UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended DECEMBER 31, 201 5
Or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from TO
Commission File Number: 001-36046
AXOGEN, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA
(State or other jurisdiction of
incorporation or organization)
13631 Progress Blvd., Suite 400 Alachua, FL
(Address of principal executive offices)
41-1301878
(I.R.S. Employer
Identification No.)
32615
(Zip Code)
Registrant’s telephone number, including area code: (386)-462-6800
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of class)
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted in its corporate website, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company ☒
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of June 30, 2015, the value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $57,895,176
based upon the last reported sale price of our common s tock on the NASDAQ Capital Market.
The number of shares outstanding of the r egistrant’s common stock as of February 25, 2016 was 29,984,591 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive proxy statement for its 201 6 annual meeting of shareholders are incorporated by reference into Part III of this
Form 10-K to the extent stated herein. Such proxy statement will be filed with the Securities and Exchange Commission within 120 days after the fiscal
year ended December 31, 2015.
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
TABLE OF CONTENTS
PART I
PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases
of Equity Securities
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder
Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
Signatures
Exhibit Index
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FORWARD-LOOKING STATEMENTS
From time to time, in reports filed with the Securities and Exchange Commission (including this Form 10-
K), in press releases, and in other communications to shareholders or the investment community, AxoGen, Inc.
(the “Company”, “AxoGen”, “we” or “our”) may provide forward-looking statements, as defined in the
Private Securities Litigation Reform Act of 1995, concerning possible or anticipated future results of
operations or business developments. Words such as "expects", "anticipates", "intends", "plans", "believes",
"seeks", "estimates", "projects", "forecasts", "continue", "may", "should", "will" variations of such words and
similar expressions are intended to identify such forward-looking statements. The forward-looking statements
may include, without limitation, statements regarding our growth, our 2016 guidance, product development,
product potential, financial performance, sales growth, product adoption, market awareness of our products,
data validation, our visibility at and sponsorship of conferences and educational events. The forward-looking
statements are subject to risks and uncertainties, which may cause results to differ materially from those set
forth in the statements. Forward-looking statements in this Form 10-K should be evaluated together with the
many uncertainties that affect the Company’s business and its market, particularly those discussed in the risk
factors and cautionary statements in the Company’s filings with the Securities and Exchange Commission,
including as described in “Risk Factors” included in Item 1A of this Form 10-K. Forward-looking statements
are not guarantees of future performance, and actual results may differ materially from those projected. The
forward-looking statements are representative only as of the date they are made, and the Company assumes no
responsibility to update any forward-looking statements, whether as a result of new information, future events
or otherwise.
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PART I
ITEM 1. BUSINESS
General
We are a leading medical technology company dedicated to peripheral nerve repair. We provide products
®
and education to improve surgical treatment algorithms for peripheral nerve injuries. Our portfolio of
regenerative medicine products is available in the United States, Canada and several other countries and
includes Avance Nerve Graft, an off-the-shelf processed human nerve allograft for bridging severed nerves
without the comorbidities associated with a second surgical site, AxoGuard® Nerve Connector, a porcine
submucosa extracellular matrix (“ECM”) coaptation aid for tensionless repair of severed nerves, and
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. Along with these core
surgical products, we also offer the AxoTouch Two-Point Discriminator and expect to launch in March 2016
the AcroVal™ Neurosensory and Motor Testing System. These evaluation and measurement tools assist
healthcare professionals in detecting changes in sensation, assessing return of sensory, grip and pinch function,
evaluating effective treatment interventions, and providing feedback to patients. The introduction of our
evaluation and measurement products further reflects our commitment to bring best practices to the treatment
of peripheral nerve conditions.
TM
Peripheral nerves provide the pathways for both motor and sensory signals throughout the body and their
damage can result in the loss of muscle function and/or feeling. Nerves can be damaged in a number of ways.
When a nerve is cut due to a traumatic injury or surgery, functionality of the nerve may be compromised,
causing the nerve to no longer carry the signals to and from the brain to the muscles and skin. This type of
injury generally requires a surgical repair. The traditional gold standard has been to either suture the nerve
ends together directly without tension or to bridge the gap between the nerve ends with a less important nerve
surgically removed from elsewhere in the patient’s own body referred to as nerve autograft. In addition,
compression on a nerve or blunt force trauma can cause nerve injuries that alter the signal conduction of the
nerve and may require surgical intervention.
In order to improve the options available for the surgical repair and regeneration of peripheral nerves,
AxoGen has developed and licensed regenerative medicine technologies. AxoGen’s innovative approach to
regenerative medicine has resulted in first-in-class products that it believes are redefining the peripheral nerve
repair market. AxoGen’s products are used by surgeons during surgical interventions to repair a wide variety
of nerve injuries throughout the body. These injuries range from a simple laceration of a finger to a complex
brachial plexus injury (an injury to the network of nerves that originate in the neck) as well as nerve injuries
caused by dental and other surgical procedures. Avance® Nerve Graft provides surgeons an implant with the
micro-architecture of a human nerve. This structure is essential and allows for bridging nerve gaps or
discontinuities up to 70mm in length. Additionally, Avance® Nerve Graft has product and sales synergies
with AxoGuard® Nerve Protector and AxoGuard® Nerve Connector. AxoGuard® products provide the unique
features of pliability, suturability, and translucence for visualization of the underlying nerve, while also
allowing the patient’s own cells to incorporate into the extracellular matrix to remodel and form a tissue similar
to the outermost layer of the nerve (nerve epineurium).
Regenerative Medical Products Industry
Regenerative medical products enable the repair, restoration, replacement or regeneration of tissue or
organ systems of the body. Regenerative medical products are becoming common in various medical arenas
because they have been shown to be effective repairing injured or defective tissues, such as bone, tendons,
dermis and other tissues of the body. Surgeons utilize regenerative medical products because they can provide
the complex structure required for implant integration and regeneration in the body.
We believe the primary driver of sustained growth in the regenerative medical product market is continued
favorable efficacy as compared to autograft tissue and synthetic medical products, and a wider understanding of
this advantage by practitioners. Repair with nerve autograft requires a secondary recovery procedure to remove
tissue from another location of the patient’s body to repair the injured area and results in loss of function at the
site of donation.
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Further, nerve autograft may also be costly and time consuming and may result in complications at the second
surgical site such as infection. In addition to processed nerve allograft (Avance® Nerve Graft), alternatives to
nerve autograft include hollow-tube synthetic or collagen-based medical products that are designed to provide
some restoration of function but may be limited by mechanisms of nerve healing and/or biocompatibility with
the body. Regenerative medical products often provide more desirable conditions for reconstruction and
regeneration of tissue, creating a superior solution for patients and physicians. AxoGen follows this trend,
providing regenerative medical products for peripheral nerve repair.
Regenerative medicine products typically consist of and rely on:
i. A scaffold or ECM to support the cells and/or provide the architecture of the tissue: and/or
ii. Cells to regenerate or recellularize the scaffold.
AxoGen’s regenerative products are scaffolds, and the patients’ own body provides the cells to regenerate or
recellularize these scaffolds.
Peripheral Nerves and Their Regeneration
The peripheral nervous system, or PNS, consists of nerves that either extend outside of, or reside outside
of, the central nervous system (primarily the brain and spinal cord). Peripheral nerves provide the pathway for
signals between the central nervous system and target organs, regulating movement (motor nerves) and touch
(sensory nerves). Therefore, if a peripheral nerve is crushed, severed, or otherwise damaged, its ability to
deliver signals to the target organs is eliminated, or significantly reduced, and could result in a loss of sensation
and/or functionality. The axon portion of the nerve cell, consisting of cell cytoplasm and resembling a hair-
like fiber, carries signals from the cell body to the target organ. Axons can be quite long, even exceeding one
meter, but are only a few micrometers in diameter. A typical nerve consists of hundreds of axons that lie
within long, thin tubes (endoneurial tubes). Analogous to a wiring cable, these endoneurial tubes are bundled
together in groups called fascicles, and each nerve may contain numerous fascicles. This sheath structure
provides protection for the axons and support for regeneration in the event of injury. Nerve injury occurs when
a sufficient number of axons have been crushed or transected (severed), thereby disrupting signals to the target
motor or sensory organ.
Given the right conditions, peripheral nerves have the ability to regenerate. Regenerating axons require
the proper environmental conditions including structure and guidance of axons in a tension and compression
free environment. In an untreated severe crush injury or transected nerve, errant axons that are not guided by
the nerve sheath structure, or other mechanism, can form painful and ineffective nerve proliferation
(neuromas). This can then require revision surgery to relieve pain or bring back sensory and/or motor
functionality. Therefore, the surgical treatment of nerve injuries is typically focused on restoring nerve
functionality by providing structural guidance to regenerating axons while protecting the nerve to alleviate
compression and tension.
Peripheral Nerve Regeneration Market Overview
Peripheral nerve injury (“PNI”) is a major source of disability impairing the ability to move muscles or to
feel normal sensations. Failure to treat nerve damage can, in severe cases, lead to full loss of sensation and/or
function, pain and, sometimes, amputation. Many peripheral nerve injury patients who receive treatment do
not optimally recover. They may suffer from both reduced, or no, muscle strength, and reduced, or no,
sensitivity and pain.
Every day patients suffer traumatic wounds to peripheral nerves severe enough to require surgical
treatment, including injuries from motor vehicle accidents, power tool injuries, gunshot wounds, dislocations,
fractures, lacerations, or other forms of penetrating trauma. The peripheral nerves commonly injured from
these traumas include the digital, median, ulnar, radial, facial, spinal accessory and brachial plexus nerves.
Traumatic PNI described herein, and excluding Oral and Carpal Tunnel defined below, is referred to by
AxoGen as occurring in the “Extremity” PNI market.
Beyond traumatic injury to nerves described above, nerve damage also occurs due to surgical
intervention. Some of these surgical nerve injuries can occur during dental and oral surgery procedures such
as third molar extractions,
5
placement of dental implants and removal of tumors during which an injury may be caused to one or more
sections of the trigeminal nerve (“Oral”). This can result in numbness in certain areas of the face and mouth.
Finally, nerves are also damaged or compromised due to compression injuries. For instance, severe and
recurrent carpal tunnel cases may result in complications and damage to the nerve that requires surgical
intervention and protection of the nerve. We refer to PNI caused by carpal tunnel syndrome as “Carpal
Tunnel”. Additional surgical procedures where nerves can be injured include the removal of cancerous tissues
or reconstructive surgery. For example, nerves may be injured or removed during a radical prostatectomy to
remove prostate cancer and this nerve injury may result in impotence and incontinence. Further, breast cancer
patients may have reduced sensation in the tissue used to reconstruct the breast after mastectomy.
In the cases where a nerve is severed and the gap between the two ends of the nerve is extremely small,
the surgeon may be able to reconnect the nerve without tension through direct suturing using a coaptation aid
(“Primary Repair”). When the gap in the nerve tissue is more than a few millimeters in length, the surgeon
typically needs to use material to bridge the gap between the nerve ends to ensure a tension-free repair (“Gap
Repair”). Historically for a Gap Repair surgeons have relied on a nerve autotransplantation (autologous nerve
grafting or nerve autograft). In nerve autograft procedures, surgeons remove nerve from another part of the
patient’s body, frequently the sural nerve from the back of the lower leg, to repair the damaged nerve. Nerve
autografting is often effective in repairing a damaged peripheral nerve, but it presents a tradeoff — the surgeon
can attempt to fix the damaged nerve but must create an additional nerve deficit at another location in the
body. For example, a patient may opt to get movement and feeling back in their finger while losing some
sensation in their foot. Additionally, the secondary surgery to obtain the needed nerve autograft also increases
operating time, and thus medical expenses, and increases the risk of surgical site infection and other
complications. In the case of extreme trauma where multiple nerves need to be repaired, it may not be possible
to recover enough nerve from the patient to complete the Gap Repair. Further, nerve autograft tissue may not
provide an appropriate diameter match with the diameter of the injured nerve stump, an important factor in a
successful repair outcome.
Drawbacks of repair with autograft nerve eventually led to the development of hollow tube conduits, or
hollow tube nerve cuffs for Primary and Gap Repair made of, for instance, bovine collagen or polyglycolic
acid. The nerve cuff is typically an absorbable hollow tube that, unlike natural peripheral nerve, does not have
internal microarchitecture and endoneurial tubes to support regenerating axons; as a result, it is deficient in the
qualities that natural nerve possesses to support nerve regeneration across a gap. Hollow-tubes may also lack
pliability and structural integrity needed when used around joints and may be difficult to use in a confined
space. Clinical data has demonstrated that hollow tubes are most effective when used in very short gaps, what
AxoGen defines as Primary Repair, and the reliability of successful nerve recovery diminishes as gap length
increases.
The shortcomings of hollow-tubes for nerve repair limit where they may be used effectively. Thus,
AxoGen believes the nerve repair market needs an alternative off-the-shelf product that offer other features
such as a natural ECM scaffold and three-dimensional structure of a typical nerve for bridging nerve
discontinuities without the comorbidities of an additional surgical site required for harvest of autograft nerve
tissue. AxoGen believes its Avance® Nerve Graft and AxoGuard® Nerve Connector products address the
market needs for both Gap and Primary Repair.
Compression on a nerve or blunt force trauma can also cause nerve injuries that may require surgical
intervention. In these cases, the nerve is not severed and thus does not create the need for a Primary or Gap
Repair. However, the surgeon may want to protect and isolate the nerve during the healing process. In these
situations nerve protection is provided by wrapping the nerve (“Nerve Protection”).
AxoGuard® Nerve Protector is a porcine submucosa extracellular matrix used for Nerve Protection. Other
Nerve Protection products are usually made from bovine collagen or polyglycolic acid and are typically
absorbable. AxoGuard® Nerve Protector provides the unique features of pliability, suturability, and
translucence for visualization of the underlying nerve, while also allowing the patient’s own cells to
incorporate into the extracellular matrix to remodel and separate the nerve from the surrounding tissue.
Based on estimates prepared by AxoGen, it believes the United States PNI market for its current product
portfolio for Extremity, Oral and Carpal Tunnel Revision is $1.6 billion (the “Market”). We estimate that the
Extremity portion
6
of the Market is approximately $1.3 billion. The estimated size of the Extremity portion of the market is based
upon epidemiological studies regarding the general number of trauma patients, physician interviews and
incidence of PNI in the population. AxoGen believes each year in the U.S. more than 1.4 million people suffer
traumatic injuries to peripheral nerves. AxoGen estimates that traumatic and non-traumatic injuries to
peripheral nerves result in over 700,000 extremity nerve repair procedures (“Health”, United States, 2011,
Publication of U.S. Department of Health & Human Services; Noble, et al. J of Trauma Injury Infection and
Critical Care 1998; Kurt Brattain, MD, Magellan Medical Technology Consultants, Inc., Minneapolis,
Minnesota 2013). AxoGen further estimated the portion of extremity nerve repair procedures that would be
addressed by AxoGen’s Gap Repair, Primary Repair and Nerve Protection products and applied the average
sales price of the AxoGen product appropriate to the procedure (Avance® Nerve Graft, AxoGuard® Nerve
Connector and AxoGuard® Nerve Protector, respectively). As a result, AxoGen estimates that the market sizes,
within the Extremity portion of the Market, for our Avance® Nerve Graft, AxoGuard® Nerve Connector and
AxoGuard® Nerve Protector products are approximately $668 million, $161 million and $483 million,
respectively.
