Commitments and Contingencies |
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| Commitments and Contingencies Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commitments and Contingencies | Commitments and Contingencies Leases
The Company and Alachua Copeland Park Investments, LLC, a Florida limited liability company (as successor in interest to Ology Bioservices Holdings, LLC, a Delaware limited liability company, who was successor in interest to SNH Medical Office Properties Trust), are parties to a lease dated February 6, 2007, as amended (the “Primary Lease”). Pursuant to the Primary Lease, the Company leases an approximately 19,000 square foot corporate headquarters facility in Alachua, Florida. On July 13, 2021, the Company entered into a sixth amendment to the Primary Lease to extend the term of the Primary Lease to October 31, 2026. The Company recorded a right-of-use asset of $1,335 and a lease liability of $1,370 related to this extension.
The Company and Cousins Heights Union, LLC, a Georgia limited liability company (as successor in interest to Heights Union, LLC), are parties to a lease of 75,000 square feet of office and lab space in Tampa, Florida (the "Heights Agreement"). Pursuant to the Heights Agreement, the Company uses the leased premises for general office, medical laboratory, training, and meeting purposes. In September 2020, the Company began occupying the space. The lease includes a $5,250 lessor allowance to be used towards the hard and soft costs of the tenant improvements and has been treated as an incentive. The Company incurred the cost of any tenant improvement in excess of this allowance. The Company concluded that it is the accounting owner of the tenant improvements and therefore, the lease incentive is accounted for as a reduction of the right-of-use asset and is recognized on the consolidated balance sheet separate from the right-of-use asset as leasehold improvements. The improvements will be amortized over the life of the lease, which was determined to be the shorter of the useful life of the improvements or the lease term. The Company determined the commencement date of the lease was August 28, 2020 and valued the lease using a 10.6% incremental borrowing rate. The Company recorded a right-of-use asset of $13,323 and a lease liability of $18,573 for this lease as of the commencement date.
On July 12, 2021, the Company entered into the first amendment (the "First Amendment") to the Heights Agreement. The First Amendment revises the commencement date of the Heights Agreement to mean October 30, 2020 and revises the termination date of the Heights Agreement to be October 31, 2034. Pursuant to the First Amendment, the Company was entitled to an additional 1.5 months of free rent periods.
The Company and Ja-Cole L.P. are parties to a lease dated April 21, 2015, as amended (the "Primary Lease"), and a lease dated October 1, 2020, pursuant to which the Company leases approximately 17,500 square feet in total (the “Burleson Facility”) in Burleson, Texas. On January 27, 2022, the Company and Ja-Cole L.P. amended the Primary Lease for 15,000 square feet of the Burleson Facility to revise the commencement date of the lease to mean May 1, 2022 and the termination date of the lease to be April 30, 2027. The Burleson Facility houses raw material storage and product distribution while allowing same day order fulfillment for both the east and west coasts of the U.S.
On August 6, 2015, the Company entered into the CTS Agreement with Community Blood Center (doing business as Community Tissue Services) (“CTS”), in Dayton, Ohio, an FDA registered tissue establishment. Processing of the Avance Nerve Graft pursuant to the CTS Agreement began in February 2016. The CTS Agreement initially had a five-year term ending August 31, 2020. After three previous term extensions, on February 22, 2021, the CTS Agreement was further amended to extend the term of the agreement to December 31, 2023. Under the CTS Agreement, the Company pays CTS a facility fee for use of clean room/manufacturing, storage, and office space, which the Company accounts for as an embedded lease in accordance with Accounting Standards Codification 842, Leases.
The components of total lease expense for the years ended December 31, 2021, 2020 and 2019 were as follows:
The short-term lease costs shown above reasonably reflect the Company’s ongoing short-term lease commitments. No new short-term leases were entered into in 2021. The increase in variable lease costs is due to additional rent comprised primarily of operating costs related to the Tampa office and lab space.
Supplemental balance sheet information related to leases as of December 31, 2021 and 2020 was as follows:
Other information related to leases was as follows ($ in thousands):
The weighted-average discount rate for the majority of the Company’s leases is based on the Company’s estimated incremental borrowing rate since the rates implicit in the leases were not determinable. The Company’s incremental borrowing rate is based on management’s estimate of the rate of interest the Company would have to pay to borrow on a fully collateralized basis over a similar term and amount equal to the lease payments.
