for the transfer cost of the Axoguard products.provision. Under the Distribution Agreement, AxogenCook Biotech agreement, the Company provides purchase orders to Cook Biotech, and Cook Biotech fulfills the purchase orders. The agreement allows for termination provisions for both parties. The loss of the ability to sell the Axoguard
products could have a material adverse effect on the Company's business until other replacement products would be available.
In June
27, 2017, the Company entered into the Nerve End Cap Supply Agreement
(the "Supply Agreement") with Cook Biotech whereby Cook Biotech is the exclusive contract manufacturer of the Axoguard Nerve Cap and both parties have provided the other party the
necessarilynecessary licenses to their technologies for operation of the Supply Agreement. The Supply Agreement
has a term throughexpires on August 27,
2027, provided, however, that after June 27, 2022, either party may terminate the Supply Agreement upon 90 days written notice.2027. Under the Supply Agreement
Axogenthe Company provides purchase orders to Cook Biotech and Cook Biotech fulfills the purchase orders.
Certain executive officers of theThe Company are parties to employment contracts. Such contracts have severance payments for certain conditions including change of control.
Concentrations
Vendor
Substantially all of Axogen’s revenue is currently derived from 4 products, Avance Nerve Graft, Axoguard Nerve Protector, Axoguard Nerve Connector and Avive Soft Tissue Membrane. Axogen has an exclusive distribution agreement with Cook Biotech for the purchase of Axoguard Nerve Connector and Axoguard Nerve Protector which expires June 30, 2027. The Cook Biotech Distribution Agreement also requires certain minimum purchases, although through mutual agreement the parties have not established such minimums and to date have not enforced such provision, and establishes a formula for the transfer cost of the Axoguard Nerve Connector and Axoguard Nerve Protector.
The agreement allows for termination provisions for both parties. Although there are products that Axogen believes it could develop or obtain that would replace the Axoguard products, the loss of the ability to sell the Axoguardproducts could have a material adverse effect on Axogen’s business until other replacement products would be available.
Processor
Axogen is highly dependent on the continued availability of its processing facilities at CTS in Dayton, Ohio and could be harmed if the physical infrastructure of this facility is unavailable for any prolonged period of time. In addition, disruptions could lead to significant costs and reductions in revenues,revenue, as well as a potential harm to the Axogen’sCompany's business reputation and financial results. The CTS agreement terminates December 31, 2021, subject to earlier termination by either party at any time for cause (subject toIn the non-terminating party’s right to cure, in certain circumstances), or by Axogen without cause, upon 6 months’ prior notice, whereby notice cannot be provided prior to March 1, 2021. Although Axogenevent of disruption, the Company believes it can find and make operational a new leased facility in less than six months, if required. In addition, Axogen acquired property which is located near the CTS facility and it is expected that renovations will be completed by the termination date of the CTS Agreement to provide a new processing facility that can be included in our BLA for the Avance Nerve Graft. However,but the regulatory process for approval of facilities whether licensed or owned is time-consuming and unpredictable. Axogen’sThe Company's ability to license, renovate, rebuild or find acceptable servicelease facilities takescould take a considerable amount of time and expense and could cause a significant disruption in service to its customers if it were to losecustomers. Although the availability of it production or distribution facilities. Although AxogenCompany has business interruption insurance, which would in instances other than lease termination, cover certain costs, it may not cover all costs nor help to regain Axogen’sthe Company's standing in the market.
On July
31, 2018,
Axogenthe Company purchased
a facility (the “APC”)the APC Facility in Vandalia, Ohio, located near the CTS processing facility where Avance Nerve Graft
and Avive Soft Tissue Membrane areis currently processed. The APC
Facility, when and if operational, will be the new processing facility for Avance Nerve Graft
and Avive Soft Tissue Membrane to provide continued capacity for growth and to support the transition of Avance Nerve Graft from a
Human Cellular and Tissue-based Product pursuant to Section 361
HCT/P tissue productof the Public Health Service Act to a
biologic product. The APC Facility is comprised of a
70,000107,000 square foot building on approximately 8.6
acres of land. The Company paid $731$731 for the land and this is recorded as Landland within our property and equipment account on ourthe consolidated balance sheet. The Company paid $4,300$4,300 for the building and this is recorded
asin projects in process
as part of thewithin property and equipment on the
consolidated balance sheet.
On July 9, 2019, Axogenthe Company entered into a Standard Form of Agreement Between Owner and Design-Builder (the “Design-Build Agreement”) with CRB Builders, L.L.C., a Missouri limited liability company (“CRB”), pursuant to which CRB will renovate and retrofit the APC.APC Facility. The Design-Build Agreement contains several design phase milestones that began in July 2019 and sets the date for Substantial Completion (as defined in the Design-Build Agreement) in the third quarter of 2020,by late 2021, subject to adjustment in accordance with the terms of the Design-Build Agreement. The estimated cost pursuant to the Design-Build Agreement is $29,000.was $29,300. Additional costs associated with the renovation, purchasing of furniture and equipment, validation and certification of the APC Facility are estimated to be $14,400. These capital expenditure costs will be incurred$20,900, plus capitalized interest of $11,300. The Company temporarily deferred the construction as they arise untilpart of the anticipated full transitioncost containment initiatives implemented in the second quarter of material processing to2020, and subsequently resumed construction in early January of 2021. For the APC by early 2022.