AxoGen estimates that the Oral portion of the Market is approximately $129 million of the Market, based
upon research that has indicated approximately 68,000 PNI occur in the U.S. each year that are related to third
molar extractions, anesthetic injections and dental implants. (The Prophylactic Extraction of Third Molars: A
Public Health Hazard: Jay W. Friedman, DDS, Health Policy and Ethics; Peer Reviewed; Friedman American
Journal of Public Health; September 2007, Vol 97, No. 9, pp 1554 — 1559 — Journal of Oral Implantology,
Vol. XXXVI/No. Five/2010; “Inferior Alveolar Nerve Injury in Implant Dentistry: Diagnosis, Causes,
Prevention, and Management”; Ahmed Ali Alhassani, BDS - “Nerve Injuries after Dental Injection: A Review
of the Literature”; Clinical Practice, July/August 2006, Vol. 72, No. 6, Miller H. Smith, BMedSc, DDS; Kevin
E. Lung, BSc, DDS, MSc, FRCD(C)). AxoGen has applied the average sales price of the Avance® Nerve Graft
and AxoGuard® Nerve Protector that address Oral PNI in order to derive the Oral portion of the Market.
AxoGen estimates that the Carpal Tunnel portion of the Market is approximately $160 million. According
to literature, there are approximately 500,000 carpal tunnel relief surgeries performed annually in the U.S., and
AxoGen assumes that 20% of such surgeries require revision procedures to address the recurrence of
symptoms (“Vein-Graft Wrapping for the Treatment of Recurrent Compression of the Median Nerve”,
Microsurgery 16:752-756 1995, Dean G. Sotereanos, M.D.). As a result, AxoGen estimates that
approximately 100,000 carpal tunnel revision surgeries are performed each year in the U.S. to address the
recurrence of symptoms. These revision surgeries are required due to compression of the nerve due to soft
tissue attachments from the surrounding tissue or tissue infiltration entrapping the nerve. To prevent additional
recurrences, surgeons will opt to use a Nerve Protection product such as the AxoGuard® Nerve Protector. In
order to derive the Carpal Tunnel portion of the Market, AxoGen multiplied the average sales price of our
AxoGuard® Nerve Protector by the number of estimated carpal tunnel revisions.
AxoGen continues to look at expansion markets beyond those that AxoGen has defined as Extremity, Oral
and Carpal Tunnel. In addition to these areas, AxoGen believes a market exists to treat nerves that are severed
during the removal of both benign and cancerous tumors. For example, nerves may be injured or removed
during a surgical prostatectomy to remove prostate cancer resulting in impotence and incontinence. Further, a
patient who receives repair of peripheral nerves in the breast following a mastectomy and reconstruction, may
avoid the reduced sensation typically experienced by many breast cancer patients. AxoGen believes that we
will continue to identify market expansion opportunities for our current product portfolio.
AxoGen’s Product Portfolio
Overview of AxoGen’s Products
AxoGen’s proprietary products and technologies are designed to overcome fundamental challenges in
nerve repair. AxoGen’s Avance Nerve Graft is the alternative to autografts and other off-the-shelf nerve
repair products for nerve gaps up to 70mm in length. AxoGuard® Nerve Connector is a coaptation aid for
transected nerve injuries. AxoGuard® Nerve Protector completes the surgical repair portion of the product
portfolio and is a protective wrap for nerves damaged by compression, or where the surgeon wants to protect
and isolate the nerve during the healing process after
®
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surgery. The AxoGen surgical repair product portfolio, depicted below, provides surgeons off-the-shelf
solutions for a wide variety of peripheral nerve injuries.
Functional measurements play an important role in the evaluation of nerve function. It assists the
healthcare professionals in detecting changes in sensation or muscle strength, assessing return of sensory or
motor function, establishing effective treatment interventions, and providing feedback to the patients
Standardized evaluation and measurement of nerve function is also an important part of identifying nerve
injuries and determining treatment outcomes. AxoGen’s functional measurement products include the
AxoTouch™ Two-Point Discriminator tool (for sensory function) and the AcroVal™ Neurosensory and Motor
Testing System (for sensory and motor function) which will be launched in March 2016.
Avance® Nerve Graft
Avance® Nerve Graft is intended for the surgical repair of peripheral nerve discontinuities to support
regeneration across the defect (a gap created when the nerve is severed). It is intended to act as a bridge in
order to guide and structurally support axonal regeneration across a nerve gap caused by traumatic injury or
surgical intervention. Avance® Nerve Graft is decellularized and sterile extracellular matrix (ECM) processed
from human peripheral nerve tissue. AxoGen developed the Avance® Nerve Graft by following the guiding
principle that the human body created the optimal nerve structure. AxoGen, through its licensing efforts and
research, developed the Avance® process, a proprietary method for processing recovered human peripheral
nerve tissue in a manner that preserves the essential structure of the ECM while cleansing away cellular and
noncellular debris. Avance® Nerve Graft provides the natural nerve structure of an autograft and the ease and
availability of an off-the-shelf product. AxoGen believes that Avance® Nerve Graft is the first off-the-shelf
human nerve allograft for bridging nerve discontinuities. Avance® Nerve Graft is comprised of bundles of
small diameter endoneurial tubes that are held together by an outer sheath called the epineurium. Avance®
Nerve Graft has been processed to remove cellular and noncellular factors such as cells, fat, blood, axonal
debris and chondroitin sulfate proteoglycans, (“CSPG”), while preserving the three-dimensional laminin lined
tubular bioscaffold (i.e. microarchitecture), epineurium and microvasculature of the peripheral nerve. After
processing, Avance® Nerve Graft is flexible and pliable, and its epineurium can be sutured in place allowing
for tension-free approximation of the proximal and distal peripheral nerve stumps. The design results in a
product that has clean and clear pathways for the regenerating axons to grow through. During the healing
process, the body revascularizes and gradually remodels the graft into the patient’s own tissue while allowing
the processed nerve allograft to physically support axonal regeneration across the nerve discontinuity.
8
With lengths up to 70 mm and diameters up to 5 mm, the Avance ® Nerve Graft allows surgeons to choose
the correct length for repairing the relevant nerve gap, as well as to match the diameter to the proximal and
distal end of the severed nerve. The Avance® Nerve Graft is stored frozen and utilizes packaging that
maintains the graft in a sterile condition. The packaging is typical for medical products so the surgical staff is
familiar with opening the package for transfer of the Avance® Nerve Graft into the sterile surgical field. Such
packaging also provides protection during shipment and storage and a reservoir for the addition of sterile fluid
to aid in thawing the product. The Avance® Nerve Graft thaws in less than 10 minutes, and once thawed, it is
ready for implantation.
The Avance® Nerve Graft provides the following key advantages:
· A three-dimensional bioscaffold for bridging a nerve gap;
· No patient donor-nerve surgery, therefore no comorbidities associated with a secondary
surgical site;
· Available in a variety of diameters up to 5mm to meet a range of anatomical needs;
· Available in a variety of lengths up to 70mm, to meet a range of gap lengths;
· Decellularized and cleansed extracellular matrix that remodels into patient’s own tissue;
·
Structurally supports the body’s own regeneration process;
· Handles similar to an autograft, and is flexible and pliable;
· Alleviates tension at the repair site;
·
·
Three year shelf life; and
Supplied sterile.
AxoGuard® Nerve Connector
AxoGuard® Nerve Connector is a coaptation aid used to align and connect severed nerve ends in a
tensionless repair. The product is in a tubular shape with an open lumen on each end where the severed nerve
ends are placed. It is typically used when the gap between the nerve ends is less than 5mm in
length. AxoGuard® Nerve Connector is made from a minimally processed porcine ECM which allows the
body’s natural healing process to repair the nerve while its tube shape isolates and protects the injured nerves
during the healing process. During healing, the material revascularizes and the patient’s own cells incorporate
into the extracellular matrix product to remodel and form a tissue similar to the outermost layer of the nerve
(nerve epineurium). AxoGuard® Nerve Connector is provided sterile, for single use only, and in a variety of
sizes to meet the surgeon’s needs.
AxoGuard® Nerve Connector can be used:
· As an alternative to direct suture repair;
·
·
·
·
To relieve tension at the coaptation site of severed nerves;
To aid coaptation in direct repair, grafting, or cable grafting repairs;
To reduce the risk of forced fascicular mismatch; and
To reinforce the coaptation site.
AxoGuard® Nerve Connector has the following advantages:
· Minimally processed porcine submucosa extra-cellular matrix product used to repair severed
nerve tissue;
· Alleviates tension at the repair site;
·
·
Revascularizes and remodels into the patient’s own tissue instead of degrading;
Reduces the number of required sutures (versus direct repair with suture) allowing for up to
40% reduced surgery time (Boechstyns, Jhand Surg. 2013;38:2405-2411);
· Moves location of sutures away from the coaptation face;
Reduces potential for fascicular mismatch;
·
· Allows visualization of underlying nerve tissue;
· Available in 7 different diameters and 2 different lengths to address a variety of nerve repair
situations;
Conforms to the nerve;
·
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·
·
Strong and flexible, easy to suture; and
Stored at room temperature with an 18-month shelf life.
AxoGuard® Nerve Protector
AxoGuard® Nerve Protector is a product used to protect and wrap injured peripheral nerves and reinforce
reconstructed nerve gaps while preventing soft tissue attachments. It is designed to protect and isolate the nerve
during the healing process after surgery by creating a barrier between the nerve tissue and the surrounding
tissue bed. The product is delivered in a slit tube format allowing it to be wrapped around nerve
structures. AxoGuard® Nerve Protector is made from a minimally processed porcine ECM. During healing,
the material revascularizes and the patient’s own cells incorporate into the extracellular matrix product to
remodel and separate the nerve from the surrounding tissue. AxoGuard® Nerve Protector competes against off-
the-shelf biomaterials such as reconstituted collagen as well as the use of the patients own tissue such as vein
and hypothenar fat pad wrapping. AxoGuard® Nerve Protector is provided sterile, for single use only, and in a
variety of sizes to meet the surgeon’s needs.
AxoGuard® Nerve Protector can be used to:
Protect injured nerves or nerve repair sites from surrounding tissue;
·
· Minimize risk of soft tissue attachments and entrapment in compressed nerves;
·
·
Protect nerves in a traumatized wound bed; and
Reinforce a coaptation site.
AxoGuard® Nerve Protector has the following advantages:
· Minimally processed Porcine submucosa bioscaffold used to reinforce a coaptation site,
wrap a partially severed nerve or protect nerve tissue;
Creates a protective layer that isolates and protects the nerve in a traumatized wound bed;
Revascularizes and remodels into the patient’s own tissue instead of degrading;
Easily conforms and provides 360 degree wrapping of injured nerve tissue;
Supports the body’s own natural wound healing;
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· Minimizes the potential for soft tissue attachments and nerve entrapment by physically
isolating the nerve during the healing process;
· Allows nerve gliding;
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Strong and flexible, plus easy to suture;
Is available in 5 different widths and 2 different lengths to address a variety of nerve repair
situations; and
Stored at room temperature with an 18-month shelf life.
·
AcroVal™ Neurosensory and Motor Testing System
AcroVal
TM
Neurosensory and Motor Testing System is a device for evaluating patients with peripheral
nerve conditions. We believe that an important step for improving patient outcomes is to support the
standardized evaluation and measurement of nerve function. Today there is little consistency of measurement
protocols. With the AcroVal™ system examiners will have digital, less subjective results for their patients with
conditions like peripheral neuropathy, nerve compression syndromes, and transected nerves. Ultimately, we
believe that standardization of evaluation and measurement techniques will facilitate comparison and
interpretation of clinical results leading to better understanding and care for patients with peripheral nerve
conditions.
Dr. A. Lee Dellon, a w orld-renowned peripheral nerve expert, developed the nerve functional evaluation
and measurement system over 25 years ago. We acquired the rights to his device in 2015 and will launch the
product in
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March 2016. The AcroVal™ consists of three different devices designed to evaluate hand strength and
neurosensory function:
· AcroGrip™ - hand grip strength measurement;
· AcroPinch™ – pinch strength measurement; and
·
Pressure-Specified Sensory Device™ (PSSD) – somatosensory evaluation and
measurement device
AcroVal™ can be used to assist healthcare professionals:
In detecting changes in sensation, pinch strength or grip strength;
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· Assessing return of sensory or motor function;
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Establishing effective treatment interventions; and
Providing feedback to patients.
AcroVal™ has the following advantages:
Flexible format to allow for additional measurement devices;
· Quantitative, electronic pre and post-intervention results;
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· Assessment of severity of nerve entrapment syndromes;
· Noninvasive; and
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Reference database to provide baseline standards and support patient education.
AxoTouchTM Two Point Discriminator
The AxoTouch™ Two-Point Discriminator tool can be used to measure the innervation density of any
surface area of the skin. The discs are useful for determining sensation after a nerve injury, following the
progression of a repaired nerve, and during the evaluation of a person with a possible nerve injury, such as
nerve division or nerve compression.
The AxoTouch™ Two-Point Discriminator tool is a set of two aluminum discs each containing a series of
prongs spaced between 2 to 15 millimeters apart. Additionally, 20 and 25 millimeter spacing is provided. A
circular depression on either side of the disc allows ease of rotation. The discs can be rotated between a single
prong for testing one-point and any of the other spaced prongs for testing two-point intervals.
AxoTouch™ Two-Point Discriminator has the following advantages:
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·
·
·
·
Capable of measuring the innervation density of any skin surface;
Portable and easy to use;
Strong aluminum design is resistant to bending;
Bright colors allow for clear discrimination between discs;
Clear numbering allows users to interpret results; and
Reusable carry case protects discs.
Tissue Recovery and Processing for Avance® Nerve Graft
Avance® Nerve Graft Processing Overview
Over several years, AxoGen has developed the Avance ® Process, an advanced and proprietary technique to
process the Avance® Nerve Graft from donated peripheral nerve tissue. The Avance® Process requires special
training over several months for each manufacturing associate who processes Avance® Nerve Grafts. The
processing and manufacturing system for Avance® Nerve Graft has required significant capital investment, and
we plan to make additional investments to continually improve our manufacturing and quality assurance
processes and systems.
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AxoGen’s Avance® Process, depicted below, consists of several steps, including peripheral nerve tissue
recovery and testing, donor medical review and release, processing, packaging, and sterilization to meet or
exceed all applicable U.S. Food and Drug Administration (the “FDA”) , state, and international regulations and
American Association of Tissue Banks (“AATB”) standards. As an FDA registered tissue establishment,
AxoGen utilizes both its own personnel and a variety of subcontractors for recovery, storage, testing,
processing and sterilization of the donated peripheral nerve tissue. Additionally, independent certified
laboratories have been contracted by AxoGen and its subcontractors to perform testing. The safety of
Avance® Nerve Graft is supported by donor screening, process validation, process controls, and validated
terminal sterilization methods. The AxoGen Quality System has built in redundancies so that each Avance®
Nerve Graft released for implantation meets our stringent quality control and product requirements.
Avance® Nerve Graft Tissue Recovery and Processing
®
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AxoGen partners with FDA registered tissue establishments and AATB accredited recovery agencies or
recovery agencies in compliance with AATB standards to recover human peripheral nerve tissue for Avance
Nerve Graft processing. After consent for donation is obtained, donations are screened and tested in detail for
safety in compliance with the federal regulations and AATB standards on communicable disease
transmission. AxoGen processes and packages Avance Nerve Graft using its employees and equipment.
