UNITED STATES
FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 2021 ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number:001-36046 Axogen, Inc. Securities registered pursuant to Section 12(b) of the Act: Trading Symbol Name of each exchange on which registered Common Stock, $0.01 par value AXGN The Nasdaq Stock Market ☐ 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO As of September June 30, 2020Minnesota41-1301878(State or Other Jurisdiction of(I.R.S. EmployerIncorporation or Organization)Identification No.)13631 Progress Blvd., Suite 400, Alachua, FL32615(Address of Principal Executive Offices)(Zip Code)386-462-6800Securities registered pursuant to Section 12(b) of the Act:Title of each class YES ⌧Yes ☒ NONo ◻☐YES ⌧Yes NO ◻☒ No ⌧☐◻☒◻☐☐ ☐ ◻☐⌧☒October 27, 2020,July 30, 2021, the registrant had 40,126,25341,397,053 shares of common stock outstanding.
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1
Forward-Looking Statements
June 30, 2021 | December 31, 2020 | ||||||||||
Assets | |||||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | 53,078 | $ | 48,767 | |||||||
Restricted cash | 6,333 | 6,842 | |||||||||
Investments | 46,839 | 55,199 | |||||||||
Accounts receivable, net of allowance for doubtful accounts of $258 and $416, respectively | 18,182 | 17,618 | |||||||||
Inventory | 13,415 | 12,529 | |||||||||
Prepaid expenses and other | 3,948 | 4,296 | |||||||||
Total current assets | 141,795 | 145,251 | |||||||||
Property and equipment, net | 50,952 | 38,398 | |||||||||
Operating lease right-of-use assets | 15,272 | 15,614 | |||||||||
Finance lease right-of-use assets | 53 | 64 | |||||||||
Intangible assets | 2,460 | 2,054 | |||||||||
Total assets | $ | 210,532 | $ | 201,381 | |||||||
Liabilities and Shareholders’ Equity | |||||||||||
Current liabilities: | |||||||||||
Accounts payable and accrued expenses | $ | 19,839 | $ | 21,968 | |||||||
Current maturities of long-term lease obligations | 1,789 | 863 | |||||||||
Total current liabilities | 21,628 | 22,831 | |||||||||
Long-term debt, net of financing fees | 46,081 | 32,027 | |||||||||
Long-term lease obligations | 20,344 | 20,874 | |||||||||
Debt derivative liability | 3,776 | 2,497 | |||||||||
Other long-term liabilities | 0 | 3 | |||||||||
Total liabilities | 91,829 | 78,232 | |||||||||
Commitments and contingencies - see Note 13 | 0 | 0 | |||||||||
Shareholders’ equity: | |||||||||||
Common stock, $0.01 par value per share; 100,000,000 shares authorized; 41,337,108 and 40,618,766 shares issued and outstanding | 413 | 406 | |||||||||
Additional paid-in capital | 336,495 | 326,390 | |||||||||
Accumulated deficit | (218,205) | (203,647) | |||||||||
Total shareholders’ equity | 118,703 | 123,149 | |||||||||
Total liabilities and shareholders’ equity | $ | 210,532 | $ | 201,381 |
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| | September 30, | | December 31, | | ||
| | 2020 | | 2019 | | ||
Assets | | | | | | | |
Current assets: | | | | | | | |
Cash and cash equivalents | | $ | 60,002 | | $ | 35,724 | |
Restricted cash | | | 7,607 | | | 6,000 | |
Investments | | | 39,126 | | | 60,786 | |
Accounts receivable, net of allowance for doubtful accounts of $478 and $1,092, respectively | |
| 18,758 | |
| 16,944 | |
Inventory | |
| 11,929 | |
| 13,861 | |
Prepaid expenses and other | |
| 2,551 | |
| 1,706 | |
Total current assets | |
| 139,973 | |
| 135,021 | |
Property and equipment, net | |
| 36,110 | |
| 14,887 | |
Operating lease right-of-use assets | | | 15,987 | | | 3,133 | |
Finance lease right-of-use assets | | | 70 | | | 87 | |
Intangible assets | |
| 1,797 | |
| 1,515 | |
Total assets | | $ | 193,937 | | $ | 154,643 | |
| | | | | | | |
Liabilities and Shareholders’ Equity | | | | | | | |
Current liabilities: | | | | | | | |
Accounts payable and accrued expenses | | $ | 16,279 | | $ | 19,130 | |
Current maturities of long-term lease obligations | | | 2,499 | | | 1,736 | |
Contract liabilities, current | |
| 14 | |
| 14 | |
Total current liabilities | |
| 18,792 | |
| 20,880 | |
| | | | | | | |
Long-term Debt, net of financing fees | | | 31,817 | | | — | |
Debt derivative liability | | | 2,450 | | | — | |
Common stock derivative option liability | | | 183 | | | — | |
Long-term lease obligations | | | 18,976 | | | 1,595 | |
Long-term contract liabilities | |
| 6 | |
| 15 | |
Total liabilities | |
| 72,224 | |
| 22,490 | |
| | | | | | | |
Commitments and Contingencies - see Note 13 | | | | | | | |
| | | | | | | |
Shareholders’ equity: | | | | | | | |
Common stock, $0.01 par value per share; 100,000,000 shares authorized; 40,123,841 and 39,589,755 shares issued and outstanding | |
| 401 | |
| 396 | |
Additional paid-in capital | |
| 318,949 | |
| 311,618 | |
Accumulated deficit | |
| (197,637) | |
| (179,861) | |
Total shareholders’ equity | |
| 121,713 | |
| 132,153 | |
Total liabilities and shareholders’ equity | | $ | 193,937 | | $ | 154,643 | |
See notes to condensed consolidated financial statements.
Axogen, Inc.
Three Months Ended | Six Months Ended | ||||||||||||||||||||||
June 30, 2021 | June 30, 2020 | June 30, 2021 | June 30, 2020 | ||||||||||||||||||||
Revenues | $ | 33,580 | $ | 22,116 | $ | 64,617 | $ | 46,377 | |||||||||||||||
Cost of goods sold | 7,092 | 5,605 | 12,264 | 10,421 | |||||||||||||||||||
Gross profit | 26,488 | 16,511 | 52,353 | 35,956 | |||||||||||||||||||
Costs and expenses: | |||||||||||||||||||||||
Sales and marketing | 19,250 | 14,290 | 37,224 | 32,128 | |||||||||||||||||||
Research and development | 5,723 | 4,071 | 11,471 | 8,685 | |||||||||||||||||||
General and administrative | 8,669 | 6,404 | 17,032 | 11,906 | |||||||||||||||||||
Total costs and expenses | 33,642 | 24,765 | 65,727 | 52,719 | |||||||||||||||||||
Loss from operations | (7,154) | (8,254) | (13,374) | (16,763) | |||||||||||||||||||
Other (expense) income: | |||||||||||||||||||||||
Investment income | 29 | 237 | 63 | 548 | |||||||||||||||||||
Interest expense | (565) | (31) | (1,010) | (62) | |||||||||||||||||||
Change in fair value of derivatives | (84) | 0 | (105) | 0 | |||||||||||||||||||
Other expense | (124) | (57) | (132) | (20) | |||||||||||||||||||
Total other (expense) income, net | (744) | 149 | (1,184) | 466 | |||||||||||||||||||
Net Loss | $ | (7,898) | $ | (8,105) | $ | (14,558) | $ | (16,297) | |||||||||||||||
Weighted average common shares outstanding — basic and diluted | 41,080,898 | 39,823,414 | 40,894,405 | 39,760,602 | |||||||||||||||||||
Loss per common share — basic and diluted | $ | (0.19) | $ | (0.20) | $ | (0.36) | $ | (0.41) |
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| | Three Months Ended | | Nine Months Ended | | ||||||||
| | September 30, | | September 30, | | September 30, | | September 30, | | ||||
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| 2020 |
| 2019 |
| 2020 |
| 2019 |
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| | | | | | | | | | | | | |
Revenues | | $ | 33,428 | | $ | 28,564 | | $ | 79,805 | | $ | 78,550 | |
Cost of goods sold | |
| 5,697 | |
| 4,510 | |
| 16,118 | | | 12,468 | |
Gross profit | |
| 27,731 | |
| 24,054 | |
| 63,687 | | | 66,082 | |
Costs and expenses: | | | | | | | | | | | | | |
Sales and marketing | |
| 17,726 | |
| 18,245 | |
| 49,854 | | | 53,146 | |
Research and development | |
| 4,230 | |
| 4,181 | |
| 12,915 | | | 12,602 | |
General and administrative | |
| 6,820 | |
| 7,740 | |
| 18,726 | | | 24,321 | |
Total costs and expenses | |
| 28,776 | |
| 30,166 | |
| 81,495 | | | 90,069 | |
Loss from operations | |
| (1,045) | |
| (6,112) | |
| (17,808) | | | (23,987) | |
Other income (expense): | | | | | | | | | | | | | |
Investment income | | | 28 | | | 555 | | | 576 | | | 1,925 | |
Interest expense | |
| (397) | |
| (7) | |
| (459) | | | (32) | |
Change in fair value of derivatives | | | (71) | | | — | | | (71) | | | — | |
Other (expense)/income | |
| 6 | |
| (7) | |
| (14) | | | (3) | |
Total other income (expense), net | |
| (434) | |
| 541 | |
| 32 | | | 1,890 | |
Net Loss | | $ | (1,479) | | $ | (5,571) | | $ | (17,776) | | $ | (22,097) | |
Weighted average common shares outstanding — basic and diluted | |
| 40,093,588 | |
| 39,340,492 | |
| 39,873,167 | | | 39,151,218 | |
Loss per common share — basic and diluted | | $ | (0.04) | | $ | (0.14) | | $ | (0.45) | | $ | (0.56) | |
See notes to condensed consolidated financial statements.
