AxoGen(AXGN) - 2021 Q4 - Annual Report

Part I Business Axogen leads in peripheral nerve repair, offering a product portfolio targeting a $2.7 billion market and pursuing a Biologics License Application for its key graft General Overview The company develops and commercializes technologies for peripheral nerve regeneration and repair, offering a portfolio of clinically proven products - Axogen's core business is providing solutions for peripheral nerve repair, aiming to restore function and quality of life for patients[21] - The main product portfolio includes Avance® Nerve Graft (human nerve allograft), Axoguard® products (porcine ECM-based connector, protector, and cap), and Avive® Soft Tissue Membrane (human umbilical cord)[22] - The market availability of Avive® Soft Tissue Membrane was suspended effective June 1, 2021, pending FDA discussions regarding its regulatory classification, not due to safety issues[23] Peripheral Nerve Regeneration Market Overview The company estimates its total addressable market in the U.S. at approximately $2.7 billion across trauma, oral, breast, and compression segments Total Addressable Market (U.S.) | Market Segment | Estimated Size | | :--- | :--- | | Total Addressable Market | $2.7 billion | | Trauma | $1.9 billion | | Oral Maxillofacial (OMF) | $300 million | | Breast Reconstruction Neurotization | $250 million | | Upper Extremity Compression | $270 million | - The company is expanding into the surgical treatment of pain, with the market size for this segment still under evaluation[35] Axogen's Product Portfolio The company's product portfolio provides a comprehensive platform for peripheral nerve repair, led by the Avance® Nerve Graft and Axoguard® product line - Avance® Nerve Graft: A decellularized human peripheral nerve allograft for bridging nerve gaps up to 70mm, supported by over 10 years of clinical evidence[36][37][39] - Axoguard® Nerve Connector: A porcine ECM tube for tensionless repair of nerve gaps up to 5mm, reducing the need for sutures at the repair site[40][41] - Axoguard® Nerve Protector: A porcine ECM wrap to protect damaged nerves, reinforce repairs, and prevent soft tissue attachments[42][43] - Axoguard® Nerve Cap: A porcine ECM cap designed to protect severed nerve ends and reduce the formation of painful neuromas[47][48][49] - Avive® Soft Tissue Membrane: Market availability was suspended on June 1, 2021, and it historically accounted for approximately 5% of revenues[44] Tissue Recovery and Processing The company processes human tissue using its proprietary Avance Method™ and is building a new facility to support future growth and its BLA submission - The company uses the proprietary Avance Method™ to process human nerve tissue, preserving the essential extracellular matrix structure[54] - Processing is currently conducted at a facility licensed from Community Tissue Services (CTS), with the agreement terminating on December 31, 2023[57][58] - Axogen is renovating a new Axogen Processing Center (APC) facility in Ohio to support growth and the Avance Nerve Graft BLA submission[59] Manufacturing of Other Products The Axoguard® product line is manufactured exclusively by Cook Biotech under agreements extending to 2027 - The Axoguard product line is manufactured by Cook Biotech Incorporated under exclusive distribution and supply agreements that terminate in 2027[64][65][67] - Axogen has sufficient inventory of the Axotouch Two-Point Discriminator to support sales through 2024[68] Sales and Marketing The company's commercial strategy focuses on surgeon education, clinical data expansion, and a specialized direct sales force - The company focuses on educating surgeons, including training over three-quarters of U.S. hand and microsurgery fellows in 2021[74] - As of December 31, 2021, the commercial team consisted of 115 direct sales professionals and approximately 28 independent sales agencies in the U.S[74] - In 2021, approximately 88% of global product revenue was generated through the direct sales channel[74] - The company is generating extensive clinical data through studies like RANGER (over 2,500 enrollments), RECON (Phase 3), and REPOSE (neuroma study)[71][73] Research and Development R&D efforts are concentrated on expanding clinical data and developing product line extensions, with a total investment of $24.2 million in 2021 - Current development focus is on expanding clinical data and developing line extensions of Avance and Axoguard products[79] R&D Expense | Year | R&D Expense | | :--- | :--- | | 2021 | $24.2 million | Competition Axogen competes with traditional repair methods and off-the-shelf products from major medical technology companies - Primary competition includes traditional methods (autograft) and off-the-shelf products (hollow-tube conduits, wraps)[80][81] - Major corporate competitors for off-the-shelf repair options are Integra LifeSciences, Baxter International, and Stryker Corporation[81] - Axogen believes its key competitive advantages include its intellectual property, regulatory expertise with the FDA BLA process, and its broad product portfolio[82][84] Intellectual Property The company protects its technology through patents, trademarks, and exclusive licenses, anticipating 12 years of market exclusivity upon BLA approval - Axogen holds exclusive worldwide licenses from the University of Florida Research Foundation (UFRF) and the University of Texas at Austin (UTA) for Avance Nerve Graft technologies[86] - The company owns or is the exclusive licensee