From 2009 until February 2016 this processing and packaging was performed at LifeNet Health, Virginia
Beach, Virginia (“LifeNet Health”). Business requirements of LifeNet Health led to their need for additional
space and they notified AxoGen that AxoGen would need to transition out of the Virginia Beach facility on or
before February 27, 2016. On August 6, 2015 Axogen entered into a License and Services Agreement with
Community Blood Center (d/b/a Community Tissue Services) (“CTS”), Dayton, Ohio, an FDA registered
tissue establishment. Processing of the Avance Nerve Graft pursuant to the CTS agreement began in February
2016. The CTS agreement is for a 5-year term, subject to earlier termination by either party for cause, or after
August 6, 2017 without cause, upon 18 months notice. Under the CTS agreement AxoGen pays CTS a facility
fee for clean room/manufacturing, storage and office space. CTS also provides services in support of
AxoGen’s manufacturing such as routine sterilization of daily supplies, providing disposable supplies,
microbial services and office support. The service fee is based on a per donor batch rate. The CTS facility
provides a cost effective, quality controlled and licensed facility. However, AxoGen could reproduce a
manufacturing space that would meet its needs if it no longer continued its relationship with CTS. AxoGen’s
processing methods and process controls have been developed and validated to ensure product uniformity and
quality. Pursuant to the CTS agreement, AxoGen pays license fees on a monthly basis to CTS which total an
annual amount of approximately $416,000.
®
Avance® Nerve Graft Packaging
After processing, each Avance® Nerve Graft is visually inspected and organized by size (length and
diameter) into finished product codes. It is then packaged in individual medical grade clamshells and primary
packaging. The outer pouch is the primary sterility and moisture barrier. The packaging operation is
performed in a controlled environment at CTS.
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Avance® Nerve Graft Sterilization and Labeling
After being processed and packaged, Avance® Nerve Graft is then irradiated and shipped to its Burleson,
Texas distribution facility (the “Distribution Facility”). There the product receives its final labels and is
released following a final stringent technical and quality review. Orders for Avance® Nerve Graft are placed
with AxoGen’s customer care team and product is packaged and shipped from the Distribution Facility.
Avance® Nerve Graft Product Release
The AxoGen Quality System meets the requirements set forth under 21 CFR Part 1271 for Human Cells,
Tissues and Cellular and Tissue-Based Products, including Good Tissue Practices (“GTP”) and is compliant
with the 21 CFR Part 820 Quality System Regulations (“QSR”). AxoGen has established quality procedures
for review of tissue recovery, relevant donor medical record review and release to processing that meet or
exceed FDA requirements as defined in 21 CFR Part 1271, state regulations, international regulations and
AATB standards. Furthermore, AxoGen utilizes validated processes for the handling of raw material
components, environmental control, processing, packaging and terminal sterilization. In addition to ongoing
monitoring activities for product conformity to specifications and sterility, product biocompatibility, shipping
methods and shelf life have been validated in accordance with applicable industry standards.
Manufacturing of AxoGen Products Other Than Avance® Nerve Graft
Manufacturing for the AxoGuard® Product Line
AxoGuard® is manufactured by Cook Biotech Incorporated, West Lafayette, Indiana (“Cook Biotech”),
which was established in 1995 to develop and manufacture tissue grafts utilizing porcine extracellular matrix
technology. AxoGen decided to expand its portfolio of products and felt that the unique ECM material offered
by Cook Biotech provided the combination of properties needed in nerve reconstruction. Cook Biotech’s ECM
material is pliable, capable of being sutured, translucent and allows the patient’s own cells to incorporate into
the extracellular matrix to remodel and form a tissue similar to the nerve’s epineurium. In August 2008, Cook
Biotech entered into an agreement, amended in March 2012, with AxoGen to distribute its product worldwide
in the field of the peripheral and central nervous system, but excluding use of the AxoGuard ® product in the
oral cavity for endodontic and periodontal applications and oral and maxillofacial surgery solely as they relate
to dental, soft or hard tissue repair or reconstruction. The exclusion results in certain areas of AxoGen’s market
expansion into the oral surgery market being limited to the Avance Nerve Graft.
®
The Cook Biotech agreement runs through August 27, 2022. It requires certain minimum purchases,
although through mutual agreement the parties have not established such minimums and to date have not
enforced such provision, and establishes a formula for the transfer cost of the AxoGuard® products. Under the
agreement, AxoGen provides purchase orders to Cook Biotech, and Cook Biotech fulfills the purchase orders.
Manufacturing for the AcroVal™ Neurosensory and Motor Testing System and AxoTouch Two Point
TM
Discriminator
The AcroVal™ Neurosensory and Motor Testing System and AxoTouch Two Point Discriminator are
contract manufactured by Cybernetics Research Laboratories (“CRL”), Tucson, Arizona. CRL supplies the
AxoTouch unpackaged and it is packaged at the Distribution Facility.
TM
The AcroVal™ Neurosensory and Motor Testing System and AxoTouch Two Point Discriminator are
contract manufactured by Cybernetics Research Laboratories (“CRL”), Tucson, Arizona. CRL supplies the
AxoTouch unpackaged and it is packaged at the Burleson distribution facility. The Company and CRL are
finalizing contracting for the AcroVal™. It is expected that CRL will provide the AcroVal™ to the
Company’s Burleson distribution facility and AxoGen will perform final inspection and package for customer
shipment. CRL will provide warranty service on behalf of the Company for the AcroVal™ and maintain
certain levels of spare parts inventory for manufacturing and fulfillment of warranty work.
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We believe CRL has capacity to support any future volumes of AcroVal
TM
and AxoTouch .
TM
Sales and Marketing
Overview
The AxoGen portfolio of nerve repair solutions, consisting of the Avance Nerve Graft, AxoGuard Nerve
®
®
®
Connector and AxoGuard Nerve Protector, offers a full range of products for surgical peripheral nerve repair
needs. Its AcroVal™ Neurosensory and Motor Testing System and AxoTouch Two Point Discriminator
evaluation and measurement tools assist healthcare professionals in detecting changes in sensation, assessing
return of sensory function, establishing effective treatment interventions, and providing feedback to
patients. AxoGen is focused on the developing market of peripheral nerve repair and regeneration, is
committed to improving awareness of new surgical peripheral nerve repair options and is advancing evaluation
capabilities for nerve issues, as well as building additional scientific and clinical data to assist surgeons and
patients in making informed choices. AxoGen believes that there is an opportunity to rethink current
approaches to nerve repair and that its approach will solidify its position as a leader in the field of products for
peripheral nerve injuries. The following provides the key elements of AxoGen’s sales and marketing strategy.
TM
Increase Awareness of AxoGen’s Products
Prior to the introduction of AxoGen’s portfolio of nerve repair products, surgeons had a limited number of
options available for the surgical repair of nerve injuries. AxoGen entered the market to improve the standard
of care for patients. Unlike other off-the-shelf options, all of AxoGen’s nerve repair products are composed of
an extracellular matrix which remodels into the patient’s own tissue and provides physical support for the
body’s natural healing process.
AxoGen intends to increase market share by improving awareness of nerve repair techniques and
AxoGen’s products through the continued use of educational conferences and presentations, surgical resident
and fellow training, scientific publications, and a knowledgeable and professional sales team. AxoGen works
to increase usage with existing customers as well as expand the overall customer base. AxoGen is focused on
plastic reconstructive surgeons and orthopedic and plastic surgeons who perform surgeries on patients suffering
traumatic nerve injuries and who perform hand reconstructive surgeries and certain oral surgeons who repair
oral nerve injuries.
Expand Clinical and Scientific Data Regarding the Performance of AxoGen Products
Generating clinical data is an important component of AxoGen’s marketing strategy. AxoGen will
continue to accept patients in its RANGER® clinical study (defined below in “Government Regulations”), a
utilization registry of Avance® Nerve Graft. Three publications and more than 44 scientific conference
presentations have been generated to date from the registry. A multicenter prospective randomized
comparative pilot study of hollow tube conduits and Avance® Nerve Graft has completed subject enrollment
and outcome follow-up. A pivotal multicenter prospective randomized comparative pilot study of hollow tube
conduits and Avance® Nerve Graft to support the transition to a BLA has begun enrollment. Case series in
digital nerve repair have been published from the Mayo Clinic, Georgetown University Medical Center and
Philadelphia Hand Center and a case series in OMF has been published from UT Southwestern. A number of
additional investigator initiated case reports, studies and publications have been completed. A pilot study on
the repair of the cavernous nerves in prostate cancer patients has completed enrollment and follow-up at
Vanderbilt and data analysis and report are underway. Case series in brachial plexus, military trauma,
neurotization of breast reconstruction and compressive neuropathy are also being developed. AxoGen also
supports outside research and will continue to work with investigators working on grants with a translational
focus.
Expand the AxoGen Sales Team
AxoGen provides full sales and distribution services through both a direct sales force and a team of
independent distributors. As of December 31, 2015, we had 41 direct sales professionals and 24 independent
distributors. AxoGen
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provides support and resources for independent distributors both within and outside the United States and is
increasing its direct sales force in selected United States territories. AxoGen provides products to hospitals,
surgery centers and military hospitals, calling on plastic reconstructive surgeons and orthopedic and plastic
hand surgeons and certain oral surgeons to review the benefits of the AxoGen products. While surgeons make
the decision to implant the products in appropriate patients, hospitals make the decision to buy the products
from AxoGen. In today’s budget constrained environment, hospital committees review new technologies for
cost effectiveness as well as quality. AxoGen believes that it has been successful in meeting the needs of these
hospital committees by demonstrating the cost/benefit of its products and providing a fair value to the hospital.
AxoGen Strengths
AxoGen believes that it has the following strengths in the field of nerve repair and regeneration:
Established Nerve Repair Expertise
AxoGen has made a significant investment in understanding peripheral nerve anatomy and surgical nerve
repair and regeneration. This has been accomplished through interaction with leading academic centers
throughout the United States and by striving to build an outstanding internal team of technical and clinical
experts.
Commitment to the Promotion and Education of Best Practices in Peripheral Nerve Repair
TM
AxoGen has established educational conferences and presentations and surgical resident and fellow
training that we believe is positioning us as a leader in providing peripheral nerve repair best practices. The
is a continuation of this commitment as we believe that an important step for improving patient
AcroVal
outcomes is to support the standardized evaluation and measurement of nerve function. Ultimately,
standardization of evaluation and measurement techniques will facilitate comparison and interpretation of
clinical results leading to better understanding and care for patients with peripheral nerve injuries which can be
incorporated into our educational programs and materials.
Surgical Implant Commercialization Experience
The AxoGen commercialization team consists of sales, marketing, and customer care professionals with
backgrounds in the medical device and biotechnology industries. The team has strong experience in the
introduction of technologies and has been instrumental in beginning to establish the Avance® Nerve Graft and
the AxoGuard® product line as a new standard of care for the surgical treatment of nerve injuries. AxoGen
believes it can leverage these capabilities in expanding the commercial success of the current AxoGen
products and future product opportunities.
Avance® Nerve Graft Performance
AxoGen has worked with leading institutions, researchers and surgeons to support innovation in the field
®
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of surgical peripheral nerve repair. We believe AxoGen’s RANGER study (defined below in the section
entitled “Government Regulations”) is the largest multi-center clinical study conducted in peripheral nerve gap
repair. AxoGen’s A Multicenter, Prospective, Randomized, Subject and Evaluator Blinded Comparative Study
of Nerve Cuffs and Avance Nerve Graft Evaluating Recovery Outcomes for the Repair of Nerve
Discontinuities (“RECON”) study, the phase 3 trial to support its Biologics License Application (“BLA”),
continues AxoGen’s clinical work, providing a new multi-center, prospective, randomized, clinical study on
the Avance Nerve Graft. (See “Government Regulations”). The January, 2012 edition of Microsurgery and
November 2012 edition of The Journal of Hand Surgery and June 2015 edition of Journal of Reconstructive
Microsurgery each contain an article summarizing the RANGER study results. The Brooks et al. publication
reported on 55 Avance Nerve Graft nerve repairs and resulted in meaningful motor and sensory recovery in
87% of nerve discontinuities between 5 and 50 mm. Additionally, no implant related adverse events were
reported. (Brooks, D. N., Weber, R. V., Chao, J. D., Rinker, B. D., Zoldos, J., Robichaux, M. R., Ruggeri, S.
B., Anderson, K. A., Bonatz, E. E., Wisotsky, S. M., Cho, M. S., Wilson, C., Cooper, E. O., Ingari, J. V., Safa,
B., Parrett, B. M. and Buncke, G. M. (2012), Processed nerve allografts for peripheral nerve reconstruction: A
multicenter study of utilization and outcomes in sensory, mixed, and motor nerve reconstructions.
Microsurgery, 32: 1—14. doi: 10.1002/micr.20975 and Cho, et al. 2012, J Hand Surg Am 37(11):2340-9). A
meta-analysis of available clinical outcomes data from published
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papers on the leading synthetic collagen conduit showed meaningful improvement in only 40-74% of cases
bridging a gap in the nerve. A similar meta-analysis for nerve autograft reported meaningful improvement in
60-88% of nerve repairs.
International Opportunity for Product Sales
AxoGen currently focuses on the U.S. market, with additional foreign sales in Canada, Spain, Austria,
United Kingdom, Israel, Greece, Chile, Switzerland and certain other countries. The need for the surgical
repair of injured nerves is a global issue. Through its ex-U.S. sales, AxoGen has shown the capability to take its
current nerve repair product offering into new geographical markets. AxoGen does not currently have
European Union (“E.U.”) wide approval for Avance Nerve Graft, but the AxoGuard products have a CE
®
Mark and can be sold in the E.U. and affiliated countries.
®
Research and Development
AxoGen believes it provides the most extensive product portfolio for peripheral nerve repair
available. Our current development focus is to expand clinical data in both traumatic nerve repair and other
surgical applications. Additional product line extensions of the Avance and AxoGuard products and other
nerve repair products may be developed. In this regard, AxoGen introduced an AxoGuard Connector line
extension in winter 2014 by providing a new longer 15mm product. Our nerve evaluation and measurement
tools are further examples of our development activity having launched the AxoTouch in the fall of 2014 and
launching the AcroVal
systems in March 2016. AxoGen works with academic institutions in the expansion
of treatments for peripheral nerve and is involved in a number of grants from government agencies related to
nerve repair or use of our products and/or technologies. For the years ended December 31, 2015 and 2014,
AxoGen spent approximately $3,237,000 and $3,033,000, respectively, on research and development expenses
and recognized grant revenue of $433,000 and $314,000, respectively.