Axogen, Inc.
| | | | | | | |
| | Nine Months Ended | | ||||
| | September 30, | | September 30, | | ||
|
| 2020 |
| 2019 |
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Cash flows from operating activities: | | | | | | | |
Net loss | | $ | (17,776) | | $ | (22,097) | |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | |
Depreciation | | | 993 | | | 631 | |
Amortization of right-of-use assets | | | 1,282 | | | 1,352 | |
Amortization of intangible assets | |
| 111 | | | 89 | |
Amortization of deferred financing fees | | | 22 | | | — | |
Provision for bad debt | | | (115) | | | (150) | |
Provision for inventory write-down | | | 2,108 | | | (44) | |
Changes in fair value of derivatives | | | 71 | | | — | |
Changes in investment gains and losses | | | (29) | | | (957) | |
Share-based compensation | |
| 5,725 | | | 7,384 | |
Change in operating assets and liabilities: | | | | | | | |
Accounts receivable | |
| (1,700) | | | 20 | |
Inventory | |
| (176) | | | (1,657) | |
Prepaid expenses and other | |
| (844) | | | (1,099) | |
Accounts payable and accrued expenses | |
| (911) | | | 1,288 | |
Operating lease obligations | | | (1,213) | | | (1,276) | |
Cash paid for interest portion of finance leases | | | (2) | | | (3) | |
Contract and other liabilities | |
| (9) | | | (23) | |
Net cash used in operating activities | |
| (12,463) | | | (16,542) | |
| | | | | | | |
Cash flows from investing activities: | | | | | | | |
Purchase of property and equipment | |
| (18,907) | | | (3,676) | |
Purchase of investments | | | (41,794) | | | (104,314) | |
Proceeds from sale of investments | | | 63,483 | | | 122,071 | |
Cash payments for intangible assets | |
| (393) | | | (396) | |
Net cash provided by investing activities | |
| 2,389 | | | 13,685 | |
| | | | | | | |
Cash flows from financing activities: | | | | | | | |
Proceeds from the issuance of long-term debt | | | 35,000 | | | — | |
Proceeds from the paycheck protection program | | | 7,820 | | | — | |
Repayment of paycheck protection program | | | (7,820) | | | — | |
Payments for debt issuance costs | | | (642) | | | — | |
Payments of employee tax withholding in exchange of common stock awards | | | (665) | | | — | |
Cash paid for debt portion of finance leases | | | (10) | | | (24) | |
Proceeds from exercise of stock options |
| | 2,276 | | | 3,142 | |
Net cash provided by financing activities | |
| 35,959 | | | 3,118 | |
Net increase in cash, cash equivalents, and restricted cash | |
| 25,885 | | | 261 | |
Cash, cash equivalents, and restricted cash, beginning of period | |
| 41,724 | | | 30,294 | |
Cash, cash equivalents and restricted cash, end of period | | $ | 67,609 | | $ | 30,555 | |
| | | | | | | |
Supplemental disclosures of cash flow activity: | | | | | | | |
Cash paid for interest | | $ | 379 | | $ | 31 | |
Supplemental disclosure of non-cash investing and financing activities: | | | | | | | |
Acquisition of fixed assets in accounts payable and accrued expenses | | $ | 1,271 | | $ | 684 | |
Obtaining a right-of-use asset in exchange for a lease liability | | $ | 14,119 | | $ | 26 | |
Embedded derivative associated with the long-term debt | | $ | 2,562 | | $ | — | |
Six Months Ended | |||||||||||
June 30, 2021 | June 30, 2020 | ||||||||||
Cash flows from operating activities: | |||||||||||
Net loss | $ | (14,558) | $ | (16,297) | |||||||
Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
Depreciation | 1,405 | 618 | |||||||||
Amortization of right-of-use assets | 960 | 802 | |||||||||
Amortization of intangible assets | 96 | 72 | |||||||||
Amortization of deferred financing fees | 227 | 0 | |||||||||
Provision for bad debt | (65) | (115) | |||||||||
Provision for inventory write-down | 2,455 | 1,624 | |||||||||
Changes in fair value of derivatives | 105 | 0 | |||||||||
Changes in investment gains and losses | 31 | (141) | |||||||||
Share-based compensation | 6,499 | 2,778 | |||||||||
Change in operating assets and liabilities: | |||||||||||
Accounts receivable | (498) | 3,010 | |||||||||
Inventory | (3,341) | (600) | |||||||||
Prepaid expenses and other | 199 | (1,699) | |||||||||
Accounts payable and accrued expenses | (5,061) | (4,212) | |||||||||
Operating lease obligations | 35 | (915) | |||||||||
Cash paid for interest portion of finance leases | (1) | 0 | |||||||||
Contract and other liabilities | (3) | (6) | |||||||||
Net cash used in operating activities | (11,515) | (15,081) | |||||||||
Cash flows from investing activities: | |||||||||||
Purchase of property and equipment | (10,924) | (13,183) | |||||||||
Purchase of investments | (23,966) | (22,965) | |||||||||
Proceeds from sale of investments | 32,295 | 59,883 | |||||||||
Cash payments for intangible assets | (692) | (216) | |||||||||
Net cash (used in) provided by investing activities | (3,287) | 23,519 | |||||||||
Cash flows from financing activities: | |||||||||||
Proceeds from the issuance of long-term debt | 15,000 | 35,000 | |||||||||
Proceeds from the paycheck protection program | 0 | 7,820 | |||||||||
Repayment of paycheck protection program | 0 | (7,820) | |||||||||
Payments for debt issuance costs | 0 | (350) | |||||||||
Payments of employee tax withholding in exchange of common stock awards | 0 | (658) | |||||||||
Cash paid for debt portion of finance leases | (8) | (8) | |||||||||
Proceeds from exercise of stock options | 3,612 | 1,784 | |||||||||
Net cash provided by financing activities | 18,604 | 35,768 | |||||||||
Net increase in cash, cash equivalents, and restricted cash | 3,802 | 44,206 | |||||||||
Cash, cash equivalents, and restricted cash, beginning of period | 55,609 | 41,724 | |||||||||
Cash, cash equivalents and restricted cash, end of period | $ | 59,411 | $ | 85,930 | |||||||
Supplemental disclosures of cash flow activity: | |||||||||||
Cash paid for interest | $ | 739 | $ | 23 | |||||||
Supplemental disclosure of non-cash investing and financing activities: | |||||||||||
Acquisition of fixed assets in accounts payable and accrued expenses | $ | 3,035 | $ | 617 | |||||||
Obtaining a right-of-use asset in exchange for a lease liability | $ | 371 | $ | 796 | |||||||
Embedded derivative associated with the long-term debt | $ | 1,173 | $ | 2,563 | |||||||
Acquisition of intangible assets in accounts payable and accrued expenses | $ | 190 | $ | 0 |
See notes to condensed consolidated financial statements.
| | | | | | | | | | | | | | |
| | Common Stock |
| Paid-in |
| Accumulated |
| Shareholders' | ||||||
| | Shares | | Amount |
| Capital |
| Deficit |
| Equity/(Deficit) | ||||
Three Months Ended September 30, 2020 | | | | | | | | | | | | | | |
Balance at June 30, 2020 | | 40,022,499 | | $ | 400 | | $ | 315,518 | | $ | (196,158) | | $ | 119,760 |
Net Loss | | - | | | - | | | - | | | (1,479) | | | (1,479) |
Stock-based compensation | | - | | | - | | | 2,947 | | | - | | | 2,947 |
Issuance of restricted and performance stock units | | 22,529 | | | - | | | - | | | - | | | - |
Shares surrendered by employees to pay tax withholdings | | (1,230) | | | - | | | (8) | | | - | | | (8) |
Exercise of stock options and employee stock purchase plan | | 80,043 | | | 1 | | | 492 | | | - | | | 493 |
Balance at September 30, 2020 | | 40,123,841 | | $ | 401 | | $ | 318,949 | | $ | (197,637) | | $ | 121,713 |
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Nine Months Ended September 30, 2020 | | | | | | | | | | | | | | |
Balance at December 31, 2019 | | 39,589,755 | | $ | 396 | | $ | 311,618 | | $ | (179,861) | | $ | 132,153 |
Net Loss | | - | | | - | | | - | | | (17,776) | | | (17,776) |
Stock-based compensation | | - | | | - | | | 5,725 | | | - | | | 5,725 |
Issuance of restricted and performance stock units | | 168,311 | | | 2 | | | (2) | | | - | | | - |
Shares surrendered by employees to pay tax withholdings | | (38,086) | | | (1) | | | (664) | | | - | | | (665) |
Exercise of stock options and employee stock purchase plan | | 403,861 | | | 4 | | | 2,272 | | | - | | | 2,276 |
Balance at September 30, 2020 | | 40,123,841 | | $ | 401 | | $ | 318,949 | | $ | (197,637) | | $ | 121,713 |
| | | | | | | | | | | | | | |
Three Months Ended September 30, 2019 | | | | | | | | | | | | | | |
Balance at June 30, 2019 | | 39,252,294 | | $ | 393 | | $ | 304,819 | | $ | (167,252) | | $ | 137,960 |
Net Loss | | - | | | - | | | - | | | (5,571) | | | (5,571) |
Stock-based compensation | | - | | | - | | | 2,397 | | | - | | | 2,397 |
Issuance of restricted and performance stock units | | 3,312 | | | - | | | - | | | - | | | - |
Exercise of stock options and employee stock purchase plan | | 205,712 | | | 2 | | | 623 | | | - | | | 625 |
Balance at September 30, 2019 | | 39,461,318 | | $ | 395 | | $ | 307,839 | | $ | (172,823) | | $ | 135,411 |
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Nine Months Ended September 30, 2019 | | | | | | | | | | | | | | |
Balance at December 31, 2018 | | 38,900,875 | | $ | 389 | | $ | 297,319 | | $ | (150,726) | | $ | 146,982 |
Net Loss | | - | | | - | | | - | | | (22,097) | | | (22,097) |
Stock-based compensation | | - | | | - | | | 7,384 | | | - | | | 7,384 |
Issuance of restricted and performance stock units | | 41,340 | | | - | | | - | | | - | | | - |
Exercise of stock options and employee stock purchase plan | | 519,103 | | | 6 | | | 3,136 | | | - | | | 3,142 |
Balance at September 30, 2019 | | 39,461,318 | | $ | 395 | | $ | 307,839 | | $ | (172,823) | | $ | 135,411 |
| | | | | | | | | | | | | | |
Common Stock | Paid-in Capital | Accumulated Deficit | Shareholders' Equity/(Deficit) | ||||||||||||||||||||||||||
Shares | Amount | ||||||||||||||||||||||||||||
Three Months Ended June 30, 2021 | |||||||||||||||||||||||||||||
Balance at March 31, 2021 | 40,842,717 | $ | 408 | $ | 329,603 | $ | (210,307) | $ | 119,704 | ||||||||||||||||||||
Net Loss | — | — | — | (7,898) | (7,898) | ||||||||||||||||||||||||
Stock-based compensation | — | — | 3,804 | — | 3,804 | ||||||||||||||||||||||||
Issuance of restricted and performance stock units | 44,411 | 0 | 0 | — | 0 | ||||||||||||||||||||||||
Exercise of stock options and employee stock purchase plan | 449,980 | 5 | 3,088 | — | 3,093 | ||||||||||||||||||||||||
Balance at June 30, 2021 | 41,337,108 | $ | 413 | $ | 336,495 | $ | (218,205) | $ | 118,703 | ||||||||||||||||||||
Six Months Ended June 30, 2021 | |||||||||||||||||||||||||||||
Balance at December 31, 2020 | 40,618,766 | $ | 406 | $ | 326,390 | $ | (203,647) | $ | 123,149 | ||||||||||||||||||||
Net Loss | — | — | — | (14,558) | (14,558) | ||||||||||||||||||||||||
Stock-based compensation | — | — | 6,499 | — | 6,499 | ||||||||||||||||||||||||
Issuance of restricted and performance stock units | 138,944 | 1 | (1) | — | 0 | ||||||||||||||||||||||||
Shares surrendered by employees to pay tax withholdings | 0 | — | 0 | — | 0 | ||||||||||||||||||||||||
Exercise of stock options and employee stock purchase plan | 579,398 | 6 | 3,607 | — | 3,613 | ||||||||||||||||||||||||
Balance at June 30, 2021 | 41,337,108 | $ | 413 | $ | 336,495 | $ | (218,205) | $ | 118,703 | ||||||||||||||||||||
Three Months Ended June 30, 2020 | |||||||||||||||||||||||||||||
Balance at March 31, 2020 | 39,738,767 | $ | 397 | $ | 311,850 | $ | (188,053) | $ | 124,194 | ||||||||||||||||||||
Net Loss | — | — | — | (8,105) | (8,105) | ||||||||||||||||||||||||
Stock-based compensation | — | — | 2,222 | — | 2,222 | ||||||||||||||||||||||||
Issuance of restricted and performance stock units | 10,021 | 0 | 0 | — | 0 | ||||||||||||||||||||||||
Shares surrendered by employees to pay tax withholdings | (1,766) | — | (17) | — | (17) | ||||||||||||||||||||||||
Exercise of stock options and employee stock purchase plan | 273,758 | 3 | 1,463 | — | 1,466 | ||||||||||||||||||||||||
Balance at June 30, 2020 | 40,020,780 | $ | 400 | $ | 315,518 | $ | (196,158) | $ | 119,760 | ||||||||||||||||||||
Six Months Ended June 30, 2020 | |||||||||||||||||||||||||||||
Balance at December 31, 2019 | 39,589,755 | $ | 396 | $ | 311,618 | $ | (179,861) | $ | 132,153 | ||||||||||||||||||||
Net Loss | — | — | — | (16,297) | (16,297) | ||||||||||||||||||||||||
Stock-based compensation | — | — | 2,778 | — | 2,778 | ||||||||||||||||||||||||
Issuance of restricted and performance stock units | 145,943 | 1 | (1) | — | 0 | ||||||||||||||||||||||||
Shares surrendered by employees to pay tax withholdings | (38,736) | (1) | (657) | — | (658) | ||||||||||||||||||||||||
Exercise of stock options and employee stock purchase plan | 323,818 | 4 | 1,780 | — | 1,784 | ||||||||||||||||||||||||
Balance at June 30, 2020 | 40,020,780 | $ | 400 | $ | 315,518 | $ | (196,158) | $ | 119,760 |
Axogen, Inc.