As ofyear ended December 31, 2019,2021, the Company has recorded $6,066$19,581 related to renovations and design build.and build in projects in progress. The Company has recorded $35,270 to date related to this project. In addition to these project costs, the Company has capitalized interest of $4,277 for the year ended December 31, 2021. To date, the Company has capitalized interest of $5,274 related to this project. These items are recorded as projects in process as part of thewithin property and equipment on the consolidated balance sheet.
Axogen expects The Company anticipates spending $19,300, including projected capitalized interest of $6,100 in 2022 and an additional $1,700 in 2023. The Company anticipates that this building will be completed in early 2022, followed by a year-long process to receivevalidate and certify the facility by early 2023. The Company anticipates commencing tissue processing in the facility upon completion of the validation and certification process.
The Company obtained certain economic development grants from state and local authorities totaling up to $2,685 including $1,250 of cash grants to offset costs to acquire and develop the
APC.APC Facility. The economic development grants are subject to certain job creation milestones by 2023 and related contingencies.
As previously disclosedThe Company received $950 and $238 from these grants in the years ended December 31, 2021 and 2020, respectively. These grants have claw back clauses if the Company previously entered into an agreement with Heights Union, LLC, a Florida limited liability company (“Heights Union”), fordoes not meet these job creation milestones by 2023.
Fair Value of the leaseDebt Derivative Liabilities
The fair value of NaN thousand square feet of office space. Pursuant to the Heights Union lease, the Company will use the Heights Union Premises for general office, medical laboratory, training and meeting purposes. The Company anticipates occupying the premises by the second quarter of 2020. Associated with the lease, the Company anticipates spending up to $9,833 for leasehold improvements, equipment and furniture and fixtures. AsDebt Derivative Liabilities is $5,562 as of December 31, 2019,2021. The fair value of the Debt Derivative Liabilities was determined using a probability-weighted expected return model based upon the 4 potential settlement scenarios for the Oberland Facility which are described in Note 3 - Summary of Significant Accounting Policies – Derivative Instruments. The estimated settlement value of each scenario, which includes any required make-whole payment (see "Note 10 - Long-Term Debt, Net of Financing Fees"), is then discounted to present value using a discount rate that is derived based upon the initial terms of the Oberland Facility at issuance and corroborated utilizing a synthetic rating analysis. The calculated fair values under the 4 scenarios are then compared to the fair value of a plain vanilla note, with the difference reflecting the fair value of the Debt Derivative Liabilities. The Company estimated the make-whole payments required under each scenario according to the terms of the Oberland Facility to generate an internal rate of return equal to 11.5% through the scheduled maturity dates, less the total of all quarterly interest and royalty payments previously paid to Oberland Capital. The calculation utilized the XIRR function in Microsoft Excel as required by the Oberland Facility. If the debt is not prepaid but instead is held to its scheduled maturities, the Company’s estimate of the make-whole payment for the first tranche of the Oberland Facility is $68 on June 30, 2027, and the Company’s estimate of the make-whole payment for the second tranche of the Oberland Facility is zero on June 30, 2028. The Company has consistently applied this approach since the inception of the debt agreement on June 30, 2020.
The Company has become aware that Oberland Capital may have an alternative interpretation of the calculation of the make-whole payments that the Company
has recorded $441believes does not properly utilize the same methodology utilized by the XIRR function in Microsoft Excel as described in the Oberland Facility. The Company estimates the top end of
leasehold improvementsthe range of the make-whole payments if the debt is held to scheduled maturity under an alternative interpretation to be approximately $13,000 for the first tranche of the Oberland Facility on June 30, 2027, and approximately $5,000 for the second tranche of the Oberland Facility on June 30, 2028. Further, if the debt is prepaid prior to the
new facility.scheduled maturity dates and subject to the alternative interpretation, the make-whole payment would be larger than the amounts herein.
Other Commitments
Certain executive officers of the Company are parties to employment contracts. Such contracts have severance payments for certain conditions including change of control.
Legal Proceedings
The Company is subject to various claims, lawsuits, and proceedings in the ordinary course of the Company's business, some of which have been dismissed by the Company. In the opinion of management, such claims are either adequately covered by insurance or otherwise indemnified, or are not expected, individually or in the aggregate, to result in a material, adverse effect on the Company's financial condition. However, it is possible that the Company's results of operations, financial position and cash flows in a particular period could be materially affected by these contingencies.