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Competition
The medical device and biotechnology industries are characterized by rapidly advancing technologies,
intense competition and a strong emphasis on proprietary products. As such, AxoGen cannot predict what
products may be offered in the future that may compete with AxoGen’s products. With regard to nerve
function evaluation and measurement there are a number of methods and techniques with little consistency of
measurement protocols. Currently as to nerve repair products, AxoGen competes primarily against all
transected and non-transected nerve repair approaches including direct suture repair, autograft and hollow-tube
nerve conduits and materials used to wrap and protect nerve tissue. Because the requirements of the
biomaterials used in nerve repair can vary based on the severity and location of the injury, the size and
function of the nerve, surgical technique and patient preference, AxoGen’s nerve repair products compete
against both autograft materials (nerve in the case of a bridging repair and vein or fat in the case of a nerve
protection repair) and a limited number of off-the-shelf alternatives. Competitive aspects of our products focus
on the overall value proposition of our products and their suitability for specific applications and can include
composition and structure of the material, ease of use, clinical evidence, handling, and price. AxoGen’s major
competitors for off-the-shelf repair options in hollow-tube conduits and bio-absorbable wraps are the following
companies:
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Integra LifeSciences Holding Corporation (NASDAQ: IART) (“Integra”). Integra offers
NeuraGen®, a hollow tube product made from reconstituted bovine collagen and NeuraWrapTM,
a reconstituted bovine collagen biomaterial used for nerve wrapping;
Baxter International, Inc. (NYSE: BAX) (“Baxter”). Baxter acquired Synovis which offers
Neurotube, a hollow tube made of polyglycolic acid; and
Stryker Corporation (NYSE: SYK) (“Stryker”). Stryker offers the NeuroMatrix and Neuroflex
products, both of which are hollow tubes derived from reconstituted bovine collagen and
NeuroMend, a reconstituted bovine collage biomaterial used for nerve wrapping.
AxoGen believes that surgeons use Avance ® Nerve Graft because it provides them with the natural three-
dimensional structure and familiar handling characteristics of a typical nerve for bridging nerve discontinuities
(severed
16
nerves) without the comorbidities and additional surgical site of an autograft as well as confidence in the
performance of the product as a result of the growing body of clinical literature. AxoGuard® Nerve Protector
and AxoGuard® Nerve Connector provide the unique features of pliability, suturability, and translucence for
visualization of the underlying nerve while also allowing the patient’s own cells to incorporate into the
extracellular matrix to remodel and form a tissue similar to the outermost layer of the nerve (nerve
epineurium).
AxoGen believes any current or future competitors face the following important barriers to entry as it
relates to the market for its nerve repair products. AxoGen’s intellectual property (“IP”), and that of its
partners, including patents, patents-pending and know how, is believed to be an important
barrier. Additionally, AxoGen has developed knowledge and experience in understanding and meeting FDA
regulatory requirements for Avance Nerve Graft, including having made a substantial investment in
conducting the preclinical and clinical testing necessary to support a submission for a FDA BLA. However,
due to its limited resources, its smaller size and its relatively early stage, AxoGen believes it may face
competitive challenges and barriers that are difficult to overcome and could negatively impact its growth.
®
Intellectual Property
Overview
AxoGen relies on a combination of patent, trademark, trade secret, and copyright, as well as other IP laws,
to protect IP rights. In addition, AxoGen utilizes license, non-disclosure, and assignment agreements to protect
these IP rights. Specifically, AxoGen requires vendors, contract organizations, consultants, advisors and
employees to execute nondisclosure agreements. AxoGen also requires consultants, advisors and employees
who develop IP to assign to AxoGen any of their rights to all IP conceived in connection with their relationship
with AxoGen.
License Agreements
AxoGen has entered into license agreements with University of Florida Research Foundation (the
“UFRF”) and the University of Texas at Austin (“UTA”). Under the terms of these license agreements,
AxoGen has exclusive worldwide licenses for the underlying technologies used by AxoGen in repairing and
regenerating nerves. The license agreements include both the right to issued patents and patents pending in the
U.S. and international markets. The effective term of the license agreements extends through the term of the
related patents. In the event of default, licensors may also terminate an agreement (after written notice) if
AxoGen fails to cure a breach. The license agreements contain the following key terms:
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Payment of annual license maintenance fees, some of which may be credited against future
royalty payments;
Payment of royalty fees of 1%-3% based on net sales of the licensed products, the level
depending on the agreement, which may include a minimum quarterly royalty payment with
discounts off royalty rates when royalty stacking applies;
Payment of a percentage of sublicense fees received;
Reimbursement of certain legal expenses incurred for patent prosecution and defense; and
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· Other payments of various amounts based on achieving certain milestones.
Currently, AxoGen pays royalties to UFRF and UTA specific to the licensed technologies related to the
Avance® Nerve Graft.
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Patents
As of the date of this Form 10-K, AxoGen owned or was the exclusive licensee of six issued U.S. patents,
four pending U.S. patent applications, three issued international patents and nine pending international patent
applications with regard to its peripheral nerve products. Additionally, the granted European Patent
No. EP1425390 has been validated in France, Germany, Italy, Spain, Sweden, Switzerland, and the United
Kingdom. The following table illustrates the issued U.S. patents owned or licensed by AxoGen with regard to
its peripheral nerve products, including the patent number, a description of each patent, and the estimated
expiration date of each patent.
Patent No.
US 6,972,168
Description
Estimated expiration date
Materials and Methods for Nerve Grafting, Selection of
Nerve Grafts, and in vitro Nerve Tissue Culture
August 2021
US 7,402,319
Cell Free Tissue Replacement for Tissue Engineering
September 2023
US 7,732,200
US 6,696,575
Materials and Methods for Nerve Grafting, Selection of
Nerve Grafts, and in vitro Nerve Tissue Culture
December 2022
Biodegradable, electrically conducting polymer for tissue
engineering applications
March 2021
US 7,851,447
Materials and Methods for Nerve Repair
November 2023
US 8,545,485
Nerve Elevator and Method of Use
May 2032
Additionally, AxoGen entered into an exclusive distribution agreement with Cook Biotech in August 2008,
as subsequently amended in March 2012, to distribute its ECM technology in the form of the Surgisis® Nerve
Cuff, the form of a nerve wrap or patch, or the form of any other mutually- agreed-to configuration in the field
of peripheral nervous system and central nervous system use, but excluding use of the AxoGuard® product in
the oral cavity for endodontic and periodontal applications and oral and maxillofacial surgery solely as they
relate to dental, soft or hard, tissue repair or reconstruction. AxoGen has subsequently rebranded the Surgisis
products under the AxoGuard® name. Cook Biotech holds multiple issued and pending U.S. and international
patents covering its ECM technology. The following table illustrates the two non-licensed U.S. patents held by
Cook Biotech that are specifically identified on AxoGen’s AxoGuard® Nerve Connector and AxoGuard®
Nerve Protector product labeling. The table includes the U.S. patent number, a description of each patent, and
the estimated expiration date of each patent.
U.S. Patent No.
Description
Estimated expiration date
6,206,931
Graft Prosthesis Material
August 2017
6,241,981
Composition and Method for Repairing Neurological Tissue
September 2017
7,652,077
Graft Prosthesis, Materials and Methods
6,358,284
Tubular Grafts from Purified Submucosa
November 2018
December 2017
Because of the length of time and expense associated with bringing new products through development
and the governmental approval process, medical technology companies have traditionally placed considerable
importance on obtaining and maintaining patent protection for significant new technologies, products and
processes. AxoGen intends to seek patent protection for appropriate proprietary technologies by filing patent
applications when possible in the U.S. and selected other jurisdictions. AxoGen’s policy is to seek patent
protection for the inventions that it considers important to the development of its business. AxoGen also
intends to use its scientific expertise to pursue and file patent
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applications on new developments with respect to uses, methods, and compositions to enhance its IP position
in the areas that are important to the development of its business.
Trademarks, Trade Secrets, Copyrights and Domain Names
AxoGen has registered and filed numerous trademark applications with the U.S. Patent and Trademark
Office and appropriate offices in foreign countries in order to distinguish its products from competitors’
products. It possesses trade secrets and material know-how in the following general subject matters: nerve
processing, nerve repair, product testing methods, and pre-clinical and clinical expertise. AxoGen has
registered copyrights for training tools and artistic renderings. It has entered into an agreement with an
independent artistic creator, under which the artistic director retains copyright rights to any copyrighted
material under agreement with AxoGen and provides AxoGen a license to such copyrights.
Government Regulations
U.S. Government Regulation Overview
AxoGen’s products are subject to regulation by the FDA, as well as other federal and state regulatory
bodies in the U.S. and comparable authorities in other countries. In addition, its Avance® Nerve Graft must
comply with the standards of the tissue bank industry’s accrediting organization, the American Association of
Tissue Banks.
AxoGen distributes for Cook Biotech the AxoGuard ® product line. Cook Biotech is responsible for the
regulatory compliance of the AxoGuard® product line. AxoGuard ® products are regulated as medical devices
and subject to premarket notification requirements under section 510(k) of the Federal Food, Drug, and
Cosmetic Act (the “FD&C Act”), 21 CFR Part 820 (“Quality System Regulation”) and related laws and
regulations. Cook Biotech has obtained a 510(k) premarket clearance from the FDA for the use of porcine (pig)
small intestine submucosa for the repair of peripheral nerve discontinuities where gap closure can be achieved
by flexion of the extremity. Cook Biotech has also obtained a 510(k) premarket clearance for the AxoGuard®
Nerve Protector for the repair of peripheral nerve injuries in which there is no gap or where a gap closure is
achieved by flexion of the extremity. We sell the 510(k)-cleared device under the trade name AxoGuard®
Nerve Protector and AxoGuard® Nerve Connector.
AxoGen also distributes the AxoTouch™ Two-Point Discriminator. This device that is manufactured for
AxoGen and distributed from the Burleson Facility is a Class I device (general controls) that is exempt from
premarket notification and the Quality System Regulation requirements except for the Recordkeeping and
Complaint file requirements. It is classified by FDA under 21 CFR 882.1200 (Two-point discriminator,
product code: GWI).
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devices are regulated as medical devices and are subject to premarket notification
line of devices will be manufactured for AxoGen and distributed from the Burleson
The AcroVal
Facility. The AcroVal
requirements under section 510(k) of the FD&C Act. The AcroVal
AcroPinch and PSSD, all of which received 510(k) clearance by the FDA in the 1990’s. The AcroGrip was
cleared under the name Digi-Grip Sensor, the AcroPinch was cleared as Pinch Sensor and PSSD as the NK
Pressure-Specified Sensory Device.
line of devices includes the AcroGrip ,
TM
TM
TM
TM
TM
In 2007, AxoGen began to process and distribute its Avance® Nerve Graft pursuant to Section 361 of the
PHS Act and 21 CFR Part 1271 Human Cells, Tissues, and Cellular and Tissue Based Products controls. Such
action was based on AxoGen’s good faith belief that the Avance® Nerve Graft product was a HCT/P tissue
product regulated solely under Section 361. From October 2008 through early 2010, AxoGen was in
communication with the FDA concerning the regulatory status of the Avance® Nerve Graft product. In
April 2010, in response to a Request For Designation filed by AxoGen, the FDA determined that the Avance®
Nerve Graft was a biologic product that would be reviewed and regulated by CBER under the requirements of
Section 351 of the PHS Act. Section 351 requires, among other things, an approved license to market a
biological product.
AxoGen met with CBER in July 2010 and, between July 2010 and November 2010, provided information
to CBER that resulted in the FDA issuing a letter stating the agency’s intent to exercise enforcement discretion
with respect to the introduction or delivery for introduction into interstate commerce of the Avance® Nerve
Graft assuming that certain conditions are met relating to the transition of the Avance® Nerve Graft from
regulation as a HCT/P to a biological
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product under section 351 of the PHS Act. Specifically, the FDA is permitting the Avance ® Nerve Graft to be
distributed, subject to FDA enforcement discretion, provided that:
· AxoGen transitions to compliance with Section 501(a)(2)(B) of the FD&C Act, the current
Good Manufacturing Practice, or cGMP, regulations in 21 CFR Parts 210 and 211 and the
applicable regulations and standards in 21 CFR Parts 600-610 prior to initiation of a phase 3
clinical trial; designed to demonstrate the safety, purity, and potency of the Avance® Nerve
Graft.
· AxoGen has performed several gap analyses of its quality system for compliance with
21 CFR Parts 210/211 and 600-610 regulations. The gap analyses have identified areas
in which our quality system could improve with respect to compliance to the
regulations. The transition is in process and we periodically review the 21 CFR Parts
210/211 and 600-610 regulations to ensure that we create and implement appropriate
changes, including new quality procedures. Through our internal auditing process, we
periodically assess our compliance to the regulations. As AxoGen initiates the phase 3
clinical trial and eventual BLA submission, we will retain an external audit firm with
experience in auditing to 21 CFR Parts 210/211 and 600-610 regulations to verify
quality system compliance to the regulations. The associated costs for these activities
are not material and the Company believes it can appropriately implement all necessary
changes.
· AxoGen conducts a phase 3 clinical trial to demonstrate safety, purity and potency of
the Avance® Nerve Graft under a Special Protocol Assessment (“SPA”).
· AxoGen and the FDA agreed to the SPA in August 2011 and in accordance with
FDA regulations in 21CFR § Part 312, AxoGen submitted an Investigational New
Drug Application (“IND”) to the FDA in April 2013. The IND became effective in
March 2015 and the phase 3 clinical trial was initiated in the second quarter of
2015.
· AxoGen continues to comply with the regulations and standard for 21 CFR Part 1271.
· AxoGen was audited by the FDA at its processing facility in March 2013 and March
2015 and its Distribution Facility in October 2015. The quality system was found to be
in compliance with 21 CFR Part 1271 and no FDA Form 483 observations were issued.
· AxoGen continues to exercise due diligence in executing its requirements under the
transition program.
AxoGen is working to ensure compliance with the applicable regulations through ongoing discussions with
the FDA regarding the transition of the quality system to 21 CFR Parts 210/211 and 600-610 regulations with
the FDA and through audits for compliance to 21 CFR Part 1271 and amendments to the IND providing
updates to the phase III clinical trial. The final determination of regulatory compliance will be made by the
FDA during the pre-license inspection as part of the BLA review. If the FDA does not find AxoGen to be in
compliance, or if AxoGen is unable to meet the required standards for preclinical studies, clinical studies and
Chemistry, Manufacturing, and Controls, the approval of the BLA would become impossible or delayed.
The FDA will end the period of enforcement discretion upon a final determination of AxoGen’s future
BLA submission or if the FDA finds that AxoGen does not meet the conditions for the transition plan, or is not
exercising due diligence in executing the transition (e.g., study completion, or BLA submission is neither
timely nor adequate). If final action on the BLA is negative or AxoGen is found to not meet the conditions for
the transition plan or its execution, AxoGen will not be able to continue to distribute the Avance® Nerve Graft.
AxoGen continues to work diligently with the FDA and, in this context, continues to distribute Avance® Nerve
Graft.
The BLA application of Avance® Nerve Graft, if approved, will require a potentially substantial user fee
payment to the FDA, although certain exemptions, waivers and discounts of the user fees may apply, including
certain waivers or discounts for small businesses.
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The Food and Drug Administration Safety and Innovation Act, referred to herein as FDASIA (Public Law
112-144), which was signed into law on July 9, 2012, amended the FD&C Act. FDASIA includes the
Prescription Drug User Fee Amendments of 2012 which authorizes the FDA to continue to collect the
following user fees from applicants who submit certain new drug and biological product applications and
supplements:
· Application Fee: Each new BLA has a fee required upon submission. In FY 2016, this fee for a
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BLA requiring clinical data is $2,374,200. The fee is adjusted each year so we cannot provide
an accurate estimate of what our fee will be upon submission of our BLA. For small
companies (fewer than 500 employees and no other approved biologic product on the market)
submitting its first application, a waiver of the application fee is available. AxoGen expects to
apply for this waiver for the Avance® Nerve Graft BLA.