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Basis of Presentation
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Summary of Significant Accounting Policies
Credit Losses
On January 1,
June 30, 2021 | December 31, 2020 | ||||||||||
Cash and cash equivalents | $ | 53,078 | $ | 48,767 | |||||||
Restricted cash | 6,333 | 6,842 | |||||||||
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows | $ | 59,411 | $ | 55,609 |
Credit losses for trade receivables is determined based on historical information, current information and reasonable and supportable forecasts. We have concluded that the adoptiontiming of the standard was not material as the composition of the trade receivables at the reporting date is consistent with that used in developing the historical credit-loss percentages. Further, the risk characteristicsrevenue recognition from sales to distributors.
7
Contract Balances | |||||||||||
Net Receivables | Contract Liabilities, Current | Contract Liabilities, Long-Term | |||||||||
Opening, January 1, 2020 | $ | 16,944 | $ | 14 | $ | 15 | |||||
Closing, June 30, 2020 | 14,049 | 14 | 9 | ||||||||
Increase (decrease) | (2,895) | 0 | (6) | ||||||||
Opening, January 1, 2021 | $ | 17,618 | $ | 14 | $ | 3 | |||||
Closing, June 30, 2021 | 18,182 | 14 | 0 | ||||||||
Increase (decrease) | 564 | 0 | (3) |
Allowance for Doubtful Accounts Receivable and Concentration of Credit Risk
Fair Value Measurements
On January 1, 2020,
Cloud Based Arrangements
On January 1, 2020,customer base, thus spreading the credit risk. The Company adopted ASU No. 2018-15, Guidance on Cloud Computing Arrangements. ASU 2018-15 provides guidance on implementation costs incurred in a cloud computing arrangement (“CCA”) that is a service contractalso controls credit risk through credit approvals and aligns the accounting for such costs with the guidance on capitalizing costs associated with developing or obtaining internal-use software. More specifically, the ASU 2018-15 provides guidance on accounting for implementation, set-up and other upfront costs incurred in a CCA hosted by a vendor. As of January 1, 2020, this standard did not have a material impact on the Company’s consolidated financial statements.
monitoring procedures.
Reference Rate Reform
On March 12, 2020, the FASB issued ASU 2020-04, Reference Rate Reform (ASC 848). The ASU also establishes (1) a general contract modification principle that entities can apply in other areas that may be affected by reference rate reform and (2) certain elective hedge accounting expedients. The elective contract modification guidance in the ASU applies to “contracts or other transactions that reference [LIBOR] or a reference rate that is expected to be discontinued as a result of reference rate reform” (an “affected rate”). The optional amendments are effective for all entities as of March 12, 2020 through December 31, 2020. As of September 30, 2020, this standard did not have a material impact on the Company’s consolidated financial statements.
Revenue Recognition
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 an international distribution or purchase agreement, the distributors are granted exclusive distribution rights to sell the products or services in an international 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 international distributor inventory upon termination of such 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
8
must be made regarding the international 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 domestic independent sales agencies, and also from inventory physically held by field sales representatives. For these types of product sales, the Company retains control until the product has been used or implanted, at which time revenue is recognized.
The Company elected to account for shipping and handling activities as a fulfillment cost rather than a separate performance obligation. Amounts billed to customers for shipping and handling are included as part of the transaction price and recognized as revenue when control of the underlying products is transferred to the customer. The related shipping and freight charges incurred by the Company are included in the 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.
In connection with the Acroval® Neurosensory and Motor Testing System, a product previously offered by the Company, the Company sold extended warranty and service packages to certain customers, 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:
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Contract Balances | | | | ||||||
| | Net Receivables | | Contract Liabilities, Current | | Contract Liabilities, Long-Term | |||
Opening, January 1, 2019 | | $ | 15,321 | | $ | 18 | | $ | 42 |
Closing, September 30, 2019 | | | 15,451 | | | 14 | | | 22 |
Increase (decrease) | | | 130 | | | (4) | | | (20) |
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Opening, January 1, 2020 | | $ | 16,944 | | $ | 14 | | $ | 15 |
Closing, September 30, 2020 | | | 18,758 | | | 14 | | | 6 |
Increase (decrease) | | | 1,814 | | | - | | | (9) |
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Net Loss Per Share of Common Stock
9
awards of 5,496,833 six months ended June 30, 2021 and 4,584,991 shares which were outstanding as of September 30, 2020, basic and 2019, respectively, were not included in the computation of diluted net loss per share because theywere the same as the effect of potentially dilutive securities and would have been anti-dilutive.
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In October 2020,none that could potentially have a material impact on the FASB issued ASU 2020-08, Codification Improvements to Subtopic 310-20, Receivables-Nonrefundable Fees and Other Costs. The guidance is effective for fiscal years beginning after December 15, 2020. Early adoption is not permitted. We are currently evaluating the impact the standard may have on ourCompany’s consolidated financial statements and relatedcondition, results of operations, or disclosures.
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Inventories areInventory
June 30, 2021 | December 31, 2020 | ||||||||||
Finished goods | $ | 9,288 | $ | 8,876 | |||||||
Work in process | 482 | 751 | |||||||||
Raw materials | 3,645 | 2,902 | |||||||||
Inventory | $ | 13,415 | $ | 12,529 |
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| December 31, |
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| | 2020 | | 2019 | | ||
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Finished goods | | $ | 8,339 | | $ | 10,403 | |
Work in process | |
| 798 | |
| 730 | |
Raw materials | | | 2,792 | |
| 2,728 | |
Inventories | | $ | 11,929 | | $ | 13,861 | |
® 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 U.S. Food and Drug Administration (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 condensed consolidated statement of operations related to this announcement.
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10
The following table represents the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2021:
(Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||||||||||
June 30, 2021 | |||||||||||||||||||||||
Assets: | |||||||||||||||||||||||
Money market funds | $ | 31,496 | $ | 0 | $ | 0 | $ | 31,496 | |||||||||||||||
U.S. government securities | 12,059 | 0 | 0 | 12,059 | |||||||||||||||||||
Commercial paper | 0 | 34,780 | 0 | 34,780 | |||||||||||||||||||
Total assets | $ | 43,555 | $ | 34,780 | $ | 0 | $ | 78,335 | |||||||||||||||
Liabilities | |||||||||||||||||||||||
Oberland facility | $ | 0 | 0 | $ | 50,663 | $ | 50,663 | ||||||||||||||||
Debt derivative liabilities | 0 | 0 | 3,776 | 3,776 | |||||||||||||||||||
Total liabilities | $ | 0 | $ | 0 | $ | 54,439 | $ | 54,439 |
(Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||||||||||
December 31, 2020 | |||||||||||||||||||||||
Assets: | |||||||||||||||||||||||
Money market funds | $ | 23,044 | $ | 0 | $ | 0 | $ | 23,044 | |||||||||||||||
U.S. government securities | 12,123 | 0 | 0 | 12,123 | |||||||||||||||||||
Corporate bonds | 0 | 6,408 | 0 | 6,408 | |||||||||||||||||||
Commercial paper | 0 | 36,668 | 0 | 36,668 | |||||||||||||||||||
Total assets | $ | 35,167 | $ | 43,076 | $ | 0 | $ | 78,243 | |||||||||||||||
Liabilities | |||||||||||||||||||||||
Oberland facility | 0 | 0 | 36,855 | 36,855 | |||||||||||||||||||
Debt derivative liabilities | 0 | 0 | 2,497 | 2,497 | |||||||||||||||||||
Total liabilities | $ | 0 | $ | 0 | $ | 39,352 | $ | 39,352 |
Liabilities
June 30, 2021 | December 31, 2020 | |||||||||||||
Input | ||||||||||||||
Remaining term (years) | 6 | 6.50 | ||||||||||||
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 | 8.65 | % | (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) |
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Represents |
Common Stock Derivative Option Liability
The common stock option liability was measured using a Monte Carlo simulation model to simulate the future changes in the Company’s common stock price from the issuance date of the option agreement through the termination date of the option agreement. The 45-day volume weighted average price (“VWAP”) (see Note 10 Long Term Debt) is calculated for each simulation trial to determine the effective exercise price and number of common shares to be issued. The model assumes the holder will only exercise the option if the common stock is in the money on the exercise date. The value of the option is then determined based on the number of shares to be issued and the stock price on the date that the option is exercised. This option value is then discounted back to present value. The calculated present value of the option is then estimated using the average of 100,000 trials of the simulation model.