On January 9, 2019, Plaintiff Neil Einhorn, on behalf of himself and others similarly situated, filed a putative class action complaint in the United StatedStates District Court for the Middle District of Florida alleging violations of the federal securities laws against Axogen, Inc., certain of its directors and officers (“Individual Defendants”), and Axogen’s 2017 Offering Underwriters and 2018 Offering Underwriters (collectively, with the Individual Defendants, the “Defendants”), captioned Einhorn v. Axogen, Inc., et al., No. 8:19-cv-00069 (M.D. Fla.). Plaintiff asserts that Defendants made false or misleading statements in connection with the Company’s November 2017 registration statement issued regarding its secondary public offering in November 2017 and May 2018 registration statement issued regarding its secondary public offering in May 2018, and during a class period of August 7, 2017 to December 18, 2018. In particular, Plaintiff asserts that Defendants issued false and misleading statements and failed to disclose to investors: (1) that the Company aggressively increased prices to mask lower sales; (2) that the Company’s pricing alienated customers and threatened the Company’s future growth; (3) that ambulatory surgery centers form a significant part of the market for the Company’s products; (4) that such centers were especially sensitive to price increases; (5) that the Company was dependent on a small number of surgeons whom the Company paid to generate sales; (6) that the Company’s consignment model for inventory was reasonably likely to lead to channel stuffing; (7) that the Company offered purchase incentives to sales representatives to encourage channel stuffing; (8) that the Company’s sales representatives were encouraged to backdate revenue to artificially inflate metrics; (9) that the Company lacked adequate internal controls to prevent such channel stuffing and backdating of revenue; (10) that the Company’s key operating metrics, such as the number of active accounts, were overstated; and (11) that, as a result of the foregoing, Defendants’ positive statements about the Company’s business, operations, and prospects, were materially misleading and/or lacked a reasonable basis. Axogen was served on January 15, 2019. On February 4, 2019, the courtCourt granted the parties’ stipulated motion which provided that Axogen is not required to file a response to the complaint until thirty days after Plaintiff files a consolidated amended complaint. On June 19, 2019, Plaintiff filed an Amended Class Action Complaint, and on July 22, 2019, Defendants filed a motion to dismiss. Plaintiff filed opposing papers on August 12, 2019. The Court held a status hearing on September 11, 2019 and stayed all deadlines regarding the parties’ obligations to file a case management report. On December 4, 2019, the parties’parties presented oral arguments and are currently awaitingarguments. On April 21, 2020, the court’s ruling.Court dismissed the complaint without prejudice, finding the Plaintiff failed to state a claim upon which relief could be granted. The Plaintiff is seeking compensatory damages, reimbursementfiled a Second Amended Class Action Complaint on June 22, 2020.Axogen filed a motion to dismiss on August 6, 2020.The Plaintiff filed an opposition on September 20, 2020.The Court held oral argument on February 25, 2021. On March 19, 2021, the Court dismissed the Second Amended Complaint with prejudice, finding again that the Plaintiff failed to state a claim upon which relief could be granted. On April 14, 2021, Plaintiff filed a notice of expenses and costs, including counsel and expert fees and such other relief as the court deems just and proper.appeal. Plaintiff filed its opening brief on June 28, 2021. The Company and Individual Defendants dispute the allegations and intend to vigorously defend against the Complaint.filed its appellee brief on August 11, 2021. The Plaintiff filed a reply brief on September 14, 2021. The Eleventh Circuit has scheduled oral argument for March 8, 2022. The amount of loss, if any, cannot be reasonably estimated at this time.
Jackson v. Zaderej, et al., No. 8:19-cv-01976 U.S. District Court (M.D. FL). On August 12, 2019, Plaintiff Harvey Jackson, derivatively on behalf of Axogen, filed a verified shareholder derivative complaint for violations of securities laws, breach of fiduciary duty, waste of corporate assets and unjust enrichment against Quentin S. Blackford, Gregory G. Freitag, Mark Gold, Jamie M. Grooms, Alan M. Levine, Peter J. Mariani, Guido Neels, Robert J. Rudelius, Amy Wendell, and Karen Zaderej (the “Individual Defendants”) and Nominal Defendant Axogen, Inc. (“Axogen”) (collectively, “Defendants”). Plaintiff asserts that the Individual Defendants, who are current or former Axogen officers or directors, issued a false proxy statement for the election of directors in violation of Section 14(a) of the Securities Exchange Act of 1934, breached their fiduciary duties, wasted corporate assets and were unjustly enriched by allowing
Axogen to make false public statements to investors based on the same claims in the report issued December 18, 2018 by Seligman Investments (the same allegations that form the basis for the Einhorn This matter and the Bussey shareholder demand). Plaintiff demands judgment in the Company’s favor against all Individual Defendants as follows: (A) declaring that Plaintiff may maintain this action on behalf of Axogen, and that Plaintiff is an adequate representative of Company; (B) declaring that the Individual Defendants have breached and/or aided and abetted the breach of their fiduciary duties to Axogen; (C) determining and awarding to Axogen the damages sustained by it because of the violations set forth above from each of the Individual Defendants, jointly and severally, together with pre- and post-judgment interest thereon; (D) directing Axogen and the Individual Defendants to take all necessary actions to reform and improve its corporate governance and internal procedures to comply with applicable laws and protect Axogen and its shareholders from a repeat of the damaging events described therein, including, but not limited to, putting forward for shareholder vote the following resolutions for amendments to the Company’s Bylaws or Articles of Incorporation and the following actions as may be necessary to ensure proper corporate governance policies: (i) a proposal to strengthen the Board’s supervision of operations and develop and implement procedures for greater shareholder input into the policies and guidelines of the Board, (ii) a provision to permit the shareholders of Axogen to nominate at least 6 candidates for election to the Board; and (iii) a proposal to ensure the establishment of effective oversight of compliance with applicable laws, rules, and regulations; (E) awarding Axogen restitution from Individual Defendants, and each of them; (F) awarding Plaintiff the costs and disbursements of this action, including reasonable attorneys’ and experts’ fees, costs, and expenses; and (G) granting such other and further relief as the Court may deem just and proper. The Defendants filed a motion to dismiss on October 22, 2019. In response, Plaintiffs voluntarily withdrew their complaint and the matter was dismissed without prejudice by the court on November 5, 2019.