of about 30 issued U.S. patents and over 175 international patents and applications[87] - U.S. patent protection for Avance Nerve Graft extends through at least September 2023; upon BLA approval, the company expects 12 years of data exclusivity[88] Government Regulations The company operates under extensive FDA regulation, managing a transition to a full Biologics License Application (BLA) for its lead product - Axoguard products are regulated as medical devices and have 510(k) clearance from the FDA[93][94] - Avance Nerve Graft is being transitioned from a Human Tissue product (HCT/P) to a fully licensed biologic, requiring a Biologics License Application (BLA)[104][106] - The RECON study, a Phase 3 pivotal trial for the Avance BLA, has completed subject enrollment and follow-up[125] - Avance Nerve Graft received Regenerative Medicine Advanced Therapy (RMAT) designation from the FDA, which may streamline the approval process[114] - The company is subject to various healthcare laws, including Anti-Kickback, False Claims, and the Sunshine Act[134][135][238] Human Capital As of December 31, 2021, the company employed approximately 451 people, with a significant portion dedicated to sales and marketing Employee Breakdown (as of Dec 31, 2021) | Department | Number of Employees | | :--- | :--- | | Total Employees | ~451 | | Sales and Marketing | 228 | | Corporate | 79 | | Research and Development | 65 | | Operations | 56 | - No employees are represented by a labor union, and the company believes its relationship with employees is satisfactory[151] Executive Officers of the Registrant The company's leadership team includes Karen Zaderej as Chairman, CEO, and President, and Peter J. Mariani as Executive Vice President and CFO - Key executive officers include Karen Zaderej (Chairman, CEO, President), Peter J. Mariani (EVP, CFO), Bradley L. Ottinger (General Counsel), and Eric A. Sandberg (Chief Commercial Officer)[156] Risk Factors The company faces risks from product concentration, the COVID-19 pandemic, regulatory hurdles for its key products, and intellectual property challenges Risks Related to the Company Revenue is highly dependent on four products, while the COVID-19 pandemic, a history of negative cash flow, and facility dependencies pose material risks - Substantially all revenue is derived from four products: Avance Nerve Graft, Axoguard Nerve Protector, Axoguard Nerve Connector, and Axoguard Nerve Cap[172] - The COVID-19 pandemic could continue to adversely affect operations and financial results through procedure deferrals and supply chain disruptions[176][177][178] - The company is highly dependent on its facility licensed from Community Tissue Services (CTS), which expires on December 31, 2023[186] - The company has a history of not consistently generating positive cash flow and had an accumulated deficit of approximately $230.6 million as of December 31, 2021[182][183] Risks Related to the Regulatory Environment Significant regulatory risks include reliance on FDA enforcement discretion for Avance, the suspension of Avive, and the uncertain outcomes of clinical trials - The Avance Nerve Graft is distributed under an FDA enforcement discretion policy, and failure to obtain BLA approval would have a material adverse effect[226][227] - The market availability of Avive Soft Tissue Membrane was voluntarily suspended on June 1, 2021, and there is no guarantee it will return to market[220][221] - Clinical trials, such as the RECON study for the Avance BLA, are long, expensive, and have uncertain outcomes that could jeopardize regulatory approval[241][242] - The company is subject to extensive healthcare fraud and abuse laws (e.g., Anti-Kickback Statute, False Claims Act), and violations can lead to significant penalties[215][237] Risks Related to Intellectual Property Success depends on protecting intellectual property, as key patents for the Axoguard line have expired and the company relies on exclusive licenses for Avance - Failure to protect intellectual property rights could lead to costly litigation and loss of competitive advantage[263] - The patent protection for products may expire, subjecting the company to increased competition; material U.S. patents covering the Axoguard product line have expired[267] - The company depends on maintaining exclusive licenses from the University of Florida Research Foundation (UFRF) and the University of Texas at Austin (UTA) for its Avance technology[269] Risks Related to Common Stock Investors face risks from high stock price volatility, a no-dividend policy, and anti-takeover provisions under Minnesota law - The price of the company's common stock (AXGN) has been and is likely to continue to be highly volatile[274] - The company does not anticipate paying any cash dividends in the foreseeable future, retaining earnings to finance growth[276] - Anti-takeover provisions in Minnesota law may discourage or deter acquisition bids[277] Risks Related to Financing Our Business The company's credit facility contains restrictive covenants, and future fundraising efforts could result in shareholder dilution - The credit facility with Oberland Capital contains restrictive operating and financial covenants, and a breach could lead to default[280][281] - The company may need to raise additional funds in the future, which could dilute shareholder interests or be difficult to obtain on acceptable terms[284][285] General Risk Factors The company is exposed to general risks including legal proceedings, loss of key