significant unobservable input
| | | | |
| | September 30, 2020 | | |
Input | | | | |
Option term | | | 6.75 years | |
Company stock price | | $ | 11.63 | |
Risk free rate | | | 0.45% | |
Equity volatility | | | 60% | (1) |
Simulation trials | | | 100,000 | |
11
June 30, 2021 | ||||||||
Input | ||||||||
Remaining term (years) | 7 | |||||||
Maturity date | June 30, 2028 | |||||||
Coupon rate | 9.50 | % | ||||||
Revenue participation payments | Maximum each year | |||||||
Discount rate | 11.21 | % | (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) |
The following table represents the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2020:
| | | | | | | | | | | | |
| | (Level 1) | | (Level 2) | | (Level 3) | | Total | ||||
September 30, 2020 | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | |
Money market funds | | $ | 39,112 | | $ | — | | $ | — | | $ | 39,112 |
U.S. government securities | | | 4,520 | | | — | | | — | | | 4,520 |
Corporate bonds | | | — | | | 6,441 | | | — | | | 6,441 |
Commercial paper | | | — | | | 28,165 | | | — | | | 28,165 |
Asset-backed securities | | | — | | | — | | | — | | | — |
Total assets | | $ | 43,632 | | $ | 34,606 | | $ | — | | $ | 78,238 |
| | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | |
Debt derivative liability | | $ | — | | $ | — | | $ | 2,450 | | $ | 2,450 |
Common stock derivative option liability | | | — | | | — | | | 183 | | | 183 |
Total liabilities | | $ | — | | $ | — | | $ | 2,633 | | $ | 2,633 |
| | | | | | | | | | | | |
| | (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 |
There were no changes in the levels or methodology of the measurement of financial assets or liabilities during the three and ninesix months ended SeptemberJune 30, 2020.2021. The maturity datedates of the Company’s investments isare less than one year.
| | | |
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Quarter Ending September 30, 2020 | | | |
Beginning Balance, July 1, 2020 | | $ | 2,562 |
Change in fair value of option derivative | | | 11 |
Change in fair value of debt derivative | | | 60 |
Ending Balance, September 30, 2020 | | $ | 2,633 |
| | | |
Year Ending December 31, 2020 | | | |
Beginning Balance | | $ | — |
Option to purchase shares | | | 183 |
Fair Value of Derivative Feature | | | 2,450 |
Ending Balance, September 30, 2020 | | $ | 2,633 |
12
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Beginning Balance, April 1, 2021 | $ | 39,205 | |||
Addition of Oberland Facility - second tranche | 13,827 | ||||
Addition of debt derivative - second tranche | 1,173 | ||||
Change in fair value of Oberland Facility | 150 | ||||
Change in fair value of debt derivative | 84 | ||||
Ending Balance, June 30, 2021 | $ | 54,439 | |||
Six Months Ending June 30, 2021 | |||||
Beginning Balance, January 1, 2021 | $ | 39,352 | |||
Addition of Oberland Facility - second tranche | 13,827 | ||||
Addition of debt derivative - second tranche | 1,173 | ||||
Change in fair value of Oberland Facility | (18) | ||||
Change in fair value of debt derivative | 105 | ||||
Ending Balance, June 30, 2021 | $ | 54,439 |
June 30, 2021 | December 31, 2020 | ||||||||||
Prepaid insurance | $ | 1,389 | $ | 2,596 | |||||||
Stock option receivable | 421 | 2 | |||||||||
Litigation receivable | 23 | 23 | |||||||||
Prepaid events | 318 | 203 | |||||||||
Prepaid marketing | 270 | 587 | |||||||||
Prepaid software license | 312 | 220 | |||||||||
Prepaid professional fees | 380 | 251 | |||||||||
Other prepaid items | 835 | 414 | |||||||||
Prepaid and Other Assets | $ | 3,948 | $ | 4,296 |
| | | | | | | |
|
| September 30, |
| December 31, |
| ||
| | 2020 | | 2019 | | ||
| | | | | | | |
Prepaid insurance | | $ | 539 | | $ | — | |
Stock option receivable | | | — | | | 244 | |
Litigation receivable | | | 23 | | | 98 | |
Prepaid events | | | 493 | | | 110 | |
Prepaid marketing | | | 480 | | | 227 | |
Prepaid software license | | | 135 | | | 207 | |
Prepaid professional fees | | | 529 | | | 433 | |
Other Prepaid items | | | 352 | | | 387 | |
Prepaid and Other Assets | | $ | 2,551 | | $ | 1,706 | |
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Property and Equipment
June 30, 2021 | December 31, 2020 | ||||||||||
Furniture and equipment | $ | 4,166 | $ | 2,334 | |||||||
Leasehold improvements | 14,469 | 12,983 | |||||||||
Processing equipment | 3,580 | 2,634 | |||||||||
Land | 731 | 731 | |||||||||
Projects in process | 34,236 | 24,540 | |||||||||
Property and equipment, at cost | 57,182 | 43,223 | |||||||||
Less: accumulated depreciation and amortization | (6,230) | (4,825) | |||||||||
Property and equipment, net | $ | 50,952 | $ | 38,398 |
| | | | | | | |
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| September 30, |
| December 31, |
| ||
| | 2020 | | 2019 | | ||
| | | | | | | |
Furniture and equipment | | $ | 2,236 | | $ | 2,059 | |
Leasehold improvements | |
| 12,223 | |
| 2,203 | |
Processing equipment | |
| 2,887 | |
| 2,772 | |
Land | | | 731 | | | 731 | |
Projects in process | | | 22,790 | | | 10,886 | |
Property and equipment, at cost | | | 40,867 | | | 18,651 | |
Less: accumulated depreciation and amortization | |
| (4,757) | |
| (3,764) | |
Property and equipment, net | | $ | 36,110 | | $ | 14,887 | |
13
of SeptemberJune 30, 2020, $1,6072021, $83 remained in the Escrow Account and is recorded as restricted cash in the condensed consolidated balance sheet.
.
June 30, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||||||||||||
Amortized intangible assets | |||||||||||||||||||||||||||||||||||
Patents | $ | 1,987 | $ | (180) | $ | 1,807 | $ | 1,496 | $ | (139) | $ | 1,357 | |||||||||||||||||||||||
License agreements | 1,101 | (800) | 301 | 1,093 | (745) | 348 | |||||||||||||||||||||||||||||
Total amortizable intangible assets | $ | 3,088 | $ | (980) | $ | 2,108 | $ | 2,589 | $ | (884) | $ | 1,705 | |||||||||||||||||||||||
Unamortized intangible assets | |||||||||||||||||||||||||||||||||||
Trademarks | $ | 352 | $ | — | $ | 352 | $ | 349 | $ | — | $ | 349 | |||||||||||||||||||||||
Total intangible asset, net | $ | 3,440 | $ | (980) | $ | 2,460 | $ | 2,938 | $ | (884) | $ | 2,054 |
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| September 30, 2020 |
| December 31, 2019 |
| ||||||||||||||
| | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | ||||||
Amortized intangible assets | | | | | | | | | | | | | | | | | | ||
Patents | | $ | 1,201 | | $ | (122) | | $ | 1,079 | | $ | 845 | | $ | (84) | | $ | 761 | |
License agreements | | | 1,089 | | | (720) | | | 369 | | | 1,067 | | | (647) | | | 420 | |
Total amortizable intangible assets | | $ | 2,290 | | $ | (842) | | $ | 1,448 | | $ | 1,912 | | $ | (731) | | $ | 1,181 | |
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Unamortized intangible assets | | | | | | | | | | | | | | | | | | | |
Trademarks | | $ | 349 | | $ | — | | $ | 369 | | $ | 334 | | $ | — | | $ | 334 | |
Total intangible asset, net | | $ | 2,639 | | $ | (842) | | $ | 1,797 | | $ | 2,246 | | $ | (731) | | $ | 1,515 | |
Year Ending December 31, | |||||
2021 (excluding the six months ended June 30, 2021) | $ | 104 | |||
2022 | 208 | ||||
2023 | 183 | ||||
2024 | 106 | ||||
2025 | 106 | ||||
Thereafter | 1,401 | ||||
Total | $ | 2,108 |
| | |
Year Ending December 31, | | |
2020 (excluding nine months ended September 30, 2020) | $ | 40 |
2021 | | 160 |
2022 | | 160 |
2023 | | 151 |
2024 | | 67 |
Thereafter | | 870 |
TOTAL | $ | 1,448 |
License Agreements
14
•
Currently, under the University of Texas at Austin’s agreement, the Company would owe a milestone fee of $15 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.
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Accounts Payable and Accrued Expenses
| | | | | | | |
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| September 30, |
| December 31, |
| ||
| | 2020 | | 2019 | | ||
| | | | | | | |
Accounts payable | | $ | 3,507 | | $ | 8,262 | |
Accrued expenses | | | 3,091 | | | 3,237 | |
Accrued compensation | | | 9,681 | |
| 7,631 | |
Accounts Payable and Accrued Expenses | | $ | 16,279 | | $ | 19,130 | |
June 30, 2021 | December 31, 2020 | ||||||||||
Accounts payable | $ | 6,721 | $ | 4,597 | |||||||
Accrued expenses | 5,480 | 3,778 | |||||||||
Accrued compensation | 7,638 | 13,593 | |||||||||
Accounts Payable and Accrued Expenses | $ | 19,839 | $ | 21,968 |
10. Long TermLong-Term Debt
June 30, 2021 | December 31, 2020 | |||||||||||||
Oberland Facility - first tranche | $ | 35,000 | $ | 35,000 | ||||||||||
Oberland Facility - second tranche | 15,000 | 0 | ||||||||||||
Less - unamortized debt discount and deferred financing fees | (3,919) | (2,973) | ||||||||||||
Total long-term debt | $ | 46,081 | $ | 32,027 |
On June 30, 2021, the second tranche of $15,000 was drawn down by the Company. The second tranche of the Oberland Facility matures on June 30, 2028.
15
Company2021 paid $858 of interest$840 and $1,672, respectively, to Oberland for this debt facility.Capital. The Company capitalized approximately $489$1,187 of the interest towards the costs to construct and retrofit its Axogen Processing Center in Vandalia, OH (See Note 13 - Commitments and Contingency)Contingencies). The capitalized interest is recorded as part of property and equipment in the condensed consolidated balance sheet.
all covenants.