Establishment Fee: Establishment fees (for the place of business where the biologic product is
manufactured) are based on the FDA budget divided by the total number of establishments. In
FY 2016, the Establishment Fee is $585,200. This fee is adjusted each year so we cannot
provide an accurate estimate of what our fee will be upon approval of our BLA. AxoGen will
have to pay an establishment fee after BLA approval and then pay such fee annually thereafter.
Product Fee: A product fee is assessed for each strength or potency in which the approved
(non-revoked, non-suspended) product is manufactured in final dosage form. The product fee
is based on an estimate of the number of products that would be subject to, and for which the
companies would pay, product fees. The product fee is determined by dividing the adjusted
total fee revenue from product fees by the number of estimated products (based on previous
year’s product fees) subject to the product fee (excluding product fee waivers and reductions
granted by the FDA). For FY 2016, the product fee has been established at
$114,450. AxoGen may have to pay a Product Fee after BLA approval. AxoGen expects to
apply for a product fee waiver for the Avance® Nerve Graft.
FDA — General
FDA regulations govern nearly all the activities that AxoGen performs, or that are performed on its behalf,
to ensure that medical products distributed domestically or exported internationally are safe and effective for
their intended uses. The activities the FDA regulates include the following:
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product design, development and manufacture;
product safety, testing, labeling and storage;
pre-clinical testing in animals and in the laboratory;
clinical investigations in humans;
premarketing clearance or approval and licensing;
record-keeping and document-retention procedures;
advertising and promotion;
the import and export of products;
product marketing, sales and distribution;
post-marketing surveillance and medical device reporting, including reporting of deaths,
serious injuries, communicable diseases, device malfunctions or other adverse events; and
corrective actions, removals and recalls.
Failure to comply with applicable FDA regulatory requirements may subject AxoGen to a variety of
administrative or judicially-imposed penalties or sanctions and/or prevent it from obtaining or maintaining
required approvals, clearances or licenses to manufacture and market its products. Such failure to comply with
the applicable FDA requirements may subject AxoGen to stringent administrative or judicial actions or
sanctions, such as agency refusal to approve pending applications, warning letters, product recalls, product
seizures, total or partial suspension of production or distribution of products, injunctions, or civil or criminal
prosecution.
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FDA’s Premarket Clearance and Approval Requirements - Medical Devices
Unless an exemption applies, each medical device distributed commercially in the U.S. requires either a
510(k) premarket notification submission or a Pre-Market Approval (“PMA”) Application to the FDA.
Medical devices are classified into one of three classes—Class I, Class II, or Class III—depending on the
degree of risk, the level of control necessary to assure the safety and effectiveness of each medical device and
how much is known about the type of device. For devices first intended for marketing after May 28, 1976, pre-
market review and clearance by the FDA for Class I and II medical devices is accomplished through the
510(k) pre-market notification procedure by finding a device substantially equivalent to a legally marketed
Class I or II device, unless the device is exempt. The majority of Class I medical devices are exempt from the
510(k) premarket notification requirement. Devices deemed by the FDA to pose the greatest risk, such as life-
sustaining, life-supporting or implantable devices for which Class II controls are inadequate to assure safety or
effectiveness, and novel devices, including devices deemed not substantially equivalent to a previously cleared
510(k) device, are placed in Class III. Class III devices generally require an approved PMA prior to marketing.
A PMA must be supported by extensive data, including, but not limited to, technical, preclinical, clinical
trials, manufacturing and labeling to demonstrate to the FDA’s satisfaction, the safety and effectiveness of the
device.
FDA’s Premarket Approval Requirements - Biologic Products
Biological Product License Application (BLA) Pathway
Biological products subject to BLA requirements are approved under the Public Health Service
Act. Biological products require FDA approval of a BLA to be marketed. In order to be approved, a BLA
must demonstrate the safety, purity and potency of the product candidate based on results of preclinical studies
and clinical trials. A BLA must also contain extensive CMC and other manufacturing information, and the
applicant must pass an FDA pre-approval inspection of the manufacturing facility or facilities at which the
biologic product is produced to assess compliance with the FDA’s cGMP. Satisfaction of FDA approval
requirements for biologics typically takes several years and the actual time required may vary substantially
based on the type, complexity and novelty of the product. AxoGen cannot be certain that any BLA approvals
for its products will be granted on a timely basis, or at all.
The steps for obtaining FDA approval of a BLA to market a biologic product in the U.S. include:
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completion of preclinical laboratory tests, animal studies and formulation studies under the
FDA’s good laboratory practices regulations;
submission to the FDA of an IND, for human clinical testing, which must become effective
before human clinical trials may begin and which must include independent Institutional
Review Board, or IRB, approval at each clinical site before the trials may be initiated;
performance of an adequate and well-controlled clinical trial in accordance with Good
Clinical Practices to establish the safety and efficacy of the product for each indication;
submission to the FDA of a BLA, which contains detailed information about the CMC for
the product, reports of the outcomes and full data sets of the clinical trials, and proposed
labeling and packaging for the product;
satisfactory review of the contents of the BLA by the FDA, including the satisfactory
resolution of any questions raised during the review;
satisfactory completion of an FDA Advisory Committee review, if applicable;
satisfactory completion of an FDA inspection of the manufacturing facility or facilities at
which the product is produced to assess compliance with cGMP regulations, to assure that
the facilities, methods and controls are adequate to ensure the product’s identity, strength,
quality and purity; and
FDA approval of the BLA including agreement on post-marketing commitments, if
applicable.
Preclinical tests include laboratory evaluations of product chemistry, toxicity and formulation, as well as
animal studies. An IND sponsor must submit the results of the preclinical tests, together with manufacturing
information and analytical data, to the FDA as part of the IND. Some preclinical testing may continue after the
IND is submitted. The
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IND must become effective before human clinical trials may begin. An IND will automatically become
effective 30 days after receipt by the FDA, unless before that time the FDA raises concerns or questions about
issues such as the conduct of the trials and or supporting preclinical data as outlined in the IND. In that case,
the IND sponsor and the FDA must resolve any outstanding FDA concerns or questions before clinical trials
can proceed. In other words, submission of an IND may not result in the FDA allowing clinical trials to
commence.
Biosimilar Biological Products
A regulatory approval pathway for biosimilars was established by The Biologics Price Competition and
Innovation Act (“BPCIA”), as part of the Patient Protection and Affordable Care Act of 2010. An important
component of the legislation specified that a manufacturer of a reference biological product would be granted
12 years of exclusive, non-patent market exclusivity before a biosimilar could be approved for marketing in the
US. An application for a biosimilar product may not be submitted to FDA until four years after the approval
date of the BLA for the reference biological product. BPCIA provides for an abbreviated licensure process for
a biosimilar, i.e., a biological product that is highly similar to an FDA-approved biological product, known as a
reference product, and has no clinically meaningful differences compared to the reference product in terms of
safety, purity and potency. At its discretion, the FDA can waive a requirement for any required element in an
application for a biosimilar product. In addition, the legislation distinguished approval of a biosimilar from
approval of such a product as a substitute for the reference biological products. Where a product is approved as
a substitute for the reference biologic, it is considered an interchangeable product. Approval as interchangeable
requires that the product is biosimilar and can be expected to produce the same clinical results as the reference
product in any given patient, and if intended for repeat dosing, a demonstration that the risk in terms of safety
or diminished efficacy of alternating or switching between the use of the interchangeable and reference
product is not greater than the risk of using the reference product without such alternating or switching.
Interchangeable products can be substituted for a reference product without intervention of the prescribing
healthcare provider. Several states are enacting or are considering laws that regulated the use and substitution
of biosimilar and interchangeable products. For example, Virginia requires licensure as interchangeable by
the FDA for a pharmacist to dispense a biosimilar in place of a prescribed biological product (Virginia § 54.1-
3408.04).
FDA’s Pre-Approval and Pre-Licensing Requirements
Before approving a BLA, the FDA generally inspects the facility or the facilities at which the product is
manufactured. The FDA will not approve the product if it finds that the facility does not appear to be in cGMP
compliance. If the FDA determines the application, manufacturing process or manufacturing facilities are not
acceptable, it will either not approve the application or issue a complete response letter to indicate that the
review cycle for an application is complete and that the application is not ready for approval. The letter will
describe specific deficiencies and, when possible, will outline recommended actions the applicant might take to
get the application ready for approval. Notwithstanding the submission of any requested additional
information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for
approval.
The testing and approval process requires substantial time, effort and financial resources, and each may
take several years to complete. Data obtained from clinical activities are not always conclusive and may be
susceptible to varying interpretations, which could delay, limit or prevent regulatory approval. The FDA may
not grant approval on a timely basis, or at all. AxoGen may encounter difficulties or unanticipated costs in its
efforts to secure necessary governmental approvals, which could delay or preclude it from marketing its
products. The FDA may limit the indications for use or place other conditions on any approvals that could
restrict the commercial application of the products. After approval, some types of changes to the approved
product, such as adding new indications, manufacturing changes and additional labeling claims, are subject to
further testing requirements and FDA review and approval.
Post-Approval Requirements
After regulatory approval of a product is obtained, AxoGen will be required to comply with a number of
post-approval requirements. For example, as a condition of approval of a BLA, the FDA may require post
marketing testing and surveillance to monitor the product’s safety or efficacy. In addition, holders of an
approved BLA are required to keep extensive records, to report certain adverse reactions and production
problems such as biologic deviation reports to
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the FDA, to provide updated safety and efficacy information and to comply with requirements concerning
advertising and promotional labeling for their products. Also, quality control and manufacturing procedures
must continue to conform to cGMP regulations as well as the manufacturing conditions of approval set forth in
the BLA. The FDA periodically inspects manufacturing facilities to assess compliance with cGMP regulations,
which imposes certain procedural, substantive and recordkeeping requirements. Accordingly, manufacturers
must continue to expend time, money and effort in the area of production and quality control to maintain
compliance with cGMP and other aspects of regulatory compliance.
Future FDA inspections may identify compliance issues at AxoGen’s facilities or at the facilities of its
contract manufacturers that may disrupt production or distribution, or require substantial resources to correct
and prevent recurrence of any deficiencies. In addition, discovery of problems with a product or the failure to
comply with applicable requirements may result in restrictions on a product, manufacturer or holder of an
approved BLA, including withdrawal or recall of the product from the market or other voluntary, FDA-
initiated or judicial action that could delay or prohibit further marketing. Newly discovered or developed safety
or effectiveness data may require changes to a product’s approved labeling, including the addition of new
warnings and contraindications. Finally, new government requirements, including those resulting from new
legislation, may be established that could delay or prevent regulatory approval of AxoGen products that are
currently under development or regulatory activity.
The FDA has broad regulatory compliance and enforcement powers. If the FDA determines that AxoGen
failed to comply with applicable regulatory requirements, it can take a variety of compliance or enforcement
actions, such as issuing a FDA Form 483 notice of inspectional observations, warning letter, or untitled letter,
imposing civil money penalties, suspending or delaying issuance of approvals, requiring product recall,
imposing a total or partial shutdown of production, withdrawal of approvals or clearances already granted, and
pursuing product seizures, consent decrees or other injunctive relief, and criminal prosecution through the U.S.
Department of Justice (the “DOJ”). The FDA can also require AxoGen to repair, replace or refund the cost of
devices that it manufactured or distributed. If any of these events were to occur, it could materially adversely
affect AxoGen’s business.
Clinical Trials
Clinical trials are required to support a BLA or PMA and are sometimes required for 510(k) clearance.
Clinical trials involve the administration of the investigational product to human subjects under the supervision
of qualified investigators. Clinical trials are conducted under strict requirements to ensure the protection of
human subjects participating in the trial and under protocols detailing, among other things, the objectives of
the study, the parameters to be used in monitoring and safety, and the effectiveness criteria to be evaluated.
Clinical trials for biological products require the submission and FDA acceptance of an IND and clinical trials
for medical devices require the submission and FDA approval of an Investigational Device Exemption
application, or IDE, unless the device regulations provide for an exemption from the IDE
requirement. Clinical trials for significant risk devices may not begin until the IDE is approved by the FDA
and the Institutional Review Board (IRB) overseeing the particular clinical trial. If the product is considered a
non-significant risk device under FDA regulations, the trial must only be approved by an IRB prior to its
initiation. A protocol for each clinical trial and any subsequent protocol amendments must be submitted to the
FDA as part of the IND or IDE, for significant risk devices. In addition, for these studies, an IRB at each site at
which the study is conducted must approve the protocol, subject consent form and any amendments for each
site at which the study is conducted. All research subjects must be informed, among other things, about the
risks and benefits of the investigational product and provide their informed consent in writing.
Clinical trials under an IND typically are conducted in three sequential phases, but the phases may overlap
or be combined. In AxoGen’s case, AxoGen believes that the Phase 3 clinical trial study for the Avance®
Nerve Graft represents the only new clinical data that will be required to evaluate safety and
effectiveness. Phase 1 clinical trials usually involve the initial introduction of the investigational product into
a small group of healthy volunteers (e.g., 10 to 20) to evaluate the product’s safety (dosage tolerance and
pharmacokinetics if a biologic product) and, if possible, to gain an early indication of its effectiveness. Phase 2
clinical trials usually involve controlled trials in a larger but limited patient population (e.g., a few hundred) to:
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evaluate dosage tolerance and appropriate dosage;
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identify possible adverse effects and safety risks; and
provide a preliminary evaluation of the efficacy of the product for specific indications.
Phase 3 clinical trials usually further evaluate clinical efficacy and test further for safety in an expanded
patient population (e.g., a hundred to several thousand). Phase 3 clinical trials usually involve comparison with
placebo, standard treatments or other comparators. Usually at least one well-controlled large Phase 3 or pivotal
clinical trial demonstrating safety and efficacy is required to support a BLA. These trials are intended to
establish the overall risk-benefit profile of the product and provide an adequate basis for physician labeling.
Phase 3 trials are almost always larger, more time consuming, complex and costly than Phase 1 and Phase 2
clinical trials. Phase 1, Phase 2 and Phase 3 clinical testing may not be completed successfully within any
specified period, if at all. Furthermore, the FDA or AxoGen may suspend or terminate clinical trials at any
time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable
health risk, have experienced a serious and unexpected adverse event, or that continued use in an
investigational setting may be unethical. Similarly, an IRB can suspend or terminate approval of research if the
research is not being conducted in accordance with the IRB’s requirements or if the research has been
associated with unexpected serious harm to patients.
Investigational New Drug Application
For a biologic product, an IND must be submitted prior to the initiation of the clinical study. The IND
application must contain information in three broad areas:
· Animal Pharmacology and Toxicology Studies - Preclinical data to permit an assessment as
to whether the product is reasonably safe for initial testing in humans. Also included are
any previous experiences with the product in humans (often foreign use).
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· Manufacturing Information - Information pertaining to the composition, manufacturer,
stability, and controls used for manufacturing of the drug substance and the drug
product. This information is assessed to ensure that the company can adequately produce
and supply consistent batches of the drug.
Clinical Protocols and Investigator Information - Detailed protocols for proposed clinical
studies to assess whether the initial-phase trials will expose subjects to unnecessary
risks. Also, information on the qualifications of clinical investigators—professionals
(generally physicians) who oversee the administration of the experimental compound—to
assess whether they are qualified to fulfill their clinical trial duties. Finally, commitments to
obtain informed consent from the research subjects, to obtain review of the study by an IRB,
and to adhere to the investigational new drug regulations.