personnel, cybersecurity threats, and potential internal control weaknesses - The company is currently a defendant in securities class action lawsuits and may be subject to other costly legal proceedings[286] - The loss of key members of the executive management team could adversely affect the business[290] - The company is dependent on internal information systems that are vulnerable to cybersecurity attacks and breaches[302][303] - If the company's internal controls over financial reporting are not effective, it could result in unreliable financial reports[307][308] Properties Axogen leases its corporate and distribution facilities and is building its own processing center in Ohio to replace an expiring services agreement - Corporate headquarters are leased in Alachua, FL (19,000 sq ft) and a major office/lab facility is leased in Tampa, FL (75,000 sq ft)[309][310] - A distribution facility is leased in Burleson, TX (17,500 sq ft)[312] - The company is renovating its own Axogen Processing Center (APC) facility in Vandalia, OH, to replace its current processing arrangement with CTS, which ends in 2023[314] Legal Proceedings The company is defending a securities class action lawsuit that was dismissed by the District Court but is currently under appeal - The company is a defendant in a putative securities class action lawsuit, Einhorn v Axogen, Inc, et al, filed in January 2019[537] - The District Court dismissed the Second Amended Complaint with prejudice on March 19, 2021; the plaintiff has appealed the dismissal to the Eleventh Circuit[537] - A separate stockholder derivative complaint, Bach v Zaderej, et al, was voluntarily dismissed by the plaintiff in November 2021[538] Mine Safety Disclosures This section is not applicable to the company - None[316] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Axogen's common stock trades on Nasdaq as "AXGN," and the company has never paid cash dividends, retaining earnings for growth - The company's common stock is traded on the Nasdaq Capital Market under the symbol "AXGN"[317] - As of February 22, 2022, there were 41,795,240 shares of common stock outstanding[318] - The company has never declared or paid cash dividends and does not anticipate paying them in the foreseeable future[321] - The company did not repurchase any of its securities in the fourth quarter of 2021 and had no sales of unregistered securities in 2021[320] Reserved This item is intentionally left blank Management's Discussion and Analysis of Financial Condition and Results of Operations Revenues grew 13.4% to $127.4 million in 2021, though net loss widened to $27.0 million due to increased operating expenses Results of Operations In 2021, revenue increased 13.4% to $127.4 million and gross margin improved, but a 14.0% rise in expenses led to a wider net loss of $27.0 million Financial Performance Comparison (2021 vs. 2020) | Metric | 2021 | 2020 | Change | | :--- | :--- | :--- | :--- | | Revenues | $127.4M | $112.3M | +13.4% | | Gross Profit | $104.4M | $90.7M | +15.1% | | Gross Margin | 82.0% | 80.8% | +1.2 p.p. | | Loss from Operations | ($25.4M) | ($23.2M) | +9.5% | | Net Loss | ($27.0M) | ($23.8M) | +13.4% | Financial Performance Comparison (2020 vs. 2019) | Metric | 2020 | 2019 | Change | | :--- | :--- | :--- | :--- | | Revenues | $112.3M | $106.7M | +5.2% | | Gross Profit | $90.7M | $89.4M | +1.5% | | Gross Margin | 80.8% | 83.7% | -2.9 p.p. | | Loss from Operations | ($23.2M) | ($31.4M) | -26.2% | | Net Loss | ($23.8M) | ($29.1M) | -18.3% | - R&D expenses increased 35.5% in 2021 to $24.2 million, primarily due to increased spending on the BLA for Avance Nerve Graft[337] Liquidity and Capital Resources The company held $84.1 million in cash and investments at year-end 2021, which management believes is sufficient for at least the next 12 months Liquidity Position (as of Dec 31, 2021) | Metric | Value | | :--- | :--- | | Cash, Cash Equivalents & Investments | $84.1M | | Working Capital | $102.8M | | Current Ratio | 5.2x | Cash Flow Summary (2021) | Activity | Cash Flow | | :--- | :--- | | Operating Activities | ($13.4M) | | Investing Activities | ($23.6M) | | Financing Activities | $20.5M | - The company has a credit facility with Oberland Capital, with $50 million drawn as of year-end 2021[365][366] - Significant capital expenditures are ongoing for the renovation of the APC Facility, with $19.3 million anticipated to be spent in 2022[364] Quantitative and Qualitative Disclosures About Market Risk The company is primarily exposed to interest rate risk from its variable-rate debt, while credit and foreign currency risks are considered minimal - Interest Rate Risk: The company is exposed to interest rate changes through its Oberland debt facility, which has an interest rate floor of 9.5%[372] - Credit Risk: Financial instruments subject to credit risk include cash balances exceeding FDIC limits ($32.2 million as of Dec 31, 2021) and accounts receivable[373][375] - Foreign Currency Exchange Risk: Exposure is minimal as revenue from international markets is denominated in U.S. dollars[376] Financial Statements and Supplementary Data This section contains the audited consolidated financial statements, accompanying notes, and the independent auditor's report from Deloitte & Touche LLP Report of Independent Registered Public Accounting Firm Deloitte & Touche LLP issued an unqualified opinion on the financial statements and internal controls, identifying inventory valuation as a Critical Audit Matter - Deloitte & Touche LLP issued