Novitzki v. Zaderej, et al, 19-CA-11745 DIV L (13th Judicial Circuit, Hillsborough Cnty., Fl.). On November 11, 2019, Plaintiff Joseph Novitzki, derivatively on behalf of Axogen, filed a verified stockholder derivative complaint for breach of fiduciary duty, waste of corporate assets and unjust enrichment against Karen Zaderej, Gregory G. Freitag, Peter J. Mariani, Amy Wendell, Robert J. Rudelius, Mark Gold, Guido Neels, and Jamie M. Grooms (the “Individual Defendants”) and Nominal Defendant Axogen, Inc. (“Axogen”) (collectively, “Defendants”). Plaintiff asserts that the Individual Defendants, who are current or former Axogen officers or directors, breached their fiduciary duties, wasted corporate assets and were unjustly enriched by allowing Axogen to make false public statements to investors based on the same claims in the report issued December 18, 2018 by Seligman Investments (the same allegations that form the basis for the Einhorn matter and the Bussey shareholder demand). Plaintiff demands judgment in the Company’s favor against all Individual Defendants as follows: (a) against all of the defendants and in favor of the Company for the amount of damages sustained by the Company as a result of the defendants' breaches of fiduciary duties, waste of corporate assets, and unjust enrichment; (B) directing Axogen to take all necessary actions to reform and improve its corporate governance and internal procedures to comply with applicable laws and to protect Axogen and its stockholders from a repeat of the damaging events described herein, including, but not limited to, putting forward for stockholder vote, resolutions for amendments to the Company's Bylaws or Articles of Incorporation and taking such other action as may be necessary to place before stockholders for a vote of the following corporate governance policies: (1) directing Axogen to employ an independent, third-party expert to calculate the Company's market size (including the dollar values of Axogen's total addressable market and portion of the market relating to extremity trauma and OMF); (2) a provision to control insider selling; (3) a proposal to strengthen Axogen's oversight of its disclosure procedures; (4) a proposal to strengthen the Company's controls over financial reporting; (5) a proposal to strengthen the Board's supervision of operations and develop and implement procedures for greater stockholder input into the policies and guidelines of the Board; and (6) a provision to permit the stockholders of Axogen to nominate at least 3 candidates for election to the Board; (C) extraordinary equitable and/or injunctive relief as permitted by law, equity, and state statutory provisions sued hereunder, including attaching, impounding, imposing a constructive trust on, or otherwise restricting the proceeds of defendants' trading activities or their other assets so as to assure that plaintiff on behalf of Axogen has an effective remedy; (D) Awarding to Axogen restitution from defendants, and each of them, and ordering disgorgement of all profits, benefits, and other compensation obtained by the defendants, including all ill-gotten gains from insider selling by defendants; (E) awarding to plaintiff the costs and disbursements of the action, including reasonable attorneys' fees, accountants' and experts' fees, costs, and expenses; and (F) granting such other and further relief as the Court deems just and proper. After Defendants’ counsel had multiple discussions with Plaintiff’s counsel pointing out that it’s complaint was deficient for the same reasons argued in Jackson, the Plaintiff agreed to voluntarily dismiss the complaint without prejudice, which the court so-ordered on January 24, 2020.
These matters are subject to various uncertainties and it is possible that it may be resolved unfavorably to the Company. However, while it inis not possible to predict with certainty the outcome of the matter, the Company and the Individual Defendants dispute the allegations and intend to vigorously defend themselves.
113
Bach v. Zaderej, et al., 27-cv-20-5997 (Hennepin Cnty., Minn.).On April 21, 2020, Plaintiff Michael Bach, derivatively on behalf of Axogen, filed a verified stockholder derivative complaint for breach of fiduciary duty, insider selling, corporate waste and unjust enrichment against Karen Zaderej, Gregory G. Freitag, Peter J. Mariani, Amy Wendell, Robert J. Rudelius, Mark Gold, Guido Neels, Jamie M. Grooms, Quentin S. Blackford, and Alan M. Levine (the “Individual Defendants”) and Nominal Defendant Axogen, Inc. (“Axogen”) (collectively, “Defendants”).The Bach Complaint was never served on Defendants and therefore no response was necessary. On November 14, 2021, Plaintiff Michael Bach filed a voluntary notice of dismissal without prejudice against all Defendants.