Once the IND is submitted, the sponsor must wait 30 calendar days before initiating any clinical
trials. During this time, the FDA has an opportunity to review the IND for safety to assure that research
subjects will not be subjected to unreasonable risk.
AxoGen Clinical Trials
AxoGen has an active clinical research program to gather data on the Avance Nerve Graft. AxoGen has
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completed two clinical studies and is performing two ongoing clinical studies. The ongoing studies are “A
Multicenter Retrospective Study of Avance Nerve Graft Utilization, Evaluations and Outcomes in Peripheral
Nerve Injury Repair (“RANGER ”)” and “A Multicenter, Prospective, Randomized, Patient and Evaluator
Blinded Comparative Study of Nerve Cuffs and Avance Nerve Graft Evaluating Recovery Outcomes for the
Repair of Nerve Discontinuities (“RECON”)”. Completed studies are “A Multicenter, Prospective,
Randomized, Comparative Study of Hollow Nerve Conduit and Avance Nerve Graft Evaluation Recovery
Outcomes of the Nerve Repair in the Hand (“CHANGE”)” and a pilot study to evaluate the use of Avance
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Nerve Graft in the reconstruction of nerves following prostatectomy.
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AxoGen will continue to accept patients in the RANGER clinical study, a utilization registry of Avance
Nerve Graft. Three publications and more than 44 scientific conference presentations have been generated to
date from the registry. The RANGER Study is an observational study in current enrollment. It is designed to
allow enrollment of up to a total of 1,000 subjects over the next several years. The follow-up for the
RANGER Study is standard of care up to 36 months post nerve repair. At the time of the BLA submission, if
1,000 subjects have not been enrolled and follow-up
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completed, AxoGen will submit an interim report in the BLA for the enrolled subjects. In 2013, a Matched
Autograft and Tube Conduit Case Control Cohort Arm of RANGER (“MATCH”) comparative arm was
added. Subjects treated with Avance Nerve Graft were matched to the nerve autograft or tube conduit treated
groups based on size of gap length. We anticipate having approximately 300 subjects treated with nerve
autograft and/or tube conduit in the comparative arm.
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AxoGen has worked with leading institutions, researchers and surgeons to support innovation in the field
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of surgical peripheral nerve repair. AxoGen believes that RANGER is currently the largest multi-center
observational clinical study conducted in peripheral nerve gap repair. AxoGen’s ongoing RECON study will
also continue our clinical work, providing a new multi-center, prospective, randomized, clinical study on the
Avance Nerve Graft. The January 2012 edition of Microsurgery, November 2012 edition of The Journal of
Hand Surgery and June 2015 edition of Journal of Reconstructive Microsurgery each contain an article
summarizing RANGER study results (Brooks, et al. Processed nerve allografts for peripheral nerve
reconstruction: A multicenter study of utilization and outcomes in sensory, mixed, and motor nerve
reconstructions. Microsurgery, 2012 Jan; 32(1): 1-14; and Cho, et al. Functional outcome following nerve
repair in the upper extremity using processed nerve allograft. J Hand Surg Am 2012 Nov; 37(11):2340-9 and
Rinker, et al. Outcomes of short-gap sensory nerve injuries reconstructed with processed nerve allografts from
a multicenter registry study. J Reconstr Microsurg 2015 Jun; 31(5):384-90). Brooks et al. reported on 55
Avance Nerve Graft nerve repairs and resulted in meaningful motor and sensory recovery in 87% of nerve
discontinuities between 5 and 50 mm. Cho et al. showed that Avance Nerve Graft provided 89% meaningful
recovery for digital nerve injuries, and 80% meaningful recovery for motor function in mixed and motor nerve
injuries. An expanded data milestone was presented at the 5th Vienna Symposium on Surgery of Peripheral
Nerves in June 2014 and such expanded RANGER data provides that of the injuries repaired with the
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Avance Nerve Graft 90%, 80% and 87% achieved meaningful recovery for gap lengths of 5-14 mm, 15-29
mm and 30-65 mm, respectively. Rinker et al. reported on a subgroup from the RANGER registry on sensory
recovery of short-gap digital nerve repairs between 5-15 mm using Avance Nerve Graft. The study cohort
included 24 subjects with 37 digital nerve repairs. Outcomes analysis demonstrated meaningful levels of
sensory recovery. No implant related adverse experiences were reported in any of such reports.
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The following describes available clinical outcomes data from published papers on the leading synthetic
and collagen conduit. Published papers on the leading synthetic collagen conduit by Weber, et al., 2000 and
Wangensteen and Kalliainen, 2009, showed meaningful improvement: 74% in sensory nerves and 43% in
sensory, mixed and motor nerves, respectively, of cases bridging a gap in the particular type of nerve. A paper
published by Haug, et al., 2013 on the leading synthetic and collagen conduit showed meaningful
improvement in 40% sensory nerves using the static 2-point discrimination test. Autograft studies where
autograft and direct repair or direct suture were tested by Weber, et al., 2000, Kim and Kline 2001-2006,
Frykman and Gramyk, 1991, Frykman and Gramyk, 1991 and Kallio, 1993, as interpreted by Brooks et al.
2012, reported meaningful recovery: 86% in sensory nerves, 67-86% in sensory and mixed nerves, 80% in
sensory nerves, 75-78% mixed nerves and 70% sensory nerves, respectively, of cases bridging a gap in the
particular type of nerve. Published papers by Kim and Kline 2001-2006 and Frykman and Gramyk, 1991
reported successful recovery in 75% and 78% of mixed and motor nerves, respectively. A study by Kallio et
al., 1993 showed recovery in 67% of mixed and motor nerves where recovery was defined as results indicating
a classification of useful or better motor and sensory recovery.
The RECON study will include up to 15 centers and is a prospective, randomized, controlled, patient and
evaluator blinded, comparative study of Avance Nerve Graft and Collagen Nerve Cuffs in the repair of
peripheral nerve discontinuities. The study objective is to assess the safety and efficacy of peripheral nerve
repair in 150 subjects. Subjects will be followed over the course of 12 months to assess safety and efficacy
outcomes with assessments being performed at various defined intervals up to 12 months. The study is
currently in early enrollment and no outcome data is available at this time.
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CHANGE was a prospective randomized controlled pilot study of nerve cuffs and Avance Nerve Graft
for the reconstruction of peripheral nerve discontinuities in male and female subjects that sustained injury to at
least one nerve in the hand, distal to the superficial palmar arch that after resection resulted in a nerve gap of
>5 mm and ≤20 mm. The study enrolled a total of 23 patients (14 for Avance Nerve Graft and 9 for Conduits)
with 31 nerve repairs at a total of 4 sites. The study has been completed.
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A pilot study on the repair of the cavernous nerves in prostate cancer patients at Vanderbilt with 24 month
follow-up has been completed. A total of 12 subjects were enrolled in this single center study. The primary
objective of this study was to assess the technical feasibility of using Avance Nerve Graft for neurovascular
bundle (NVB) reconstruction during RALP. The secondary objective of the study was to assess the long term
safety and efficacy of NVB reconstruction by assessing quality of life and erectile function through validated
questionnaires 24 months post-repair.
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Clinical trials are subject to extensive recordkeeping and reporting requirements. AxoGen’s clinical trials
must be conducted under the oversight of an IRB for the relevant clinical trial sites and must comply with FDA
regulations, including but not limited to those relating to good clinical practices. AxoGen is also required to
obtain the patients’ written informed consent in form and substance that complies with both FDA requirements
and state and federal privacy and human subject protection regulations. AxoGen, the FDA or the IRB may
suspend a clinical trial at any time for various reasons, including a belief that the risks to study subjects
outweigh the anticipated benefits. Even if a trial is completed, the results of clinical testing may not adequately
demonstrate the safety and efficacy of the biological product or device, or may otherwise not be sufficient to
obtain FDA approval to market the product in the U.S. Similarly, in Europe, the clinical study for a medicine
product must be authorized by the Competent Authority in each Member State in which the clinical trial is to
be conducted, and must receive a favorable opinion from an ethics committee.
Pervasive and Continuing Regulation
There are numerous regulatory requirements that apply after a product is cleared or approved. For medical
devices, these include, but are not limited to: the FDA’s regulations for device labeling (21 CFR Part 801),
medical device reporting (21 CFR Part 803), reporting of corrections and removals (21 CFR Part 806),
establishment registration and device listing requirements (21 C.F.R. Part 807); and compliance with the
Quality System Regulation (QSR) per 21 CFR Part 820. Distribution of medical devices is also subject to
license/registration requirements in some states. For tissue and biologic products, the regulatory requirements
include: the FDA’s registration and listing requirements, donor eligibility requirements and compliance with
Good Tissue Practices (“GTP”) in 21 CFR Part1271 for human tissue products, compliance with the FDA’s
cGMP in 21 CFR Parts 210, 211, and 600 for biological products, and postmarket BLA requirements (21 CFR
Part 601). Among other things, these regulations require manufacturers, including third party manufacturers to:
·
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·
·
·
follow stringent design, testing, control, documentation and other quality assurance
procedures during all aspects of the manufacturing process;
comply with labeling regulations and FDA prohibitions against the false or misleading
promotion or the promotion of products for uncleared, unapproved or off-label uses or
indications;
comply with requirements to obtain clearance or approval for certain changes affecting the
product, including changes to the product’s manufacturing, labeling, or intended use;
report to the FDA certain adverse events, adverse reactions and deviations: (a) for medical
devices, a report to FDA is required if the device may have caused or contributed to a death
or serious injury or malfunctioned in a way that would likely cause or contribute to a death
or serious injury if the malfunction were to recur; (b) for biologics, a deviation from current
GMP or an unexpected or unforeseeable event that may affect the safety, purity, or potency
of the product must be reported; and (c) for human tissue products, FDA requires reporting
of certain adverse reactions involving a communicable disease related to an HCT/P that the
company made available for distribution;
comply with post-approval restrictions or conditions, including post-approval study
commitments and post-market safety and annual reporting requirements;
follow post-market surveillance regulations that may apply when necessary to protect the
public health or to provide additional safety and effectiveness data for the device; and
follow requirements to issue notices of correction or removal, or conduct market
withdrawals or recalls where quality or other issues arise.
AxoGen has not received any reports of adverse events concerning the Avance Nerve Graft
®
product. Three adverse events have been reported for the AxoGuard products (one each in 2013, 2014 and
2015). AxoGen has not had to submit any Medical Device Reports (“MDRs”), biological deviation reports, or
tissue adverse reaction reports to the
®
27
®
FDA. Cook Biotech submitted an MDR for the AxoGuard adverse events in 2013, 2014 and 2015. Although
AxoGen’s AxoGuard products have had just three adverse events reported to date, there may have been other
incidents, including patient deaths, which may have occurred during procedures utilizing AxoGen’s products
without AxoGen being aware of any such incidents. In addition, there can be no assurance that in the future
AxoGen’s products will not cause or contribute to an adverse event that would require AxoGen to submit
MDRs, biological deviation reports, or tissue adverse reaction reports to the FDA.
®
The advertising and promotion of medical products are also regulated by the Federal Trade Commission
and by state regulatory and enforcement authorities. Recently, some promotional activities for FDA-regulated
products have been the subject of enforcement action brought under healthcare reimbursement laws and
consumer protection statutes. In addition, under the Federal Lanham Act and similar state laws, competitors
and others can initiate litigation relating to advertising claims.
AxoGen is registered with the FDA as a tissue establishment for the Avance® Nerve Graft. The FDA has
broad post-market and regulatory enforcement powers. AxoGen is subject to unannounced inspections by the
FDA to determine compliance with the GTP, GMP and other regulations, and these inspections may also
include the manufacturing facilities of suppliers.
Failure by AxoGen or by AxoGen’s suppliers to comply with applicable regulatory requirements can result
in enforcement action by the FDA or other federal or state authorities, which may include any of the following
sanctions, among others:
· warning letters, fines, injunctions, consent decrees and civil penalties;
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customer notifications, repair, replacement, refunds, recall or seizure of our products;
operating restrictions, partial suspension or total shutdown of production;
suspension or termination of our clinical trials;
refusing our PMA or BLA for new products, new intended uses or modifications to existing
products; and
· withdrawing or spending premarket approvals that have already been granted; and criminal
prosecution.
Education Grants, U.S. Anti-kickback, False Claims and Other Healthcare Fraud and Abuse Laws
Educational Grants
A medical product manufacturer may provide financial support, including support by way of grants, to
third-parties for the purpose of conducting medical educational activities. If these funded activities are
considered by the FDA to be independent of the manufacturer, then the activities fall outside the FDA
restrictions on promotion to which the manufacturer is subject.
The FDA considers several factors in determining whether an educational event or activity is independent
from the substantive influence of the product manufacturer and therefore non-promotional, including, but not
limited to, the following:
· whether the intent of the funded activity is to present clearly defined educational content,
free from commercial influence or bias;
· whether the third party grant recipient and not the manufacturer has maintained control over
selecting the faculty, speakers, audience, program content and materials;
· whether the program focuses on a single product of the manufacturer without a discussion
of other relevant existing competitive products or treatment options;
· whether there was meaningful disclosure to the audience, at the time of the program,
regarding the manufacturer’s funding of the program, any significant relationships between
the provider, presenters, or speakers and the supporting manufacturer; whether any
unapproved uses will be discussed;
28
· whether there are legal, business, or other relationships between the supporting
manufacturer and provider or its employees that could permit the supporting manufacturer to
exert influence over the content of the program;
· whether the individuals employed by the provider and involved in designing or conducting
the educational activities are also involved in advising or assisting the company with respect
to sales or marketing;
· whether the information about the company’s products is further disseminated after the
initial program, by or at the direction of the company, other than in response to an
unsolicited request or through an independent provider; and
· whether the provider is compliant with standards for independence, balance, objectivity, and
scientific rigor when putting on ostensibly independent educational programs.
AxoGen seeks to ensure that the activities it supports pursuant to educational grants program are in
accordance with these criteria for independent educational activities. However, AxoGen cannot provide
assurance that the FDA or other government authorities would view the programs supported as being
independent.
Fraud, Abuse and False Claims
AxoGen is directly and indirectly subject to various federal and state laws governing relationships with
healthcare providers and pertaining to healthcare fraud and abuse, including anti-kickback laws. In particular,
the federal healthcare program Anti-Kickback Statute prohibits persons from knowingly and willfully
soliciting, offering, receiving or providing remuneration, directly or indirectly, in exchange for or to induce
either the referral of an individual, or the furnishing, arranging for or recommending a good or service for
which payment may be made in whole or part under federal healthcare programs, such as the Medicare and
Medicaid programs. Penalties for violations include criminal penalties and civil sanctions such as fines,
imprisonment and possible exclusion from Medicare, Medicaid and other federal healthcare programs. The
Anti-Kickback Statute is broad and prohibits many arrangements and practices that are lawful in businesses
outside of the healthcare industry. In implementing the statute, the Office of Inspector General of the U.S.
Department of Health and Human Services (“OIG”) has issued a series of regulations, known as the “safe
harbors.” These safe harbors set forth provisions that, if all their applicable requirements are met, will assure
healthcare providers and other parties that they will not be prosecuted under the Anti-Kickback Statute for
activities that fit within a safe harbor. The failure of a transaction or arrangement to fit precisely within one or
more safe harbors does not necessarily mean that it is illegal or that prosecution will be pursued. However,
conduct and business arrangements that do not fully satisfy each applicable element of a safe harbor may result
in increased scrutiny by government enforcement authorities, such as the OIG, and are at risk activities unless a
favorable advisory opinion is obtained from the OIG.