an unqualified opinion, stating the financial statements are presented fairly in all material respects[380] - The auditor also opined that the company maintained effective internal control over financial reporting as of December 31, 2021[380] - A Critical Audit Matter was identified related to the valuation of excess and obsolete (E&O) inventory, which involves significant management judgment[386][387] Consolidated Financial Statements The financial statements show total assets of $208.0 million, a 2021 net loss of $27.0 million, and net cash used in operations of $13.4 million Consolidated Balance Sheet Data (in thousands) | Account | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Assets | $208,024 | $201,381 | | Cash, Cash Equivalents & Investments | $84,086 | $103,966 | | Inventory | $16,693 | $12,529 | | Property and equipment, net | $62,881 | $38,398 | | Total Liabilities | $95,474 | $78,232 | | Long-term debt, net | $44,821 | $32,027 | | Total Shareholders' Equity | $112,550 | $123,149 | Consolidated Statement of Operations Data (in thousands, except per share) | Account | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Revenues | $127,358 | $112,300 | $106,712 | | Gross Profit | $104,427 | $90,719 | $89,363 | | Loss from Operations | ($25,416) | ($23,182) | ($31,406) | | Net Loss | ($26,985) | ($23,786) | ($29,135) | | Loss per Share | ($0.65) | ($0.60) | ($0.74) | Consolidated Statement of Cash Flows Data (in thousands) | Activity | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Net Cash Used in Operating | ($13,405) | ($9,626) | ($19,872) | | Net Cash (Used in)/Provided by Investing | ($23,649) | ($16,963) | $27,271 | | Net Cash Provided by Financing | $20,452 | $40,474 | $4,031 | Notes to Consolidated Financial Statements The notes detail key accounting policies, debt terms, commitments for the new APC facility, and the status of ongoing legal proceedings - Inventory: The company recorded an inventory write-down of $1.25 million in 2021 related to the suspension of its Avive product[413] - Long-Term Debt: As of Dec 31, 2021, the company had $50 million in debt outstanding from its Oberland Facility, with a net carrying value of $44.8 million[472][473] - Stock-Based Compensation: Total stock-based compensation expense was $10.9 million in 2021, with $19.5 million of unrecognized cost remaining[485] - Commitments: The company has significant commitments for its new APC facility, with an estimated $19.3 million to be spent in 2022[531] - Legal Proceedings: The company is defending a securities class action lawsuit (Einhorn v Axogen) which was dismissed by the district court but is now on appeal[537] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure There were no changes in or disagreements with accountants during the period - None[542] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2021 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[544] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2021[547] - The company's independent registered public accounting firm has issued an attestation report on the effectiveness of management's internal control over financial reporting[549] Other Information There is no other information to report in this section - None[549] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This section is not applicable to the company - Not applicable[549] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, officers, and corporate governance is incorporated by reference from the 2022 definitive proxy statement - Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's 2022 definitive proxy statement[551][552] - The company has adopted a Code of Business Conduct and Ethics, which is posted on its website[553] Executive Compensation Information concerning executive compensation is incorporated by reference from the 2022 definitive proxy statement - Information regarding executive compensation is incorporated by reference from the company's 2022 definitive proxy statement[554] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership and equity compensation plans is incorporated by reference from the 2022 definitive proxy statement - Information regarding security ownership and equity compensation plans is incorporated by reference from the company's 2022 definitive proxy statement[554] Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2022 definitive proxy statement - Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's 2022 definitive proxy statement[555] Principal Accountant Fees and Services Information concerning principal accountant fees and services is incorporated by reference from the 2022 definitive proxy statement - Information regarding principal accountant fees and services is incorporated by reference from the company's 2022 definitive proxy statement[556] Part IV Exhibits and Financial Statement Schedules This section lists all exhibits filed with the report and includes Schedule II detailing valuation and qualifying accounts Schedule II – Valuation and Qualifying Accounts (in thousands) | Description | 2019 | 2020 | 2021 | | :--- | :--- | :--- | :--- | | Allowance for Doubtful Accounts (Ending Balance) | $1,092 | $416 | $276 | | Valuation Allowance for Deferred Tax Assets (Ending Balance) | $39,932 | $46,517 | $53,251 | - A comprehensive list of exhibits is provided, including articles of incorporation, bylaws, material contracts, and certifications[562][566][567] Form 10-K Summary This section is not applicable, and no summary is provided in the report - None[572]