Accounting Considerations
16
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 Oberland Option as $176 as of the date of issuance of the Oberland Facility (see Note 5 Fair Value Considerations) and recorded this value as a deduction to the carrying value of the Oberland Facility. As of September 30, 2020, the carrying amounta result of the long-term debt reported insecond tranche draw, the consolidated balance sheet approximates fair value using Level 2 inputs inCompany recorded an additional derivative and estimated the fair value hierarchy. Fair values are generally estimated based on quoted market pricesto be $1,173.
The following represents the componentsan irrevocable standby letter of the net carrying value of the Oberland Facility at September 30, 2020:
| | | | | | | | | | | | |
| | | September 30, | |||||||||
| | | 2020 | |||||||||
| | | Principal Balance | | | Debt Discount | | | Debt Issuance Costs, Net | | | Long-term Debt, Net |
| | | | | | | | | | | | |
Oberland facility | | $ | 35,000 | | $ | (2,563) | | | (620) | | | 31,817 |
Other Long-Term Debt
On April 23, 2020,credit. In March 2021, the Company received a Small Business Administration (“SBA”) loan under the Paycheck Protection Program (“PPP”)entered in an agreement which required an additional irrevocable standby letter of credit in the amount of $7,820. $250.
|
|
Equity Incentive Plans
The options granted to employees prior to July 1, 2017 typically vest 25% one1 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. The options granted to directors and certain options
17
granted from time to time to certain executive officers have vested ratably over three years, 25% per quarter over one year or had no vesting period. Options typically have terms ranging from seven to ten years.
Performance stock units 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. Restricted stock units have a requisite service period of four years. The Company expenses the fair value of restricted stock awards on a straight-line basis over the requisite service period.
In February 2020, the Company issued PSUs relating to a 2017 grant with performance metrics tied to 2019 revenue. The award was issued at 72.3% of achievement and therefore, 27.7% of the stock compensation, or $536 relating to this grant was forfeited or reversed in the first quarter 2020. In addition, as a result of COVID-19 and the expected decline in revenue for 2020, it was determined that the 2018 PSU grant with performance metrics tied to 2020 revenue would not be awarded and therefore stock compensation related to these grants of $1,161 was forfeited. In June 2020, the Company concluded that the performance metrics relating to the 2020 PSU grant with performance metrics tied to 2021 revenue were no longer probable and therefore stock compensation related to these grants of $340 was also forfeited.
The New Axogen Plan allows an immediate share repurchase feature for tax withholding. The Company has a statutory obligation to withhold taxes on the employee’s behalf and the tax withholding is limited to the maximum statutory tax rates in the employees’ applicable jurisdictions. In the nine months ended September 30, 2020, employees surrendered 38,086 shares of RSU and PSU to the Company. As a result, the Company paid $665 of tax withholdings for the employees.
The Company also maintains the Axogen 2017 Employee Stock Purchase Plan (the “2017 ESPP”), which allows eligible employees to acquire shares of the Company’s common stock through payroll deductions at a discount to market price. A total of 600,000 shares of the Company’s common stock are authorized for issuance under the 2017 ESPP, and, as of September 30, 2020, 373,066 shares remained available for issuance. In June 2020, the employees purchased 77,239 shares at $7.85 through the 2017 ESPP plan.
The Company recognized stock-based compensation expense, which consisted 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, as well as the adjustment mention above, of approximately $2,947 and $2,395 for the three months ended September 30, 2020 and 2019, respectively and approximately $5,725 and $7,384 for the nine months ended September 30, 2020 and 2019, respectively.
| | | | | | | | |
| | | ||||||
| | Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life | | Aggregate Intrinsic Value (in thousands) |
Outstanding, December 31, 2019 | | 3,420,181 | | $ 12.69 | | 5.7 | | $ 26,074 |
| | | | | | | | |
Granted | | 647,090 | | $ 9.19 | | | | |
Exercised | | (326,622) | | $ 5.22 | | | | |
Cancelled | | (103,586) | | $ 20.18 | | | | |
| | | | | | | | |
Outstanding, September 30, 2020 | | 3,637,063 | | $ 12.52 | | 5.93 | | $ 10,901 |
Exercisable, September 30, 2020 | | 2,127,093 | | $ 9.78 | | | | $ 9,125 |
18
Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | Aggregate Intrinsic Value (in thousands) | ||||||||||||||||||||
Outstanding, December 31, 2020 | 3,516,484 | $12.79 | 5.93 | $ | 25,718 | ||||||||||||||||||
Granted | 556,160 | $20.23 | |||||||||||||||||||||
Exercised | (545,912) | $5.86 | |||||||||||||||||||||
Cancelled | (126,171) | $16.81 | |||||||||||||||||||||
Outstanding, June 30, 2021 | 3,400,561 | $14.97 | 6.59 | $ | 27,868 | ||||||||||||||||||
Exercisable, June 30, 2021 | 1,978,225 | $13.57 | 4.97 | $ | 19,749 |
The Company used the following weighted-average assumptions for options granted during the periods indicated:
June 30, 2021 | ||||||||||||||
Expected term (in years) | 5.93 | |||||||||||||
Expected volatility | 58.91 | % | ||||||||||||
Risk free rate | 1.03 | % | ||||||||||||
Expected dividends | 0 | % |
| | | | | |
Nine months ended September 30, |
| 2020 | | 2019 |
|
| | | |||
Expected term (in years) |
| 5.69 | | 5.76 | |
Expected volatility |
| 59.25 | % | 56.03 | % |
Risk free rate |
| 0.35 | % | 1.54 | % |
Expected dividends |
| — | % | — | % |
Outstanding Stock Units | |||||||||||||||||||||||
Stock Units | Weighted-Average Fair Value at Date of Grant per Share | Weighted Average Remaining Vesting Life | Aggregate Intrinsic Value (in thousands) | ||||||||||||||||||||
Unvested December 31, 2020 | 1,782,905 | $ | 15.23 | 1.83 | $ | 31,825 | |||||||||||||||||
Granted | 810,316 | $ | 20.68 | ||||||||||||||||||||
Released | (139,145) | $ | 17.81 | ||||||||||||||||||||
Forfeited | (181,673) | $ | 16.33 | ||||||||||||||||||||
Unvested June 30, 2021 | 2,272,403 | $ | 16.92 | 1.87 | $ | 49,107 |
| | | | | | | | |
| | Outstanding Stock Units | ||||||
| | Stock Units | | Weighted-Average Fair Value at Date of Grant per Share | | Weighted Average Remaining Vesting Life | | Aggregate Intrinsic Value (in thousands) |
Unvested December 31, 2019 | | 1,113,696 | | $ 21.62 | | 2.26 | | $ 19,800 |
| | | | | | | | |
Granted | | 995,940 | | $ 9.52 | | | | |
Released | | (168,311) | | $ 18.80 | | | | |
Forfeited | | (81,555) | | $ 18.91 | | | | |
| | | | | | | | |
Unvested September 30, 2020 | | 1,859,770 | | $ 15.51 | | 2.45 | | $ 21,572 |
Vested and Expected to Vest | | 1,859,770 | | $ 15.51 | | | | |
$7,721.
12. Income Taxes
19
13.
13. Commitments and Contingencies
Leases
20
The components of total lease expense for the three and ninesix months ended SeptemberJune 30, 20202021 were as follows:
| | | | | | |
| | | 2020 | | | 2019 |
For the Three months Ended September 30, | | | | | | |
Finance lease costs | | | | | | |
Amortization of right-to-use assets | | $ | 6 | | $ | 6 |
Interest on lease liabilities | |
| 1 | |
| 1 |
Operating lease costs | | | 707 | | | 483 |
Short term lease costs | | | 43 | | | 12 |
Variable lease costs | | | 4 | | | 1 |
Total lease cost | | $ | 761 | | $ | 501 |
| | | | | | |
For the Nine Months Ended September 30, | | | | | | |
Finance lease costs | | | | | | |
Amortization of right-to-use assets | | $ | 17 | | $ | 16 |
Interest on lease liabilities | |
| 2 | |
| 3 |
Operating lease costs | | | 1,683 | | | 1,447 |
Short term lease costs | | | 104 | | | 28 |
Variable lease costs | | | 14 | | | 16 |
Total lease cost | | $ | 1,820 | | $ | 1,510 |
2021 | 2020 | ||||||||||
For the Three Months Ended June 30, | |||||||||||
Finance lease costs | |||||||||||
Amortization of right-of-use assets | $ | 2 | $ | 6 | |||||||
Interest on lease liabilities | 0 | 1 | |||||||||
Operating lease costs | 1,034 | 491 | |||||||||
Short term lease costs | 6 | 10 | |||||||||
Variable lease costs | 169 | 51 | |||||||||
Total lease cost | $ | 1,211 | $ | 559 | |||||||
For the Six Months Ended June 30, | |||||||||||
Finance lease costs | |||||||||||
Amortization of right-to-use assets | $ | 8 | $ | 11 | |||||||
Interest on lease liabilities | 0 | 2 | |||||||||
Operating lease costs | 2,081 | 976 | |||||||||
Short term lease costs | 11 | 10 | |||||||||
Variable lease costs | 337 | 61 | |||||||||
Total lease cost | $ | 2,437 | $ | 1,060 |
The increase in variable lease costs is due to the common area maintenance expenses associated with the Tampa office space.