15. Quarterly Results of Operations (Unaudited)
The following is a summarySubsequent Event
On January 27, 2022, the Company entered into an amendment to the April 21, 2015, as amended, lease with Ja-Cole, L.P. for 15,000 square feet of the
quarterly resultsBurleson Facility. The amendment revises the commencement date of
operations for the
years ended December 31, 2019lease to mean May 1, 2022 and
2018:the termination date of the lease to be April 30, 2027.
| | | | | | | | | | |
| Quarter | | |
| | First | | Second | | Third | | Fourth | | Total |
2019 | | | | | | | | | | |
Revenues | $ | 23,285 | $ | 26,701 | $ | 28,564 | $ | 28,162 | $ | 106,712 |
Gross profit | | 19,571 | | 22,457 | | 24,054 | | 23,281 | | 89,363 |
Net loss | | (9,504) | | (7,022) | | (5,571) | | (7,038) | | (29,135) |
Loss per common share - basic and diluted | | (0.24) | | (0.18) | | (0.14) | | (0.18) | | (0.74) |
| | | | | | | | | | |
2018 | | | | | | | | | | |
Revenues | $ | 17,260 | $ | 20,584 | $ | 22,660 | $ | 23,433 | $ | 83,937 |
Gross profit | | 14,547 | | 17,478 | | 19,196 | | 19,793 | | 71,014 |
Net loss | | (5,644) | | (7,427) | | (4,102) | | (5,224) | | (22,397) |
Loss per common share - basic and diluted | | (0.16) | | (0.20) | | (0.11) | | (0.13) | | (0.60) |
Table of Contents
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company maintainsWe maintain “disclosure controls and procedures” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, and Board of Directors, as appropriate, to allow timely decisions regarding required disclosure.
In designing and evaluating our disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable assurance of achieving the desired objectives, and we necessarily are required to apply our judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.
Our management, including our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2021 and concluded that our disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
In the ordinary course of business, we routinely enhance our information systems by either upgrading current systems or implementing new ones. There were no changes in our internal control over financial reporting that occurred during the three months ended December 31, 20192021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
reporting (as defined in Rules 13a-15(d) or 15d-15(f) of the Exchange Act)
.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act.The Company’s internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with accounting principles generally accepted in the United States of AmericaUS GAAP and includes those policies and procedures that:
• | ● | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; |
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
| ● | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and |
• | ● | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements. |
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
•Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.
Because of inherent limitations, a system of internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate due to
a change in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management, including our Chief Executive Officerprincipal executive officer and Chief Financial Officer,principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and proceduresinternal control over financial reporting as of December 31, 2019. 2021.In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013).Based on their evaluation, the Chief Executive Officerprincipal executive officer and Chief Financial Officerprincipal financial officer concluded that our disclosureinternal controls and proceduresover financial reporting were effective.
The Company’s independent registered public accounting firm, Deloitte & Touche LLP, who audited the consolidated financial statements included in this Annual Report on Form 10-K, has issued an attestation report on the effectiveness of managementsmanagement's internal control over financial reporting as of December 31, 2019. This report states that the internal control over financial reporting was effective and appears on page 81 of this Annual Report on Form 10-K.2021.
ITEM 9B. OTHER INFORMATION
INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.GOVERNANCE.
Information required by this item concerning our directors will be set forth under the caption “Election of Directors” in our definitive proxy statement for our
20202022 annual meeting and is incorporated herein by reference.
Information
If applicable, information required by this item concerning compliance with Section 16(a) of the Exchange Act, as amended, will be set forth under the caption
“Section"Security Ownership of Certain Beneficial Owners and Management — Delinquent Section 16(a)
Beneficial Ownership Reporting Compliance”Reports” in our definitive proxy statement for our
20202022 annual meeting, and is incorporated herein by reference.
Information required by this item concerning the audit committee of the Company, the audit committee financial expert of the Company and any material changes to the way in which security holders may recommend nominees to the Company’s Board of Directors will be set forth under the caption “Corporate Governance” in our definitive proxy statement for our
20202022 annual meeting and is incorporated herein by reference.
The Board of Directors adopted a Code of
Business Conduct and Ethics, which is posted on our website
http:https://
ir.Axogeninc.com/governance.cfmir.axogeninc.com/governance-docs that is applicable to all employees and directors. We will provide copies of our Code of Business Conduct and Ethics without charge upon request. To obtain a copy, please visit our website or send your written request to Investors Relations, 13631 Progress Blvd., Suite 400, Alachua, FL 32615. With respect to any amendments or waivers of this Code of Business Conduct and Ethics (to the extent applicable to
the Company’sour chief executive officer, principal accounting officer or controller, or persons performing similar functions)
the Company intendswe intend to either post such amendments or waivers on
itsour website or disclose such amendments or waivers pursuant to a Current Report on Form 8-K.
ITEM 11. EXECUTIVE
COMPENSATION.
COMPENSATION.
Information required by this item will be set forth under the caption “Executive Compensation” in our definitive proxy statement for our
20202022 annual meeting and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
STOCKHOLDER MATTERS
.
Information required by this item concerning ownership will be set forth under the caption “Security Ownership of Certain Beneficial
Owners”, “Security Ownership of DirectorsOwners and
Executive Officers”Management” and “Equity Compensation Plan Information” in our definitive proxy statement for our
20202022 annual meeting and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
INDEPENDENCE
.