The Federal False Claims Act (“FCA”) imposes civil liability on any person or entity that submits, or
causes the submission of, a false or fraudulent claim to the U.S. government. Damages under the FCA can be
significant and consist of the imposition of fines and penalties. The FCA also allows a private individual or
entity with knowledge of past or present fraud against the federal government to sue on behalf of the
government to recover the civil penalties and treble damages. The DOJhas previously alleged that the
marketing and promotional practices of pharmaceutical and medical device manufacturers included the off-
label promotion of products or the payment of prohibited kickbacks to doctors violated the FCA resulting in the
submission of improper claims to federal and state healthcare entitlement programs such as Medicaid. In
certain cases, manufacturers have entered into criminal and civil settlements with the federal government under
which they entered into plea agreements, paid substantial monetary amounts and entered into corporate
integrity agreements that require, among other things, substantial reporting and remedial actions going
forward.
AdvaMed is one of the primary voluntary U.S. trade associations for medical device manufacturers. This
association has established guidelines and protocols for medical device manufacturers in their relationships
with healthcare professionals on matters including research and development, product training and education,
grants and charitable contributions, support of third party educational conferences, and consulting
arrangements. Adoption of the AdvaMed Code by a medical device manufacturer is voluntary, and while the
OIG and other federal and state healthcare regulatory agencies encourage its adoption and may look to the
AdvaMed Code, they do not view adoption of the AdvaMed Code as proof of compliance with applicable laws.
AxoGen has incorporated the principles of the AdvaMed Code in its
29
standard operating procedures, sales force training programs, and relationships with doctors. Key to the
underlying principles of the AdvaMed Code is the need to focus the relationships between manufacturers and
healthcare professionals on matters of training, education and scientific research, and limit payments between
manufacturers and healthcare professionals to fair market value for legitimate services provided and payment
of modest meal, travel and other expenses for a healthcare professional under limited circumstances. AxoGen
has incorporated these principles into its relationships with healthcare professionals under its consulting
agreements, payment of travel and lodging expenses, research and educational grant procedures and
sponsorship of third party conferences. In addition, AxoGen has conducted training sessions on these
principles. Finally, the Sunshine act, as defined below, imposes additional new reporting and disclosure
requirements on AxoGen for any “transfer of value” made or distributed to physicians and teaching hospitals,
as well as reporting of certain physician ownership interests. AxoGen cannot provide any assurance that
regulatory or enforcement authorities will view its relationships with physicians or policies as being in
compliance with applicable regulations and laws.
Regulation Outside of the United States
Sales of medical products outside of the U.S. are subject to foreign governmental regulations that vary
substantially from country to country. The time required to obtain certification or approval by a foreign
country may be longer or shorter than that required for FDA clearance or approval and the requirements may
be different.
There are restrictions under U.S. law on the export from the U.S. of medical devices and biological
product that cannot be legally distributed in the U.S. If a Class I or Class II device does not have
510(k) clearance and the manufacturer reasonably believes that the device could obtain 510(k) clearance in the
U.S., then the device can be exported to a foreign country for commercial marketing without the submission of
any type of export request or prior FDA approval if (i) the device is not sold or offered for sale in the U.S., (ii)
is labeled for export only and (iii) satisfies certain criteria relating primarily to specifications of the foreign
purchaser and compliance with the laws of the country to which it is being exported, known as Importing
Country Criteria. An unapproved Class III device can be exported if it (i) complies with the criteria discussed
above for devices that could obtain 510(k) clearance, (ii) meets certain other quality and labeling requirements,
and (iii) has a valid marketing authorization from one of a list of countries listed in the FD&C Act. If an
unapproved Class III device does not have a valid marketing authorization from one of the listed countries, an
export permit from the FDA is required in order to export it. An unapproved biological product can be
exported without submitting an export request to FDA if the product has received a marketing authorization in
one of a list of countries listed in the FD&C Act and it meets applicable requirements of the FD&C Act and the
laws of the country to which it is exported. An investigational biological product may also be exported under
an IND if a listed investigator is in a foreign country and certain requirements specified in FDA’s regulations
are met. AxoGen currently complies with applicable regulations when exporting its products and AxoGen
intends to continue such compliance in the event there are any regulatory changes regarding its products in the
United States.
The primary regulatory body in Europe is the E.U. which has adopted numerous directives and
promulgated voluntary standards regulating the design, manufacture and labeling of, and clinical trials and
adverse event reporting for, medical devices. Devices that comply with the requirements of a relevant directive
will be entitled to bear CE marking, indicating that the device conforms to the essential requirements of the
applicable directives and, accordingly, can be commercially distributed throughout the member states of the
E.U. and other countries that comply with these directives. The method for assessing conformity varies
depending on the type and class of the device, but normally involves an assessment by the manufacturer and a
third party assessment by a notified body, an independent and neutral institution appointed by a country to
conduct the conformity assessment. This third party assessment may consist of an audit of the manufacturer’s
quality system and specific testing of the manufacturer’s device. Such an assessment is required for a
manufacturer to commercially distribute the product throughout these countries. In the second quarter of 2014,
AxoGen’s Quality System became registered to ISO 13485 for Receipt, Handling, Storage and Distribution of
Medical Devices related to nerve repair.
Cook Biotech is responsible for all regulatory filings for the AxoGuard products including international
registrations. AxoGen works with Cook Biotech by providing the countries for Cook to register or get approval
for the AxoGuard® products. Cook Biotech prepares the product filing documentation and submits this
documentation to the Ministry of Health (“MOH”) for the country. Each country or region has its own
regulations and the documentation
30
required for submission varies. It typically takes less than nine months from the initiation of the project to
obtain AxoGuard® clearance in a given country or region. To date, the AxoGuard ® product line was registered
in May 2013 in Canada for distribution and in April 2013 the product line was awarded the CE Mark allowing
distribution into the E.U. and other countries that accept the CE Mark.
Tissue products are not currently regulated under the CE Mark
Although some standards of harmonization exist, each country in which AxoGen conducts business has its
own specific regulatory requirements. AxoGen procures and processes its tissue products in the U.S., and
markets in the U.S., Canada, Spain, Austria, United Kingdom, Israel, Greece, Chile, Switzerland and certain
other countries under compliance with the individual country regulations. These requirements are dynamic in
nature and, as such, are continually changing. New regulations may be promulgated at any time and with
limited notice. AxoGen will review the regulations at the time of submission of the product dossier for
regulatory review. This review involves reviewing the appropriate MOH regulations, discussion with in-
country distributors and use of consultants. It typically takes less than nine months from the initiation of the
product to develop a product dossier (specific for that country), submission of the documentation and MOH
review of the product filing. While AxoGen believes that it is in compliance with all existing pertinent
international and domestic laws and regulations, there can be no assurance that changes in governmental
administrations and regulations will not negatively impact AxoGen’s operations.
The FDA and international regulatory bodies conduct periodic compliance inspections of AxoGen’s U.S.
processing facilities. AxoGen’s operations are registered with the U.S. FDA Center for Biologics Evaluation
and Research, (CBER), as a tissue establishment. AxoGen is also accredited by the AATB and is licensed in
the states of Florida, New York, California, Maryland, Delaware, Oregon and Illinois. AxoGen believes that
worldwide regulation of tissue products is likely to intensify as the international regulatory community focuses
on the growing demand for these implant products and the attendant safety and efficacy issues of citizen
recipients. Changes in governing laws and regulations could have a material adverse effect on AxoGen’s
financial condition and results of operations. AxoGen management further believes that it can help to mitigate
this exposure by continuing to work closely with government and industry regulators.
Environmental
AxoGen’s products, as well as the chemicals used in processing, are handled and disposed of in
accordance with country-specific, federal, state and local regulations. Since 2007, AxoGen has used outside
third parties to perform all biohazard waste disposal.
AxoGen contracts with independent, third parties to perform sterilization of its allografts. In view of the
engagement of a third party to perform irradiation services, the requirements for compliance with radiation
hazardous waste do not apply, and therefore AxoGen does not anticipate that having any material adverse
effect upon its capital expenditures, results of operations or financial condition. However, AxoGen is
responsible for assuring that the service is being performed in accordance with applicable regulations.
Although AxoGen believes it is in compliance with all applicable environmental regulations, the failure to fully
comply with any such regulations could result in the imposition of penalties, fines and/or sanctions which
could have a material adverse effect on AxoGen’s business.
31
Corporate History
On September 30, 2011, AxoGen Corporation (“AC”), a Delaware corporation, completed its business
combination with LecTec Corporation (“LecTec”), a Minnesota corporation, in accordance with the terms of
an Agreement and Plan of Merger, dated as of May 31, 2011, by and among LecTec, Nerve Merger Sub Corp.,
a subsidiary of LecTec (“Merger Sub”), and AC, which the parties amended on August 9, 2011 and September
30, 2011 (as amended, the “Merger Agreement”). Pursuant to the Merger Agreement, Merger Sub merged with
and into AC, with AC continuing after the merger as the surviving corporation and a wholly owned subsidiary
of LecTec (the “Merger”). Immediately following the Merger, LecTec changed its name to AxoGen, Inc. In
October 2011, AxoGen Inc. moved its corporate headquarter facilities (principal executive office) from
Texarkana, Texas to Alachua, Florida.
LecTec was organized in 1977 as a Minnesota corporation and went public in December 1986. Prior
to the Merger it was an intellectual property licensing and holding company. LecTec held multiple domestic
and international patents based on its original hydrogel patch technology and filed patent applications on a hand
sanitizer patch. LecTec also had a licensing agreement with Novartis Consumer Health, Inc. LecTec took legal
action to protect its IP and settled all of its litigation prior to the Merger and AxoGen subsequent to the Merger
continued to hold LecTec IP until it expired.
Employees
At December 31, 2015, AxoGen had 113 full time employees which included 10 in administration,
information technology and finance, 16 in manufacturing and quality control, 13 in research and development
and regulatory and 74 in sales and marketing. As of the date of this Form 10-K AxoGen has not had a work
stoppage and no employees are represented by a labor union. AxoGen believes its relationship with its
employees is satisfactory.
Executive Officers of the Registrant
The following table lists the names and positions of the individuals who are, as of February 25, 2016,
executive officers AxoGen:
Name
Karen Zaderej
Gregory G. Freitag, JD CPA
President, Chief Executive Officer and Director
Title
CFO,
General Counsel, Senior Vice President of Business Development and Director
John P. Engels
Mark Friedman, Ph.D.
David Hansen
Shawn McCarrey
Erick DeVinney
Mike Donovan
Vice President
Vice President of Regulatory and Quality
Chief Accounting Officer
Senior Vice President of Sales
Vice President of Clinical and Translational Sciences
Vice President of Operations
Biographical information for each of our executive officers is included below.
Karen Zaderej, President, Chief Executive Officer and Director (Age 54)
Ms. Zaderej has served as AxoGen’s President, Chief Executive Officer and a member of our board of
directors (the “Board of Directors”) since September, 2011. She has served as the Chief Executive Officer of
AC, and a member of AC’s board of directors since May 2010. Ms. Zaderej joined AC in May 2006 and
served as Vice President of Marketing and Sales from May 2006 to October 2007 and as Chief Operating
Officer from October 2007 to May 2010. From October 2004 to May 2006, Ms. Zaderej worked for Zaderej
Medical Consulting, a consulting firm she founded, which assisted medical device companies build and
execute successful commercialization plans. From 1987 to 2004, Ms. Zaderej worked at Ethicon, Inc., a
Johnson & Johnson company, where she held senior positions in marketing, business development, and
research & development, as well as ran a manufacturing business. Ms. Zaderej is a Director
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of SEBio, a non-profit supporting the life science industry in the southeastern United States. Ms. Zaderej has
a MBA from the Kellogg Graduate School of Business and a BS in Chemical Engineering from Purdue
University.
AxoGen has a key-person life insurance policy for $3,000,000 insuring the life of Ms. Zaderej.
Gregory G. Freitag, JD, CPA, Chief Financial Officer, General Counsel, Senior Vice President Business
Development and Director (Age 54)
Mr. Freitag, J.D., CPA, has been AxoGen’s General Counsel and a member of our Board of Directors
since September 2011, has been AxoGen’s Senior Vice President Business Development since May 2014, has
been AxoGen’s Chief Financial Officer since August 2015 and was AxoGen’s Chief Financial Officer from
September 2011 to May 2014. He was Chief Executive Officer, Chief Financial Officer and a board member of
LecTec Corporation, an IP licensing and holding company that merged with AxoGen in September 2011, from
June 2010 through September 2011. From May 2009 to the present, Mr. Freitag has been a principal of
FreiMc, LLC, a healthcare and life science consulting and advisory firm he founded that provides strategic
guidance and business development advisory services. Prior to founding FreiMc, LLC, Mr. Freitag was a
Director of Business Development at Pfizer Health Solutions, a former subsidiary of Pfizer, Inc., from
January 2006 to May 2009. From July 2005 to January 2006, Mr. Freitag worked for Guidant Corporation in
their business development group. Prior to Guidant Corporation, Mr. Freitag was the Chief Executive Officer
of HTS Biosystems, a biotechnology tools start-up company, from March 2000 until its sale in early 2005.
Mr. Freitag was the Chief Operating Officer, Chief Financial Officer and General Counsel of Quantech, Ltd., a
public point of care diagnostic company, from December 1995 to March 2000. Prior to that time, Mr. Freitag
practiced corporate law in Minneapolis, Minnesota. Mr. Freitag is also a director of the Foundation Board of
HealthEast Care System, a health care system in Minnesota, and PDS Biotechnology Corporation, a private,
clinical stage biopharmaceutical company developing immunotherapies for cancer and other disease areas such
as infectious disease. Mr. Freitag holds a JD from the University of Chicago and a BA Economics & Business
and Law & Society from Macalester College, Minnesota.
John P. Engels, Vice President (Age 44)
Mr. Engels has served as AxoGen’s Vice President since September 2011. He is a co-founder of AC and
has served as AC’s Vice President since June 2006, having provided operational and financial leadership and
managing AxoGen’s strategic and product development partnerships until January, 2012 when he assumed the
leadership of international sales. From 1999 to 2002, Mr. Engels worked as a consultant for the University of
Florida, Saffron Hill Ventures and PA Early Stage Partners, among other companies. From 1993 to 1997,
Mr. Engels was an analyst and associate at CACM, a boutique investment banking firm. Mr. Engels is
currently a member of the board of directors of Oxicool, Inc., a privately-held company developing new
cooling technologies. Mr. Engels holds a MBA in Management and Operations from the Wharton School of
Business at the University of Pennsylvania, and a BA from the University of Chicago.
Mark Friedman, Ph.D., Vice President of Regulatory and Quality (Age 58)
Dr. Friedman has served as AxoGen’s Vice President of Regulatory and Quality since September 2011. He
has served as AC’s Vice President of Regulatory and Quality since June 2011 and served as AC’s Director of
Quality Assurance and Regulatory Affairs from September 2006 to June 2011. Prior to joining AxoGen, Dr.