Future minimum lease payments under non-cancellable leases as of December 31, 2021 were as follows (in thousands):
Service Agreements
The Company pays CTS a facility fee for the use of clean room/manufacturing, storage, and office space and for services in support of its manufacturing process including for routine sterilization of daily supplies, providing disposable supplies and microbial services, and office support. Pursuant to the CTS Agreement, the Company recorded expenses of $2,466, $1,739 and $2,148 for the years ended December 31, 2021, 2020 and 2019, respectively, in sales and marketing expenses. The CTS Agreement terminates December 31, 2023, subject to earlier termination by either party at any time for cause (subject to the non-terminating party’s right to cure, in certain circumstances), or without cause upon 6 months prior notice.
In December 2011, the Company entered into a Master Services Agreement for Clinical Research and Related Services. The Company was required to pay $151 upon execution of this agreement and the remainder monthly based on activities associated with the execution of Axogen’s phase 3 pivotal clinical trial to support the BLA for Avance Nerve Graft. Payments made under this agreement were $1,100, $1,136 and $1,056 for the years ended December 31, 2021, 2020 and 2019, respectively.
Distribution and Supply Agreements
In August 2008, the Company entered into an exclusive distribution agreement with Cook Biotech to distribute the Axoguard Nerve Connector and Axoguard Nerve Protector products worldwide and the parties subsequently amended the agreement on February 26, 2018. Pursuant to the February 2018 amendment, the agreement expires on June 30, 2027. The Cook Biotech agreement establishes a formula for the transfer cost of the Axoguard products and requires certain minimum purchases by the Company, although, through mutual agreement, the parties have not established such minimums; and, to date, have not enforced such provision. Under the Cook Biotech agreement, the Company provides purchase orders to Cook Biotech, and Cook Biotech fulfills the purchase orders. The agreement allows for termination provisions for both parties. The loss of the ability to sell the Axoguard products could have a material adverse effect on the Company's business until other replacement products would be available.
In June 2017, the Company entered into the Nerve End Cap Supply Agreement (the "Supply Agreement") with Cook Biotech whereby Cook Biotech is the exclusive contract manufacturer of the Axoguard Nerve Cap and both parties have provided the other party the necessary licenses to their technologies for operation of the Supply Agreement. The Supply Agreement expires on August 27, 2027. Under the Supply Agreement the Company provides purchase orders to Cook Biotech and Cook Biotech fulfills the purchase orders.
Axogen Processing Center Facility
The Company is highly dependent on the continued availability of its processing facilities at CTS in Dayton, Ohio and could be harmed if the physical infrastructure of this facility is unavailable for any prolonged period of time. In addition, disruptions could lead to significant costs and reductions in revenue, as well as potential harm to the Company's business reputation and financial results. In the event of disruption, the Company believes it can find and make operational a new leased facility in less than six months, but the regulatory process for approval of facilities is time-consuming and unpredictable. The Company's ability to rebuild or find acceptable lease facilities could take a considerable amount of time and expense and could cause a significant disruption in service to its customers. Although the Company has business interruption insurance, which would cover certain costs, it may not cover all costs nor help to regain the Company's standing in the market.
On July 31, 2018, the Company purchased the APC Facility in Vandalia, Ohio, located near the CTS processing facility where Avance Nerve Graft is currently processed. The APC Facility, when and if operational, will be the new processing facility for Avance Nerve Graft to provide continued capacity for growth and to support the transition of Avance Nerve Graft from a Human Cellular and Tissue-based Product pursuant to Section 361 of the Public Health Service Act to a biologic product. The APC Facility is comprised of a 107,000 square foot building on approximately 8.6 acres of land. The Company paid $731 for the land and this is recorded as land within property and equipment on the consolidated balance sheet. The Company paid $4,300 for the building and this is recorded in projects in process within property and equipment on the consolidated balance sheet.