Information required by this item concerning ownership will be set forth under the caption “Corporate Governance — Director Independence” and “Certain Relationships and Related Transactions” in our definitive proxy statement for our
20202022 annual meeting and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTINGACCOUNTANT FEES AND SERVICES
SERVICES
.
Information required by this item concerning ownership will be set forth under the caption “Ratification of Appointment of Independent Registered Public Accounting Firm” in our definitive proxy statement for our
20202022 annual meeting and is incorporated herein by reference.
Schedule II – Valuation and Qualifying Accounts
AXOGEN, INC.
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
| | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | Balance at Beginning of Year | | Additions | | Deductions (Charge-offs) | | Balance at End of Year |
| Allowance for doubtful accounts | | | | | | | |
| 2019 | $ | 1,117 | | | $ | 514 | | | $ | (539) | | | $ | 1,092 | |
| 2020 | $ | 1,092 | | | $ | — | | | $ | (676) | | | $ | 416 | |
| 2021 | $ | 416 | | | $ | — | | | $ | (140) | | | $ | 276 | |
| | | | | | | |
| Valuation allowance for deferred tax assets | | | | | | | |
| 2019 | $ | 33,876 | | | $ | 6,056 | | | $ | — | | | $ | 39,932 | |
| 2020 | $ | 39,932 | | | $ | 6,585 | | | $ | — | | | $ | 46,517 | |
| 2021 | $ | 46,517 | | | $ | 6,734 | | | $ | — | | | $ | 53,251 | |
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(a) | Financial Statements and Financial Statement Schedules |
Financial Statements and Financial Statement Schedules
The financial statements required by Item 15(a) are filed in Item 8 of this
annual reportAnnual Report on Form 10-K. Schedules not included have been omitted because they are not applicable or because the required information is included in the Consolidated Financial Statements and notes thereto.
Schedule II – Valuation and Qualifying Accounts
AXOGEN, INC.
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
| | | | | | | | |
| | Balance at Beginning of Year | | Additions | | Deductions (Chargeoffs) | | Balance at End of Year |
Allowance for doubtful accounts | | | | | | | | |
2017 | | 272 | | 223 | | (34) | | 461 |
2018 | | 461 | | 852 | | (196) | | 1,117 |
2019 | | 1,117 | | 514 | | (539) | | 1,092 |
| | | | | | | | |
Valuation allowance for deferred tax assets | | | | | | | | |
2017 | | 39,111 | | — | | (10,754) | | 28,357 |
2018 | | 28,357 | | 5,519 | | — | | 33,876 |
2019 | | 33,876 | | 5,977 | | — | | 39,853 |
The following exhibits are included in this
annual reportAnnual Report on Form 10-K or incorporated by reference in the Form 10-K.
| | |
|---|
| | |
|---|
Exhibit
Number
|
| Description
|
|---|
|
|
| | | | | | |
3.1
Exhibit Number |
| Description |
| | |
| 3.1 | | |
|
|
|
3.2 |
| |
|
|
|
+4.1
|
| |
|
|
|
4.2 |
| |
|
|
|
*10.1 |
| |
|
|
|
*10.2.1 |
| |
|
|
|
10.2.2 |
| |
|
|
|
*10.3 |
| |
|
|
|
*10.4.1 |
| |
|
|
|
*10.4.2 |
| |
|
|
|
*10.4.3 |
| |
|
|
|
*10.4.4 |
| |
118
| | |
|---|
| | |
|---|
Exhibit
Number
|
| Description
|
|---|
|
|
| | | | | | |
Exhibit Number | | Description |
| | |
| *10.5.1 |
| |
|
|
|
10.5.2 |
| |
|
|
|
10.5.3 |
| |
|
|
|
**10.6
10.6.1 |
| |
|
|
|
**10.7.1
|
| Executive Employment Agreement, effective as of October 15, 2007, by and between Axogen Corporation and Karen Zaderej (incorporated by reference to Exhibit 10.8.1 to the Company’s Current Report on Form 8-K filed on October 6, 2011).