Supplemental balance sheet information related to leases as of SeptemberJune 30, 20202021 and December 31, 20192020 was as follows:
| | | | | | |
| | | September 30, 2020 | | | December 31, 2019 |
Finance Leases | | | | | | |
Finance lease right-of-use assets | | $ | 70 | | $ | 87 |
Current maturities of long-term obligations | | $ | 18 | | $ | 17 |
Long term obligations | | $ | 17 | | $ | 30 |
Operating Leases | | | | | | |
Operating lease right-of-use assets | | $ | 15,987 | | $ | 3,133 |
Current maturities of long-term obligations | | $ | 2,481 | | $ | 1,719 |
Long term obligations | | $ | 18,959 | | $ | 1,565 |
| | | | | | |
June 30, 2021 | December 31, 2020 | ||||||||||
Finance Leases | |||||||||||
Finance lease right-of-use assets | $ | 53 | $ | 64 | |||||||
Current maturities of long-term obligations | $ | 14 | $ | 17 | |||||||
Long-term obligations | $ | 8 | $ | 13 | |||||||
Operating Leases | |||||||||||
Operating lease right-of-use assets | $ | 15,272 | $ | 15,614 | |||||||
Current maturities of long-term obligations | $ | 1,775 | $ | 846 | |||||||
Long-term obligations | $ | 20,337 | $ | 20,864 |
For the Six Months Ended June 30, | 2021 | 2020 | |||||||||
Cash paid for amounts included in the measurement of operating lease liabilities | $ | 822 | $ | 915 | |||||||
Right-of-use assets obtained in exchange for new finance lease liabilities | $ | 371 | $ | 0 | |||||||
Weighted-average remaining lease term - finance leases | 1.8 | 2.5 | |||||||||
Weighted-average remaining lease term - operating leases | 12.0 | 1.1 | |||||||||
Weighted-average discount rate - finance leases | 7.28 | % | 7.28 | % | |||||||
Weighted-average discount rate - operating leases | 10.17 | % | 6.00 | % |
| | | | | | |
For the Nine Months Ended September 30, | | | 2020 | | | 2019 |
Cash paid for amounts included in the measurement of operating lease liabilities | | $ | 1,399 | | $ | 1,314 |
Right-to-use assets obtained in exchange for new finance lease liabilities | | $ | 16 | | $ | 16 |
Weighted-average remaining lease term - finance leases | | | 2.3 | | | 3.2 |
Weighted-average remaining lease term - operating leases | | | 12.4 | | | 2.1 |
Weighted-average discount rate - finance leases | | | 7.28% | | | 7.28% |
Weighted-average discount rate - operating leases | | | 10.07% | | | 6.28% |
21
Future minimum lease payments under non-cancellable leases as of September 30, 2020 were as follows:
| | | | | | |
|
| Operating |
| Finance | ||
Year Ending December 31, | | Leases | | Leases | ||
2020 (excluding nine months ended September 30, 2020) | | $ | 493 | | $ | 5 |
2021 | | | 3,212 | | | 19 |
2022 | | | 3,530 | | | 10 |
2023 | | | 2,545 | | | 3 |
2024 | | | 2,606 | | | 1 |
2025 | | | 2,671 | | | — |
Thereafter | | | 26,126 | | | — |
Total Future Minimum Lease Payments | | $ | 41,183 | | $ | 38 |
Less imputed interest on commenced leases | | | (19,743) | | | (3) |
Total Lease Liability | | $ | 21,440 | | $ | 35 |
Service Agreements
22
upon 90 days written notice.2027. Under the Supply Agreement the Company provides purchase orders to Cook Biotech, and Cook Biotech fulfills the purchase orders.
provision.
Axogen
23
Litigation
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'sCompany'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.
Einhorn v. Axogen, Inc., et al., No. 8:19-cv-00069 (M.D. Fla.) (the “Einhorn Litigation”) (the “Court”).
Michael Bach
On October 3, 2019, the Company received a shareholder demand sent on behalf of shareholder Michael Bach requesting Plaintiff asserts that the BoardIndividual Defendants, who are current or former Axogen officers or directors, issued a false proxy statement for the election of Directors take action to remedy alleged breachesdirectors in violation of Section 14(a) of the Securities Exchange Act of 1934, breached their fiduciary duties, relatedwasted 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 (substantially the(the same allegations that form the basis for the Einhorn matters referenced above)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.
24
intendprovision to take anypermit 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 action. 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.
14. Retirement Plan
25
Cautionary Statement Regarding the Impact of the COVID-19 Pandemic
Coronavirus Disease 2019 (“COVID-19”) has had a significant adverse impact upon many sectors of the economy and the Company. With respect to the medical industry in particular, the pandemic initially has caused hospitals and clinics to: 1) reallocate their medical teams and resources to prepare for, and treat, increased COVID-19 patients; 2) defer or limit elective and non-emergency procedures; 3) restrict hospital access to non-essential personnel, including sales and clinical representatives not directly required for a specific procedure; and 4) temporarily discontinued clinical research not related to COVID-19. Accordingly, the Company advised all field-based teams to enter hospitals or clinics only at the request of a surgeon or hospital staff member (which mandate has since been lifted) and to complete all tasks occurring in hospitals or clinics in a manner that minimized human interaction (which mandate has since been lifted) and maintain social distancing.
In response to the COVID-19 pandemic, 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. At the same time, we adapted to this new environment to continue to support our customers and their patients. To achieve these objectives, we took the following specific steps at the onset of the pandemic which we continue to adapt as conditions require:
Although the Company’s sales team continued to support customers and their patients, the foregoing actions taken by the Company, governmental authorities (which, among other things, we believe led to a decline in the incidence of traumatic injuries as individuals’ day-to-day activities were restricted) and within the medical industry, as well as other effects of the pandemic, have had, and were expected to continue to have, a negative impact on the Company’s financial results. Accordingly, the Company took certain actions to preserve financial flexibility and partially mitigate the significant impact of COVID-19:
26
In May of 2020, the Company’s sales team began re-entering health care facilities, following local, regional and national guidelines and using contact tracing. The Company’s access to healthcare facilities has improved, although restrictions remain and supporting customers remotely continues to be an important learned capability. Beginning in May 2020, the Company experienced short-term regional surges in nerve repair cases as hospitals began to lift restrictions and many deferred procedures were completed. During the third quarter, surgeons and hospitals continued to prioritize nerve repair procedures as elective surgical procedures volumes returned and we did receive some benefit during the third quarter from a catch-up of previously deferred procedures. We are carefully monitoring the regional impact of COVID-19 resurgence and believe that such resurgences may continue to negatively impact both the incidence of traumatic injury, and surgical procedure volumes in certain geographies.
COVID-19 has impacted our clinical study programs and the Company has implemented strategies to help manage these disruptions across several of its studies. The Company has increased its efforts to support completion of subject follow-up visits during the COVID-19 crisis by implementing an expanded home health visit program. This allows follow-up visits to be conducted by a trained healthcare professional outside of the clinic environment and with the appropriate safety precautions.
As the Company began to experience some recovery from COVID-19, some of our cost mitigation initiatives were lifted such as the restoration of pay levels, which were lifted for most employees in August 2020, and for executive member and board members in late October. The Company began to gradually restart its tissue processing in June and has continued to increase capacity through the third quarter. We expect to be back at full capacity in the fourth quarter. Tissue recovery was also restarted in the third quarter and is ramping to full capacity. The Company has also begun to slowly ramp investment into projects that were previously on hold, including certain clinical trials, product development, and marketing and administrative initiatives, as well as preparation to restart construction of the biologics processing center in Vandelia, Ohio. While the Company expects the path and pace of recovery to be uncertain, the cost mitigation initiatives and deferrals have improved the Company’s cash burn.
OVERVIEW
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 helping to restore peripheral nerve function and quality of life to patients with physical damage or transection to peripheral nerves 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. 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’sOur 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 submucosa extracellular
27
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, and 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.neuroma. Along with these core surgical products, we also offer the Axotouch® Two-Point Discriminator, used to measure the innervation density of any surface area of the skin. Our portfolio of products is available in the United States, Canada, the United Kingdom, several European countries, South Korea and other international countries.
As such,our business continues to grow, we will transition to reporting a new account metric that we believe demonstrates the strength of adoption and potential revenue growth primarily occursin accounts that have developed a more consistent use of Axogen products in their nerve repair algorithm. We refer to these as “Core Accounts” which we define as accounts that have purchased at least $100,000 in the past 12 months. In the second quarter, we had 306 Core Accounts, an increase of 34% from increased purchasing from active accounts, followed by227 one year ago. These Core Accounts represented approximately 60% of our revenue growth from new accounts. Late last year we rebalanced our commercial organization toward our largest market opportunity, extremity trauma, and refocused our team on driving deeper penetration with our existing surgeon customers. During COVID-19 pandemic, we kept our sales team and broader commercial organization intact and tookin the opportunity to provide extensive sales training. Our sales team developed skills and shared best practices around remote case support where hospital accessquarter, which has been restricted. We believe this remote support has been appreciated by customers and has expanded our sales team’s ability to support surgeons and their patients during COVID-19 and beyond.
remained consistent over the past two years.
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.
28
Results of Operations
Three Months Ended June 30, | |||||||||||||||||||||||
2021 | 2020 | ||||||||||||||||||||||
Amount | % of Revenue | Amount | % of Revenue | ||||||||||||||||||||
(dollars in thousands) | |||||||||||||||||||||||
Revenues | $ | 33,580 | 100.0 | % | $ | 22,116 | 100.0 | % | |||||||||||||||
Cost of goods sold | 7,092 | 21.1 | 5,605 | 25.3 | |||||||||||||||||||
Gross Profit | 26,488 | 78.9 | 16,511 | 74.7 | |||||||||||||||||||
Cost and expenses | |||||||||||||||||||||||
Sales and marketing | 19,250 | 57.3 | 14,290 | 64.6 | |||||||||||||||||||
Research and development | 5,723 | 17.0 | 4,071 | 18.4 | |||||||||||||||||||
General and administrative | 8,669 | 25.8 | 6,404 | 29.0 | |||||||||||||||||||
Total costs and expenses | 33,642 | 100.2 | 24,765 | 112.0 | |||||||||||||||||||
Loss from operations | (7,154) | (21.3) | (8,254) | (37.3) | |||||||||||||||||||
Other (expense) income: | |||||||||||||||||||||||
Investment income | 29 | 0.1 | 237 | 1.1 | |||||||||||||||||||
Interest expense | (565) | (1.7) | (31) | (0.1) | |||||||||||||||||||
Change in fair value of derivatives | (84) | (0.3) | — | 0.0 | |||||||||||||||||||
Other expense | (124) | (0.4) | (57) | (0.3) | |||||||||||||||||||
Total other (expense) income, net | (744) | (2.2) | 149 | 0.7 | |||||||||||||||||||
Net Loss | $ | (7,898) | (23.5) | % | $ | (8,105) | (36.6) | % |
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, | ||||||||||||
| | 2020 | | 2019 | ||||||||||
| | | | | % of | | | | | % of | ||||
| | Amount | | Revenue | | Amount | | Revenue | ||||||
| | (dollars in thousands) | | |||||||||||
Revenues | | $ | 33,428 | | | 100.0 | % | | $ | 28,564 | | | 100.0 | % |
Cost of goods sold | | | 5,697 | | | 17.0 | | | | 4,510 | | | 15.8 | |
Gross Profit | | | 27,731 | | | 83.0 | | | | 24,054 | | | 84.2 | |
Cost and expenses | | | | | | | | | | | | | | |
Sales and marketing | | | 17,726 | | | 53.0 | | | | 18,245 | | | 63.9 | |
Research and development | | | 4,230 | | | 12.7 | | | | 4,181 | | | 14.6 | |
General and administrative | | | 6,820 | | | 20.4 | | | | 7,740 | | | 27.1 | |
Total costs and expenses | | | 28,776 | | | 86.1 | | | | 30,166 | | | 105.6 | |
Loss from operations | | | (1,045) | | | (3.1) | | | | (6,112) | | | (21.4) | |
Other income (expense): | | | | | | | | | | | | | | |
Investment income | | | 28 | | | 0.1 | | | | 555 | | | 1.9 | |
Interest expense | | | (397) | | | (1.2) | | | | (7) | | | (0.0) | |
Other expense | | | (65) | | | (0.2) | | | | (7) | | | (0.0) | |
Total other income (expense), net | | | (434) | | | (1.3) | | | | 541 | | | 1.9 | |
Net Loss | | $ | (1,479) | | | (4.4) | % | | $ | (5,571) | | | (19.5) | % |
2020.
production and an increased provision for inventory write-down as a result of COVID-19.