On July 9, 2019, the Company entered into a Standard Form of Agreement Between Owner and Design-Builder (the “Design-Build Agreement”) with CRB Builders, L.L.C., a Missouri limited liability company (“CRB”), pursuant to which CRB will renovate and retrofit the APC Facility. The Design-Build Agreement contains several design phase milestones that began in July 2019 and sets the date for Substantial Completion (as defined in the Design-Build Agreement) by late 2021, subject to adjustment in accordance with the terms of the Design-Build Agreement. The estimated cost pursuant to the Design-Build Agreement was $29,300. Additional costs associated with the renovation, validation and certification of the APC Facility are estimated to be $20,900, plus capitalized interest of $11,300. The Company temporarily deferred the construction as part of the cost containment initiatives implemented in the second quarter of 2020, and subsequently resumed construction in early January of 2021. For the year ended December 31, 2021, the Company has recorded $19,581 related to renovations and design and build in projects in progress. The Company has recorded $35,270 to date related to this project. In addition to these project costs, the Company has capitalized interest of $4,277 for the year ended December 31, 2021. To date, the Company has capitalized interest of $5,274 related to this project. These items are recorded as projects in process within property and equipment on the consolidated balance sheet. The Company anticipates spending $19,300, including projected capitalized interest of $6,100 in 2022 and an additional $1,700 in 2023. The Company anticipates that this building will be completed in early 2022, followed by a year-long process to validate and certify the facility by early 2023. The Company anticipates commencing tissue processing in the facility upon completion of the validation and certification process.
The Company obtained certain economic development grants from state and local authorities totaling up to $2,685 including $1,250 of cash grants to offset costs to acquire and develop the APC Facility. The economic development grants are subject to certain job creation milestones by 2023 and related contingencies. The Company received $950 and $238 from these grants in the years ended December 31, 2021 and 2020, respectively. These grants have claw back clauses if the Company does not meet these job creation milestones by 2023.
Fair Value of the Debt Derivative Liabilities
The fair value of the Debt Derivative Liabilities is $5,562 as of December 31, 2021. The fair value of the Debt Derivative Liabilities was determined using a probability-weighted expected return model based upon the four potential settlement scenarios for the Oberland Facility which are described in Note 3 - Summary of Significant Accounting Policies – Derivative Instruments. The estimated settlement value of each scenario, which includes any required make-whole payment (see "Note 10 - Long-Term Debt, Net of Financing Fees"), is then discounted to present value using a discount rate that is derived based upon the initial terms of the Oberland Facility at issuance and corroborated utilizing a synthetic rating analysis. The calculated fair values under the four scenarios are then compared to the fair value of a plain vanilla note, with the difference reflecting the fair value of the Debt Derivative Liabilities. The Company estimated the make-whole payments required under each scenario according to the terms of the Oberland Facility to generate an internal rate of return equal to 11.5% through the scheduled maturity dates, less the total of all quarterly interest and royalty payments previously paid to Oberland Capital. The calculation utilized the XIRR function in Microsoft Excel as required by the Oberland Facility. If the debt is not prepaid but instead is held to its scheduled maturities, the Company’s estimate of the make-whole payment for the first tranche of the Oberland Facility is $68 on June 30, 2027, and the Company’s estimate of the make-whole payment for the second tranche of the Oberland Facility is zero on June 30, 2028. The Company has consistently applied this approach since the inception of the debt agreement on June 30, 2020.
The Company has become aware that Oberland Capital may have an alternative interpretation of the calculation of the make-whole payments that the Company believes does not properly utilize the same methodology utilized by the XIRR function in Microsoft Excel as described in the Oberland Facility. The Company estimates the top end of the range of the make-whole payments if the debt is held to scheduled maturity under an alternative interpretation to be approximately $13,000 for the first tranche of the Oberland Facility on June 30, 2027, and approximately $5,000 for the second tranche of the Oberland Facility on June 30, 2028. Further, if the debt is prepaid prior to the scheduled maturity dates and subject to the alternative interpretation, the make-whole payment would be larger than the amounts herein.
Other Commitments
Certain executive officers of the Company are parties to employment contracts. Such contracts have severance payments for certain conditions including change of control.
Legal Proceedings
The Company is subject to various claims, lawsuits, and proceedings in the ordinary course of the Company's business, some of which have been dismissed by the Company. In the opinion of management, such claims are either adequately covered by insurance or otherwise indemnified, or are not expected, individually or in the aggregate, to result in a material, adverse effect on the Company's financial condition. However, it is possible that the Company's results of operations, financial position and cash flows in a particular period could be materially affected by these contingencies.