|
|
|
|
10.9.1
|
| Lease dated as of February 6, 2007, by and between Axogen Corporation and WIGSHAW, LLC (incorporated by reference to Exhibit 10.10 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, filed on November 14, 2011). |
|
|
|
10.9.2
10.6.2 |
| |
| | |
| 10.6.3 | | |
|
|
|
10.9.3
10.6.4 |
| |
|
|
|
10.9.4
10.6.5 |
| |
|
|
|
10.6.6 | | |
| | |
| 10.6.7 | | |
| | |
| 10.6.8 | | |
| | |
| 10.6.9 | | |
| | |
| | | | | | | | |
| Exhibit Number | | Description |
| | |
**10.10.110.7 |
| |
| | |
| **10.8.1 | | |
|
|
|
**10.10.2 10.8.2 |
| |
|
|
|
**10.11.1 10.9.1 |
| |
|
|
|
**10.11.2 10.9.2 |
| |
| | |
|---|
| | |
|---|
Exhibit
Number
|
| Description
|
|---|
|
|
|
| | |
**10.11.310.9.3 |
| |
|
|
|
**10.11.4 10.9.4 |
| |
|
|
|
**10.11.5 10.9.5 |
| |
|
|
|
10.12.1
**10.9.6 |
| |
| | |
| 10.10.1 | | |
|
|
|
10.12.2
10.10.2 |
| |
|
|
|
10.12.3
10.10.3 |
| |
|
|
|
10.12.4
10.10.4 | | |
|
|
|
| | | | | | | | |
10.13
Exhibit Number |
| Description |
| | |
| 10.10.5 | | |
| | |
| 10.10.6 | | |
| | |
| 10.11.1 | | |
|
|
|
10.13.1
10.11.2 |
| |
|
|
|
10.15
10.11.3 |
| Securities PurchaseSeventh Amendment to License and Services Agreement, dated as of November 12, 2014,February 22, 2021, by and between Axogen Inc.,Corporation and PDL BioPharma, Inc.Community Blood Center (d/b/a Community Tissue Services) (incorporated by reference to Exhibit 10.4 to Amendment No. 1 on Form 8-K/A10.1 to the Company’sCompany's Current Report on Form 8-K, filed on November 13, 2014, filed on February 4, 2015)26, 2021). |
|
|
|
10.16
10.13 |
| |
|
|
|
10.17
10.14 |
| |
|
|
|
| | |
|---|
| | |
|---|
Exhibit
Number
|
| Description
|
|---|
**10.18
|
| Executive Employment Agreement, dated as of February 25, 2016, by and between Axogen Corporation and Peter Mariani (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, filed on May 4, 2016).
|
**10.15
|
|
|
**10.19
|
| Executive Employment Agreement, dated as of March 11, 2016, by and between Axogen Corporation and Kevin Leach (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 14, 2016). |
|
|
|
* 10.20
10.16 |
| Credit and Security Agreement (Term Loan), dated as of October 25, 2016, by and among Axogen, Inc., Axogen Corporation, MidCap Financial Trust, MidCap Funding XIII Trust and MidCap Funding V Trust (incorporated by reference to Exhibit 10.20 to the Company’s annual report on Form 10-K for the year ended December 31, 2016, filed on March 1, 2017). |
|
|
|
* 10.21
|
| Credit and Security Agreement (Revolving Loan), dated as of October 25, 2016, by and among Axogen, Inc., Axogen Corporation and MidCap Financial Trust (incorporated by reference to Exhibit 10.2 to the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2015, filed on November 5, 2015).
|
|
|
|
10.22
|
| Form of Non-Incentive Stock Option Agreement pursuant to the Axogen, Inc. 2010 Stock Incentive Plan, as amended and restated as of March 23, 2016 (incorporated by reference to Exhibit 10.22 to the Company’s annual report on Form 10-K for the year ended December 31, 2016, filed on March 1, 2017). |
|
|
|
*10.23 10.17 |
| |
|
|
|
**10.24 10.18 |
| Retention Stock Unit Award Agreement, dated December 29, 2016, by and between Axogen, Inc. and Karen Zaderej, pursuant to Axogen, Inc. 2010 Stock Incentive Plan,, as amended and restated as of March 23, 2016 (incorporated by reference to Exhibit 10.24 to the Company’s annual report on Form 10-K for the year ended December 31, 2016, filed on March 1, 2017). |
|
|
|
10.25
10.19 |
| |
|
|
|
| | |
|---|
| | |
|---|
Exhibit
Number
|
| Description
|
|---|
10.29
10.22 |
| |
10.30
|
| Underwriting Agreement by and among the Company, Jefferies LLC and Leerink Partners LLC, as representatives of the underwriters named therein, dated May 8, 2018 (incorporated by reference to Exhibit 1.1 to the Company’s Current Report on Form 8-K filed on May 14, 2018).
|
10.31
10.23 |
| |
**10.32
|
| Executive Employment Agreement dated September 4, 2018, by and between Axogen Corporation and Angelo Scopelianos (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 7, 2018).
|
10.33
10.24 |
| |
10.34
|
| |
| 10.25.1 | | |
10.35
| | |
| 10.25.2 | | Agreement ofFirst Amendment to Office Lease, dated October 26, 2018,as of July 12, 2021, by and between Ashley Avenue Associatesamong Axogen, Inc,. Axogen Corporation, and Heights Union I, LLC and Axogen Corporation (incorporated by reference to Exhibit 10.1 to the Company’sCompany's Current Report on Form 8-K, filed on October 29, 2018)July 16, 2021). |
| | |
**10.36 10.26 | | |
| | |
**10.37
| | Form of Incentive Stock Option Agreement pursuant to the Axogen, Inc. 2010 Stock Incentive Plan, as amended and restated as of October 29, 2018 (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on October 29, 2018). |
| | |
**10.38 10.27 | | |
| | |
**10.39
10.28 |
| |
10.40
| | |
| 10.29 | | |
10.41
| | |
| 10.30.1 | | |
| | |
| | |
|---|
| | |
|---|
Exhibit
Number
|
| Description
|
|---|
10.42
10.30.2 | | |
| | | | | | | | |
**10.43
Exhibit Number |
| Separation Agreement and General Release, dated January 15, 2019, between Axogen Corporation and Jon Gingrich (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 16, 2019).Description
|
**10.44
|
| Separation Agreement and General Release, dated January 18, 2019, between Axogen Corporation and Shawn McCarrey (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 18, 2019).