2020.
29
participation. These expenses were slightly offset by increases in revenue related expenses such as commissions.hospitals begin to lift COVID-19 restrictions. As a percentage of total revenues, sales and marketing expenses decreased to 53%57% for the three months ended SeptemberJune 30, 20202021 as compared to 64%65% for the three months ended SeptemberJune 30, 2019.
2020.
General and administrative expenses decreased 12% to $6,820 for the three months ended September 30, 2020, as compared to $7,740 for the three months ended September 30, 2019,2020. The increase was primarily due to reductions in professional fees,increased compensation, including lower litigation fees as discussed above, travel expensesstock compensation and recruiting fees, offset by variable compensation as a result of increased revenue.rent and utilities from our new Tampa facility. As a percentage of total revenues, general and administrative expenses decreased to 20%26% for the three months ended SeptemberJune 30, 20202021, as compared to 27%29% for the three months ended SeptemberJune 30, 2019.
2020.
30
Comparison of the NineSix Months Ended SeptemberJune 30, 20202021 and 2019
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | ||||||||||||
| | 2020 | | 2019 | ||||||||||
| | | | | % of | | | | | % of | ||||
| | Amount | | Revenue | | Amount | | Revenue | ||||||
| | (dollars in thousands) | | |||||||||||
Revenues | | $ | 79,805 | | | 100.0 | % | | $ | 78,550 | | | 100.0 | % |
Cost of goods sold | | | 16,118 | | | 20.2 | | | | 12,468 | | | 15.9 | |
Gross Profit | | | 63,687 | | | 79.8 | | | | 66,082 | | | 84.1 | |
Cost and expenses | | | | | | | | | | | | | | |
Sales and marketing | | | 49,854 | | | 62.5 | | | | 53,146 | | | 67.7 | |
Research and development | | | 12,915 | | | 16.2 | | | | 12,602 | | | 16.0 | |
General and administrative | | | 18,726 | | | 23.5 | | | | 24,321 | | | 31.0 | |
Total costs and expenses | | | 81,495 | | | 102.1 | | | | 90,069 | | | 114.7 | |
Loss from operations | | | (17,808) | | | (22.3) | | | | (23,987) | | | (30.5) | |
Other income (expense): | | | | | | | | | | | | | | |
Investment income | | | 576 | | | 0.7 | | | | 1,925 | | | 2.5 | |
Interest expense | | | (459) | | | (0.6) | | | | (32) | | | (0.0) | |
Other expense | | | (85) | | | (0.1) | | | | (3) | | | (0.0) | |
Total other income, net | | | 32 | | | 0.0 | | | | 1,890 | | | 2.4 | |
Net Loss | | $ | (17,776) | | | (22.3) | % | | $ | (22,097) | | | (28.1) | % |
2020
Six Months Ended June 30, | |||||||||||||||||||||||
2021 | 2020 | ||||||||||||||||||||||
Amount | % of Revenue | Amount | % of Revenue | ||||||||||||||||||||
(dollars in thousands) | |||||||||||||||||||||||
Revenues | $ | 64,617 | 100.0 | % | $ | 46,377 | 100.0 | % | |||||||||||||||
Cost of goods sold | 12,264 | 19.0 | 10,421 | 22.5 | |||||||||||||||||||
Gross Profit | 52,353 | 81.0 | 35,956 | 77.5 | |||||||||||||||||||
Cost and expenses | |||||||||||||||||||||||
Sales and marketing | 37,224 | 57.6 | 32,128 | 69.3 | |||||||||||||||||||
Research and development | 11,485 | 17.8 | 8,685 | 18.7 | |||||||||||||||||||
General and administrative | 17,018 | 26.3 | 11,906 | 25.7 | |||||||||||||||||||
Total costs and expenses | 65,727 | 101.7 | 52,719 | 113.7 | |||||||||||||||||||
Loss from operations | (13,374) | (20.7) | (16,763) | (36.2) | |||||||||||||||||||
Other (expense) income: | |||||||||||||||||||||||
Investment income | 63 | 0.1 | 548 | 1.2 | |||||||||||||||||||
Interest expense | (1,010) | (1.6) | (62) | (0.1) | |||||||||||||||||||
Change in fair value of derivatives | (82) | (0.1) | 0.0 | 0.0 | |||||||||||||||||||
Other expense | (155) | (0.2) | (20) | 0.0 | |||||||||||||||||||
Total other (expense) income, net | (1,184) | (1.8) | 466 | 1.0 | |||||||||||||||||||
Net Loss | $ | (14,558) | (22.5) | % | $ | (16,297) | (35.1) | % |
As described above, certain hospitals and surgery centers, after discontinuing elective surgeries due to COVID-19, began performing such surgeries again and starting2020. Revenue growth was driven by an increase in May allowed our sales representatives to begin entering their facilities once again in May. As a result, we began to experience a surge in revenue as these facilities began scheduling surgeries. Although the Company has begun to see a recovery, its unit volume decreased by 2% in the nine months ended September 30, 2020of approximately 31%, as compared to the prior year period. This decrease was slightly offset bywell as the net impact of price increases and changes in prices and product mix of 4%approximately 8%.
The unit volume increase was attributed to growth in our core and active accounts, and also reflects the initial negative impact of the COVID-19 pandemic, which began to negatively impact procedure volumes and revenue in March of 2020.
COVID-19 pandemic.
31
Sales and marketing expenses decreased 6%increased 16% to $49,854$37,224 for the ninesix months ended SeptemberJune 30, 2020,2021, as compared to $53,146$32,128 for the ninesix months ended SeptemberJune 30, 2019.2020. This decreaseincrease was driven by the reductionprimarily due to higher compensation related expenses including sales commissions, increased spend in marketing development programs as well as increased expenses for our surgeon education as we have cancelled in-person education programs and travel as a result of travel restrictions and our cancelled in-person education programs. Increases to salaries and benefits from increased commissions relating to the increased revenue and severancenew Tampa facility.These increases were slightly offset these decreases. The majority of these decreases were the result of the impact COVID-19 has had on the Company’s business.by decreased spend in travel and symposium expense due to pandemic-related restrictions. As a percentage of total revenues, sales and marketing expenses decreased to 63%58% for the ninesix months ended SeptemberJune 30, 20202021 as compared to 68%69% for the ninesix months ended SeptemberJune 30, 2019.
2020.
2021 from 19% for the same period in the previous fiscal year.
2021, and 2020.
For
reserves.
Effect of Inflation
Inflation did not have a significant impact on the Company’s net sales, revenues or income from continuing operations during the three months ended September 30, 2020 and 2019.
32
Liquidity and Capital Resources
The Companycash in operating activities.
The Company’s
revenue.
The Company’s principal sources and uses of funds are explained below:
Six Months Ended June 30, | ||||||||||||||
2021 | 2020 | |||||||||||||
Net cash (used in) provided by: | ||||||||||||||
Operating activities | $ | (11,515) | $ | (15,081) | ||||||||||
Investing activities | (3,287) | 23,519 | ||||||||||||
Financing activities | 18,604 | 35,768 | ||||||||||||
Net increase (decrease) in cash and cash equivalents | $ | 3,802 | $ | 44,206 |
prior year period.
asset management program.
33
Operating Cash Requirements
Axogen expects$1,188 to construction in progress.
On September 20, 2018, the Company entered into an agreement (the “Heights 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 Tampa, Florida. In May 2020, the Company entered into a construction escrow agreement (the “Escrow Agreement”) with Heights Union and Commonwealth Land Title Insurance Company (“Escrow Agent”) which provided for the establishment of a federally insured escrow bank account (the “Escrow Account”) to hold Company fund to be used for tenant improvements in excess of the tenant allowance as provided in the Heights Agreement. The Company deposited $6,289 into the Escrow Account for use in completing construction of the tenant improvements. The Escrow Agent will disburse the funds upon joint written instructions from Heights Union and the Company. During the three months and nine months ended September 30, 2020, $3,003 and $4,682, respectively, was disbursed from the Escrow Account and recorded in property and equipment account of the balance sheet. The Company anticipates depleting the Escrow Account by November 2020. As of September 30, 2020, $1,607 remained in the Escrow Account and is recorded as restricted cash in the condensed consolidated balance sheet.
As of September 30, 2020, we had cash, cash equivalents and investments totaling $106,734 and total current liabilities of $18,792. 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. However, as the impact of the COVID-19pandemic on the economy and our operations evolves, we will continue to assess our liquidity needs. A continued worldwide disruption could materially affect our future access to our sources of liquidity, particularly our cash flows from operations, financial condition, capitalization, and capital investments. In the event of a sustained market deterioration, we may need additional liquidity, which would require us to evaluate available alternatives and take appropriate actions.
Material Commitments
As previously disclosed in Note 13 – Commitments and Contingencies, in July 2018, the Company purchased a 70,000 square foot facility, the APC, on approximately 8.6 acres of land in Vandalia, Ohio.
On July 9, 2019, the Company entered into the Design-Build Agreement with CRB, pursuant to which CRB will renovate and retrofit the PC. 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, subject to adjustment in accordance with the terms of the Design-Build Agreement. The estimated cost pursuant to the Design-Build Agreement is $29,300. Additional costs associated with the renovation, purchasing of furniture and equipment, validation and certification of the APC are estimated to be $13,600. These capital expenditure costs will be incurred as they arise until the anticipated full transition of material processing to the APC by late 2022. As of September 30, 2020, the Company has recorded $9,062 in the current year and $15,127 to date related to renovations and design build in construction in progress. These items are recorded as projects in process as part of the property and equipment in its condensed consolidated balance sheet. In addition, the Company will capitalize interest expense from its debt facility based on the amount of accumulated expenditures of this asset during the period that is required to get the asset ready for its intended use. In the three months ended September 30, 2020, the Company capitalized $489 to construction in progress.
34
As a result of COVID-19, the Company has implemented a cost reduction strategy designed to defer and reduce certain expenses, including deferment of the APC by up to one year. This defers approximately $25,000 of expected 2020 capital expenditures to 2021. In addition, the Company extended its current production facility License and Services agreement with Community Tissue Services (“CTS”) by one year to December 31, 2022. During the third quarter of 2020, the Company determined to resume the APC project in early 2021. The Company expects expenditures for this project of approximately $498 for the remainder of the current fiscal year and anticipates spending approximately $26,000 during 2021.
The Company expects to receive 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. The economic development grants are subject to certain job creation milestones by 2023 and related contingencies. The Company has received approximately $238 from these grants. These grants have claw back clauses if the Company does not meet these job creation milestones by 2023.
Pursuant to the Heights Agreement, the Company will use the leased premises in Tampa, Florida for general office, medical laboratory, training and meeting purposes. The lease term includes several months of free rent. The Company will record a right of use asset and liability at the commencement of the lease term. The Company anticipates occupying the premises by the fourth quarter of 2020.