On January 9, 2019, Plaintiff Neil Einhorn, on behalf of himself and others similarly situated, filed a putative class action complaint in the United States District Court for the Middle District of Florida alleging violations of the federal securities laws against Axogen, Inc., certain of its directors and officers (“Individual Defendants”), and Axogen’s 2017 Offering Underwriters and 2018 Offering Underwriters (collectively, with the Individual Defendants, the “Defendants”), captioned Einhorn v. Axogen, Inc., et al., No. 8:19-cv-00069 (M.D. Fla.). Plaintiff asserts that Defendants made false or misleading statements in connection with the Company’s November 2017 registration statement issued regarding its secondary public offering in November 2017 and May 2018 registration statement issued regarding its secondary public offering in May 2018, and during a class period of August 7, 2017 to December 18, 2018. In particular, Plaintiff asserts that Defendants issued false and misleading statements and failed to disclose to investors: (1) that the Company aggressively increased prices to mask lower sales; (2) that the Company’s pricing alienated customers and threatened the Company’s future growth; (3) that ambulatory surgery centers form a significant part of the market for the Company’s products; (4) that such centers were especially sensitive to price increases; (5) that the Company was dependent on a small number of surgeons whom the Company paid to generate sales; (6) that the Company’s consignment model for inventory was reasonably likely to lead to channel stuffing; (7) that the Company offered purchase incentives to sales representatives to encourage channel stuffing; (8) that the Company’s sales representatives were encouraged to backdate revenue to artificially inflate metrics; (9) that the Company lacked adequate internal controls to prevent such channel stuffing and backdating of revenue; (10) that the Company’s key operating metrics, such as the number of active accounts, were overstated; and (11) that, as a result of the foregoing, Defendants’ positive statements about the Company’s business, operations, and prospects, were materially misleading and/or lacked a reasonable basis. Axogen was served on January 15, 2019. On February 4, 2019, the Court granted the parties’ stipulated motion which provided that Axogen is not required to file a response to the complaint until thirty days after Plaintiff files a consolidated amended complaint. On June 19, 2019, Plaintiff filed an Amended Class Action Complaint, and on July 22, 2019, Defendants filed a motion to dismiss. Plaintiff filed opposing papers on August 12, 2019. The Court held a status hearing on September 11, 2019 and stayed all deadlines regarding the parties’ obligations to file a case management report. On December 4, 2019, the parties presented oral arguments. 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 filed a motion to dismiss on August 6, 2020. The Plaintiff filed an opposition on September 20, 2020. The Court held oral argument on February 25, 2021. On March 19, 2021, the Court dismissed the Second Amended Complaint with prejudice, finding again that the Plaintiff failed to state a claim upon which relief could be granted. On April 14, 2021, Plaintiff filed a notice of appeal. Plaintiff filed its opening brief on June 28, 2021. The Company filed its appellee brief on August 11, 2021. The Plaintiff filed a reply brief on September 14, 2021. The Eleventh Circuit has scheduled oral argument for March 8, 2022. The amount of loss, if any, cannot be reasonably estimated at this time. This matter is subject to various uncertainties and it is possible that it may be resolved unfavorably to the Company. However, while it is not possible to predict with certainty the outcome of the matter, the Company and the Individual Defendants dispute the allegations and intend to vigorously defend themselves.
Bach v. Zaderej, et al., 27-cv-20-5997 (Hennepin Cnty., Minn.). On April 21, 2020, Plaintiff Michael Bach, derivatively on behalf of Axogen, filed a verified stockholder derivative complaint for breach of fiduciary duty, insider selling, corporate waste and unjust enrichment against Karen Zaderej, Gregory G. Freitag, Peter J. Mariani, Amy Wendell, Robert J. Rudelius, Mark Gold, Guido Neels, Jamie M. Grooms, Quentin S. Blackford, and Alan M. Levine (the “Individual Defendants”) and Nominal Defendant Axogen, Inc. (“Axogen”) (collectively, “Defendants”). The Bach Complaint was never served on Defendants and therefore no response was necessary. On November 14, 2021, Plaintiff Michael Bach filed a voluntary notice of dismissal without prejudice against all Defendants.
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