|
**10.45 10.33 | | |
**10.46
| | Form of Non-Qualified Stock Option Inducement Award Agreement to be granted by Axogen, Inc. to Eric Sandberg on January 22, 2019 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on January 22, 2019).
|
| | |
**10.4710.34 | | |
10.48
|
| Commercial Lease Amendment 4, dated March 12, 2019, by and between Ja-Cole L.P. and Axogen Corporation (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, filed on May 8, 2019).
|
10.35
|
|
|
10.49
| | Standard Form of Agreement Between Owner and Design-Builder, dated as of July 9, 2019, by and between Axogen Corporation and CRB Builders, L.L.C. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on July 9, 2019).
|
| | |
**10.5010.36 | | |
| | |
***+10.5110.37 |
| |
|
|
|
+21.1
10.38 |
| |
| | |
| 10.39 | | |
| | |
| 10.4 | | |
| | |
| 10.41 | | | |
| | |
| **10.42 | | |
| | |
| **10.43 | | |
| | |
| **10.44 | | |
| | |
| **10.45 | | |
| | |
|---|
| | |
|---|
Exhibit
Number
|
| Description
|
|---|
+++32.1 |
| |
|
|
|
+101
|
| Inline XBRL Document Set for the consolidated financial statements and accompanying notes in Part II, Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. |
|
|
|
+104 101.INS |
| XBRL Instance Document – The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
| | |
| +101.SCH | | Inline XBRL Taxonomy Extension Schema Document. |
| | |
| +101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
| | |
| +101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
| | |
| +101.LAB | | Inline XBRL Extension Labels Linkbase. |
| | |
| +101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
| | |
| | | | | | | | |
| Exhibit Number | | Description |
| | |
| 104 | | Inline XBRL for the cover page of this Annual Report on Form 10-K, included in the Exhibit 101 Inline XBRL Document Set. |
|
|
|
| | | | | |
| * | Confidential treatment has been granted for portions of this Exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of 1934 as amended. The confidential portions have been deleted and filed separately with the United StatesU.S. Securities and Exchange Commission. |
|
|
** | Management contract or compensatory plan or arrangement. |
|
|
*** | Confidential treatment has been requested as to certain portions, which portions have been omitted and filed separately with the Securities and Exchange Commission.
|
+
| Filed herewith.
|
+
| Filed herewith.
|
| |
| ++ | Included on signature page. |
|
|
+++ | Furnished herewith. |
ITEM 16. Form 10-K Summary
None.
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | |
| AXOGEN, INC |
|
|
| /s/ Karen Zaderej |
| Karen Zaderej |
| Chief Executive Officer, President and Chairman of the Board |
| February 24, 202025, 2022 |
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Karen Zaderej (with full power to act alone), as his or her true and lawful attorney-in-fact and agent, with full powers of substitution and re-substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to the Annual Report on Form 10-K of Axogen, Inc., and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or their substitute or substitutes, lawfully do or cause to be done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | | | | | |
/s/ Karen Zaderej |
| February 24, 2020 25, 2022 |
Karen Zaderej, Chief Executive Officer, President and Director |
|
|
Chairman of the Board
(Principal Executive Officer) |
|
|
|
|
|
/s/ Peter J. Mariani |
| February 24, 2020 25, 2022 |
Peter J. Mariani, CFO |
|
|
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) |
|
|
(Principal Accounting Officer)
|
|
|
/s/ Quentin S. Blackford
|
| February 25, 2022
|
Quentin S. Blackford
Director | | |
| | |
| /s/ Gregory G. Freitag |
| February 24, 2020 25, 2022 |
Gregory G. Freitag General Counsel and Director |
|
|
|
|
|
/s/ Dr. Mark Gold |
| February 24, 2020 25, 2022 |
Mark Gold, M.D.
Director |
|
|
Director
|
|
|
/s/ John H. Johnson
|
| February 25, 2022
|
John H. Johnson Director | | |
| | |
| /s/ Alan M. Levine | | February 25, 2022 |
Alan M. Levine
Director | | |
| | |
| /s/ Guido J. Neels |
| February 24, 2020 25, 2022 |
Guido J. Neels
Director |
|
|
Director
|
|
|
/s/ Paul G. Thomas
|
| February 25, 2022
|
/s/ Robert J. Rudelius
Paul G. Thomas
Director |
| February 24, 2020
|
Robert J. Rudelius
|
|
|
Director
|
|
|
|
|
|
/s/ Amy Wendell |
| February 24, 2020 25, 2022 |
Amy Wendell
Director |
|
|
Director
|
|
|
|
|
|
/s/ Quentin S. Blackford
|
| February 24, 2020
|
Quentin S. Blackford
|
|
|
Director
|
|
|
|
|
|
/s/ Alan M. Levine
|
| February 24, 2020
|
Alan M. Levine
|
|
|
Director
|
|
|