Off-Balance Sheet Arrangements
Axogen does not have any off-balance sheet arrangements.
The followingaboutof our exposure to market risk of financial instruments contains forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those described due to a number of factors, including uncertainties associated with general economic conditions and conditions impacting our industry.We are exposed to certain market risks, refer to Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” included in the ordinary course of business.Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivables. We maintain our accounts for cash and cash equivalents principally at one major bank and one investment firm in the United States. We have not experienced any losses2020 Annual Report on our deposits of our cash and cash equivalents.With respect to accounts receivable, we perform credit evaluations of our customers and do not require collateral.Form 10-K. There have been no material losses on accounts receivables. Concentrationschanges to any 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.We are subject to market risk from exposure to changes in interest rates based upon our investing and cash management activities. Changes in interest rates affect interest income earned on cash and cash equivalents. 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 inthese risks since December 31, 2020. However, we can 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 September 30, 2020, the outstanding principal amount of our loans under the Oberland Facility was $35,000. Interest on our loans under the Oberland Facility is payable quarterly during the term of the loans at a rate per annum, subject to certain exceptions, equal to the sum of (a) the greater of (i) LIBOR and (ii) 2% and (b) 7.5% (which percentage is subject to adjustment as described in the Oberland facility); provided that the interest rate shall never be less than 9.5%. Changes in the LIBOR rate may therefore affect our35
interest expense associated with the loans. An increase of 100 basis points in interest rates would increase expense by approximately $350 annually based on the amounts currently outstanding and would not materially affect our results of operations.
The value of the U.S. dollar compared to the Euro has little to no effect on our financial results. International business transactions are currently invoiced in U.S. dollars. As a result, the Company has minimal exposure related to exchange rate fluctuations.
In the United States, we sell our products directly to hospitals and clinics in the local currency. Revenue is recognized as disclosed in Note 2 - Summary of Significant Accounting Policies - Revenue Recognition in our Notes to the Unaudited Condensed Consolidated Financial Statements.
In all 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 these countries through independent distributors is denominated in United States dollars.
We do not believe our operations are currently subject to significant market risks for foreign currency exchange rates, commodity prices or other relevant market price risks of a material nature.
Evaluation of Disclosure Controls and ProceduresThe Company maintainsthe design and operation of our disclosure controls and procedures as of SeptemberJune 30, 20202021 and concluded that our disclosure controls and procedures were effective. We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in the reports filed or submitted by us to the SEC is recorded, processed, summarized and reported on a timely basis and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding the required disclosure. As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of these disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and proceduresThere were effective.During the quarter ended September 30, 2020, we implemented changes to our controls relating to its new debt facility. These changes included new processes to evaluate and account for debt and debt compliance. As a result of the COVID-19 pandemic, in March certain employees of the Company began working remotely but many have returned to the office as of July. As a result of these changes to the working environment of 2020 the Company has not identified any materialno changes in the Company’sour internal control over financial reporting. The Company is continually monitoring and assessing the COVID-19 situation to determine any potential impacts on the design and operating effectiveness of our36
internal controls over financial reporting. There were no other changes in our internal controls over financial reporting during the quarter ended Septemberthe three months ended June 30, 20202021 that have materially affected, or are reasonably likely to materially affect, our internal controlscontrol over financial reporting.
reporting (as defined in Rules 13a-15(d) or 15d-15(f) of the Exchange Act).
From timetime,the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, we may be a party to various lawsuits, claims and otherare engaged in certain legal proceedings, that arise in the ordinary course of our business, some of which relate to some or all of certain of our patents. While it is not possible to determine the outcome of these matters, management does not expect that the ultimate costs to resolve these matters will materially adversely affect our business, financial position, or results of operations.Except as provided below, Axogen and its subsidiaries are not a party to any material litigation as of September 30, 2020:On January 9, 2019, Plaintiff Neil Einhorn, on behalf of himself and others similarly situated (the “Plaintiff”), filed a putative class action complaint in the United Stated District Court for the Middle District of Florida (the “Court”) alleging violations of the federal securities laws against Axogen, Inc., certain of its directors and officers (“Individual Defendants”), and (i) the several underwriters (the “2017 Offering Underwriters”) named in that certain Underwriting Agreement, dated November 16, 2017, by and between the Company and Leerink Partners LLC, as representative of the several underwriters named therein, and (ii) the several underwriters (the “2018 Offering Underwriters”) named in that certain Underwriting Agreement, dated May 8, 2018, by and between the Company and Jefferies LLC and Leerink Partners LLC, as representatives of the several underwriters named therein (the 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. Plaintiff seeks an order (a) declaring the action a proper class action pursuant to Rule 23 of the Federal Rules of Civil Procedures; (b) awarding Police and Fire Retirement System of the City of Detroit (“Lead Plaintiff”) and the prospective class compensatory damages against all Defendantsdisclosure set forth in an amountNote 13 relating to be proven at trial; (c) awarding Lead Plaintiff and the prospective class extraordinary equitable and/or injunctive relief as permittedlegal proceedings is incorporated herein by the law (including but not limited to rescission); (d) awarding Lead Plaintiff and the prospective class their costs and expenses incurred in the action, including reasonable attorneys’ fees and expert fees; (e) all such other relief that may be just and proper. Axogen was served on January 15, 2019. On February 4, 2019, the court granted the parties’ stipulated motion which provided that Axogen was 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. The Court scheduled oral argument for the motion to dismiss for December 4, 2019. On April 21, 2020, the Court dismissed the Complaint without prejudice, finding the Plaintiff failed to state a claim upon which relief could be granted. The Plaintiff filed a Second Amended Class Action Complaint on June 22, 2020. Axogen will file a motion to dismiss on August 6, 2020. The Plaintiff filed an opposition to such dismissal on September 20, 2020. Both parties have requested37
to present oral arguments and await the Court’s decision. 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 continue to dispute the allegations and intend to vigorously defend against the any amended Complaint, if filed.
On October 3, 2019, the Company received a shareholder demand sent on behalf of shareholder Michael Bach requesting that the Board of Directors take action to remedy alleged breaches of fiduciary duties related to the claims in the report issued December 18, 2018 by Seligman Investments (substantially the same allegations that form the basis for the Einhorn matters referenced above). On February 14, 2020 the Company sent a written response stating that it did not intend to take any further action. On April 21, 2020, Bach filed a shareholder derivative complaint in Hennepin County, Minnesota, alleging breach of fiduciary duty, insider selling, corporate waste, and unjust enrichment. The Board intends to vigorously defend itself in this matter. The amount of loss, if any, cannot be reasonably estimated at this time.
The Company faces a number of risks and uncertainties. In addition the other information in this report and the Company’s other filings with the SEC, readers should consider carefully the risk factors discusseddisclosed in Part I “Item 1A. Risk Factors”our 2020 Annual Report on Form 10-K. However, any investment in our business involves a high degree of risk. Before making an investment decision, you should carefully consider the Company’sinformation we include in this Quarterly Report on Form 10-Q, including our unaudited interim condensed consolidated financial statements and accompanying notes, our Annual Report on Form 10-K for the year ended December 31, 2019, as amended on Form 10-K/A. If any of these risks actually occur, the Company’s business, results of operations or2020, including our financial condition could be materially adversely affected. The COVID-19 pandemic could have a material adverse effect on our ability to operate, results of operations, financial condition, liquidity,statements and capital investments.The World Health Organization has declared the COVID-19 outbreak a pandemic,related notes contained therein, and the virus continues to spread in areas where we operate and sell our products. COVID-19, or similar extraordinary eventsadditional information in the future, could have a material adverse effect on our ability to operate, results of operations, financial condition, liquidityother reports we file with the Securities and capital investments. While the ultimate economic impact of COVID-19 cannot be reliably quantified or estimated at this time due to the uncertainty of future developments, COVID-19 will materially affect the Company’s near-term financial performance and, as a result, the Company has suspended its 2020 financial guidance provided on February 24, 2020.In response to COVID-19, several public health organizations have recommended, and some local governments have implemented, certain measures to slow and limit the transmission of the virus, including quarantines, “shelter-in-place” and “stay-at-home” orders, travel restrictions and business curtailments, among other measures. With respect to the medical industry in particular, the pandemic has caused hospitals and clinics to: (1) reallocate their teams and resources to prepare for increased COVID-19 patients; (2) defer or limit elective and non-emergency procedures; and (3) restrict hospital access to non-essential personnel, including sales and clinical representatives not directly required for a specific procedure.Such measures or others (including future measures implemented by governmental authorities and measures we have put in place orExchange Commission. These risks may in the future voluntarily put in place), as well as other effects of COVID-19, have had, and will continue to have, directly and indirectly, a material adverse effect on our business as they result in decreased demand for our product, decreased access to customer channels, decreased employee availability, adverse economic conditions, potential border closures and other disruptionsmaterial harm to our business and our financial condition and results of operations. In this event, the businessesmarket price of our business partnerscommon stock may decline and others.Our credit facility and payment obligations under the Revenue Participation Agreement with TPC Investments II LP and Argo SA LLC, each affiliatesyou could lose part or all of Oberland Capital (collectively, “Oberland Capital”), contain operating and financial covenantsyour investment. Additional risks that restrictwe currently believe are immaterial may also impair our business operations. Our business, financial conditions and financing activities, require cash payments over an extended periodfuture prospects and the trading price of time and are subject to acceleration in specified circumstances, which mayour common stock could be harmed as a 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 with38
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 within the prescribed period, 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, and Oberland Capital could, among other things, foreclose on the collateral granted to them to collateralize such indebtedness, if we are unable to pay the outstanding debt immediately. 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 a percentage of our net revenues, 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 will commence 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. 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 stockholders. There is no assurance that if we are required to secure funding, we can do so on terms acceptable to us, or at all.
Other than the item listed above, there have been no material changes in our risk factors from those disclosed in Part I “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, as amended on Form 10-K/A.
31.1† 31.2† 32†† 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† XBRL Taxonomy Extension Schema Document. 101.CAL† XBRL Taxonomy Extension Calculation Linkbase Document. 101.DEF† XBRL Taxonomy Extension Definition Linkbase Document. 101.LAB† XBRL Extension Labels Linkbase. 101.PRE† XBRL Taxonomy Extension Presentation Linkbase Document. 104† Cover Page Interactive Data File – The cover pages does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document † Filed herewith. AXOGEN, INC. Dated: /s/ Karen Zaderej Karen Zaderej Dated: /s/ Peter J. Mariani Peter J. Mariani39Exhibit
NumberDescription 10.1 Exhibit
NumberDescription10.1†40October 30, 2020August 5, 2021
Chief Executive Officer and President
(Principal Executive Officer)October 30, 2020August 5, 2021
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)41