Friedman held several regulatory and quality leadership positions at Enable Medical Corporation, a medical
device company, including Director of Quality Assurance from 1997 to 1998 and Vice President of Quality and
Regulatory from 1998 to 2001 and from 2004 to 2005. Dr. Friedman also worked for AtriCure, Inc., a company
that develops, manufactures and sells surgical ablation systems to treat atrial fibrillation, as Vice President of
Quality and Regulatory from 2001 to 2004 and as Vice President of Operations in 2004. AtriCure acquired
Enable Medical in 2005. Mr. Friedman has over 25 years of experience in developing and directing regulatory
strategy and quality systems for medical products, including 15 years with start-up medical product firms. Dr.
Friedman has a Ph.D. in Chemistry specializing in protein biochemistry from the University of Cincinnati.
33
David Hansen, Chief Accounting Officer (Age 55)
Mr. Hansen has served as Chief Accounting Officer of AxoGen since December 2015. Mr. Hansen has
served as the Corporate Controller of AxoGen, Inc. since November 2011 and the Corporate Controller of AC
since June 2006. Mr. Hansen was Vice President of Finance—Corporate Controller and Treasurer of Perma-
Fix Environmental Services, Inc., a publicly-traded environmental services company, and held other corporate
and regional accounting positions at Perma-Fix Environmental Services from 1995 to 2005. Mr. Hansen was
also the Controller at Kraft Foodservice, Inc. from 1994 to 1995 and held other accounting and procurement
positions at Kraft Foodservice, Inc. from 1985 to 1994. Mr. Hansen has over 20 years of experience in senior
financial positions at both publicly traded and private companies. Mr. Hansen holds a BBA degree in
Accounting from the University of Oklahoma.
Shawn McCarrey, Senior Vice President of Sales (Age 58)
Mr. McCarrey has served as AxoGen’s Senior Vice President of Sales since February 2013. Mr. McCarrey
was Executive Vice President of North American Cardiovascular Sales at Bayer Interventional/MEDRAD
Interventional from January 2009 to May 2012. Bayer HealthCare, a subgroup of Bayer AG, is one of the
world’s leading, innovative companies in the healthcare and medical products industry. Bayer Interventional,
now doing business as part of Bayer Medical Care’s Radiology and Interventional business, is the
Interventional franchise formerly operated under Bayer’s MEDRAD brand. From 1998 to 2009, Mr. McCarrey
held multiple escalating positions with Possis Medical, Inc., a company that developed, manufactured, and
marketed medical devices for the cardiovascular and vascular treatment markets, and served as Director or
Sales, VP of US Sales, VP of Worldwide Sales and EVP of Worldside Sales & Marketing. For more than 15
years prior to joining Possis, Mr. McCarrey served in a series of progressively responsible roles with two
divisions of C.R. Bard, United States Catheter and Instrument Corporation (USCI) which specialized in the
treatment of coronary disease in the cardiac catheterization laboratory and Davol, an operating room division
that promoted Thoraclex and Simpulse to cardiovascular and orthopedic surgeons. Mr. McCarrey holds a BS
degree in Marketing from Central Michigan University.
Erick DeVinney, Vice President of Clinical and Translational Sciences (Age 40)
Mr. DeVinney has served as AxoGen’s Vice President of Clinical and Translational Sciences since
January 2014. Prior to this he was the Director of Clinical and Translational Sciences for AxoGen from
April 2007 until January 2014. Erick has over 14 years of experience in the successful planning and
management of clinical development. Prior to joining AxoGen he served as Manager of Clinical Operations
for Angiotech Pharmaceuticals from 2005 to 2007 and Clinical Program Lead for Pharmaceutical Research
Associates International from 2001-2005. He has been involved in the successful submission of numerous
510(k), IDE and NDA applications. He has a BS in Chemistry from Virginia Commonwealth University.
Mike Donovan, Vice President of Operations (Age 51)
Mr. Donovan has served as Vice President of Operations since September 2015. Prior to this he was
Director of Operations from January 2011 until September 2015. From 1988 to 2010, Mr. Donovan held
positions at Zimmer Holdings in Manufacturing, Continuous Improvement, Quality Assurance and
Sterilization including Director of Manufacturing from 2002 to 2010. Mr. Donovan has a BS in Chemical
Engineering and an MBA from the University of Akron.
ITEM 1A. RISK FACTORS
AxoGen’s business involves a number of risks, some of which are beyond its control. The risk and
uncertainties described below are not the only ones the Company faces. Set forth below is a discussion of the
risks and uncertainties that management believes to be material to AxoGen.
34
Risks Related To Company
AxoGen has not experienced positive cash flow from its operations, and the ability to achieve positive
cash flow from operations will depend on increasing sales of its products, which may not be achievable.
AxoGen has historically operated with negative cash flow from its operations. As of December 31, 2015,
AxoGen had an accumulated deficit of approximately $103 million. If AxoGen product sales do not increase as
anticipated, then it will continue to experience negative cash flows and adverse operating conditions.
AxoGen’s continuing capital needs and other factors could cause the Company to raise additional funds
through public or private equity offerings, debt financings or from other sources. The sale of additional equity
may result in dilution to AxoGen’s shareholders. There is no assurance that AxoGen will be able to secure
funding on terms acceptable to it, or at all.
AxoGen’s revenue growth depends on its ability to expand its sales force, increase sales to existing
customers and develop new customers, and there can be no assurance that these efforts will result in
significant increase in sales.
AxoGen is in the process of investing in its sales channels composed of a combination of its direct sales
force and independent distributors to allow it to increase sales to existing customers and reach new customers.
There can be no assurance that these efforts will be successful in expanding AxoGen’s product sales. AxoGen
currently sells products directly through its employees and indirectly through distributor relationships. AxoGen
is engaged in a major initiative to build and further expand sales and marketing capabilities. The incurrence of
these expenses impacts AxoGen’s operating results, and there can be no assurance of their effectiveness. If
AxoGen is unable to develop its sales force, increase sales to existing customers and attract new customers, it
may not be able to grow revenue or maintain its current level of revenue generation.
AxoGen’s revenue depends primarily on three products.
Substantially all of AxoGen’s revenue is currently derived from only three products, the Avance Nerve
®
®
Graft, AxoGuard Nerve Protector and AxoGuard Nerve Connector, for the treatment of peripheral nerve
damage. Its ability to generate revenue is dependent on the success of these products. Accordingly, any
disruption in AxoGen’s ability to generate revenue from the sale of these products will have a material adverse
impact on its business, results of operations, financial condition and growth prospects.
®
®
The AxoGuard products are only available through an exclusive distribution agreement with Cook
Biotech. The agreement runs through August 27, 2022. However, there are conditions for continuation of the
agreement, including payment terms and minimum purchase requirements, that if breached could result in an
earlier termination of the agreement; except that through mutual agreement the parties have not established
such minimums and to date have not enforced such minimum purchase provision. Additionally, in the event
that AxoGen and Cook Biotech were to fail to reach an agreement as to minimum purchase quantities, Cook
Biotech could terminate the agreement if it was deemed that AxoGen had failed to generate commercially
reasonable sales of AxoGuard as measured by sales similar to a competitive product at the same stage in its
commercial launch as verified by a mutually acceptable third party. Although there are products that AxoGen
believes it could develop or obtain that would replace the AxoGuard products, the loss of the ability to sell
the AxoGuard products could have a material adverse effect on AxoGen’s business until other replacement
products are available.
®
®
®
AxoGen’s success will be dependent on continued acceptance of its products by the medical community.
Continued market acceptance of AxoGen’s products will depend on its ability to demonstrate that its
products are an attractive alternative to existing nerve reconstruction treatment options. Its ability to do so will
depend on surgeons’ evaluations of clinical safety, efficacy, ease of use, reliability, and cost-effectiveness of
AxoGen’s nerve repair products. For example, although AxoGen’s Avance® Nerve Graft follows stringent
safety standards, including sterilization by gamma irradiation, AxoGen believes that a small portion of the
medical community has lingering concerns over the risk of disease transmission through the use of allografts in
general. Furthermore, AxoGen believes that even if its products receive general acceptance within the medical
community, acceptance and clinical recommendations by influential surgeons will be important to the
commercial success of AxoGen’s products.
35
Negative publicity concerning methods of donating human tissue and screening of donated tissue, in the
industry in which AxoGen operates, may reduce demand for its Avance® Nerve Graft product and
negatively impact the supply of available donor tissue.
AxoGen is highly dependent on its ability to recover cadaveric nerves from tissue donors for its Avance®
Nerve Graft product. The availability of acceptable donors is relatively limited, and this availability is
impacted by regulatory changes, general public opinion of the donation process and AxoGen’s reputation for
its handling of the donation process. Media reports or other negative publicity concerning both improper
methods of tissue recovery from donors and disease transmission from donated cadaver tissue (allografts)
including bones and tendons may limit widespread acceptance of AxoGen’s Avance ® Nerve Graft.
Unfavorable reports of improper or illegal tissue recovery practices, both in the U.S. and internationally, as
well as incidents of improperly processed tissue leading to transmission of disease, may broadly affect the rate
of future tissue donation and market acceptance of allograft technologies. Potential patients may not be able to
distinguish AxoGen products, technologies, and tissue recovery and processing procedures from others
engaged in tissue recovery. In addition, unfavorable reports could make families of potential donors from
whom AxoGen is required to obtain consent before processing tissue reluctant to agree to donate tissue to for-
profit tissue processors. Any disruption in the supply could have negative consequences for AxoGen’s
revenue, operating results and continued operations.
AxoGen is highly dependent on the continued availability of its facilities and could be harmed if the
facilities are unavailable for any prolonged period of time.
Any failure in the physical infrastructure of AxoGen’s facilities, including the facility it licenses from
CTS, could lead to significant costs and disruptions that could reduce its revenues and harm its business
reputation and financial results. Any natural or man-made event that impacts AxoGen’s ability to utilize its
facilities could have a significant impact on its operating results, reputation and ability to continue operations.
This includes termination of the CTS facility service agreement which can occur after August 6, 2017 upon 18
months notice from either party. Although AxoGen believes it can find and make operational a new facility in
less than six months, and did so with its move from LifeNet Health to CTS, the regulatory process for approval
of facilities is time-consuming and unpredictable. AxoGen’s ability to rebuild or find acceptable service
facilities takes a considerable amount of time and expense and could cause a significant disruption in service to
its customers. In this regard, processing at the CTS facility began in January 2016 and there can be no
assurance that we can operate as efficiently or effectively as we have in the past. Although AxoGen has
business interruption insurance which would, in instances other than service agreement termination, cover
certain costs, it may not cover all costs nor help to regain AxoGen’s standing in the market.
AxoGen must maintain high quality manufacturing and processing.
AxoGen’s Avance® Nerve Graft is processed through its Avance® Process which requires careful
calibration and precise, high-quality processing and manufacturing. Achieving precision and quality control
requires skill and diligence by its personnel. If it fails to achieve and maintain these high quality controls,
processing and manufacturing standards, including avoidance of manufacturing errors, defects or product
failures, AxoGen could experience recalls or withdrawals of its product, delays in delivery, cost overruns or
other problems that would adversely affect its business. AxoGen cannot completely eliminate the risk of
errors, defects or failures. In addition, AxoGen may experience difficulties in scaling-up manufacturing of its
Avance® product, including problems related to yields, quality control and assurance, tissue availability,
adequacy of control policies and procedures, and lack of skilled personnel. If AxoGen is unable to process and
produce its allografts on a timely basis, at acceptable quality and costs, and in sufficient quantities, or if it
experiences unanticipated technological problems or delays in production, its business would be adversely
affected.
AxoGen relies on third party suppliers, some of which are currently the only source for the respective
components or materials they supply to it.
Most of the raw materials used in the Avance ® Process for the production of Avance ® Nerve Graft are
available from more than one supplier. However, one of the chemicals AxoGen uses in the manufacture of
Avance® Nerve Graft is
36
no longer provided by the original single source provider. AxoGen has inventory of such chemical which it
believes provides more than one year of production. AxoGen is currently evaluating multiple avenues
including a new supplier of the chemical and acceptable substitutes for the chemical. In addition, some of the
test results, packaging and reagents/chemicals AxoGen uses in its manufacturing process are also obtained
from single suppliers. We do not have written contracts with any of our single source suppliers, and at any time
they could stop supplying our orders. FDA approval of a new supplier may be required if these materials
become unavailable from AxoGen’s current suppliers. Although there may be other suppliers that have
equivalent materials that would be available to AxoGen, FDA approval of any alternate suppliers if required
could take several months or years to obtain, if able to be obtained at all. Any delay, interruption or cessation
of production by AxoGen’s third party suppliers of important materials, or any delay in qualifying new
materials, if necessary, would prevent or delay AxoGen’s ability to manufacture products. In addition, an
uncorrected impurity, a supplier’s variation in a raw material or testing, either unknown to AxoGen or
incompatible with its manufacturing process, or any other problem with AxoGen’s materials, testing or
components, would prevent or delay its ability to manufacture products. These delays may limit AxoGen’s
ability to meet demand for its products and delay its clinical trial, which would have a material adverse impact
on its business, results of operations and financial condition.
AxoGen relies on third parties to perform many necessary services for the commercialization of
Avance® Nerve Graft, including services related to the recovery, distribution and transportation.
AxoGen relies upon third parties for certain recovery, distribution and transportation services. In
accordance with product specifications, these third parties ship Avance® Nerve Graft in specially validated
shipping containers at frozen temperatures. If any of the third parties that AxoGen relies upon in its recovery,
distribution or transportation process fail to comply with applicable laws and regulations, fail to meet expected
deadlines, or otherwise do not carry out their contractual duties to AxoGen, or encounter physical damage or
natural disaster at their facilities, AxoGen’s ability to deliver product to meet commercial demand may be
significantly impaired.
AxoGen is dependent on its relationships with distributors to generate revenue.
AxoGen derives material revenues through its relationships with distributors. If such distributor
relationships were terminated for any reason, it could materially and adversely affect AxoGen’s ability to
generate revenues and profits. AxoGen intends to obtain the assistance of additional distributors to continue its
sales growth. It may not be able to find additional distributors who will agree to market and distribute its
products on commercially reasonable terms, if at all. If AxoGen is unable to establish new distribution
relationships or renew current distribution agreements on commercially acceptable terms, its operating results
could suffer.
Loss of key members of management, who it needs to succeed, could adversely affect its business.
AxoGen’s future success depends on the continued efforts of the members of its senior management team.
Competition for experienced management personnel in the healthcare industry is intense. If one or more of
AxoGen’s senior executives or other key personnel are unable or unwilling to continue in their present
positions, or if AxoGen is unable to attract and retain high quality senior executives or key personnel in the
future, its business may be adversely affected. Since the departure of its Chief Marketing Officer in June
2015 and its Chief Financial Officer in August 2015, AxoGen has been searching for their permanent
replacements to assume these responsibilities. Although AxoGen believes it has been able to absorb these
losses in the short term, the difficulty of finding key personnel has been realized and could negatively affect
AxoGen’s long term business.
AxoGen’s operating results will be harmed if it is unable to effectively manage and sustain its future
growth.
There can be no assurance that AxoGen will be able to manage its future growth efficiently or profitably.
Its business is unproven on a large scale and actual revenue and operating margins, or revenue and margin
growth, may be less than expected. If AxoGen is unable to scale its production capabilities efficiently, it may
fail to achieve expected operating margins, which would have a material and adverse effect on its operating
results. Growth may also stress AxoGen’s ability to adequately manage its operations, quality of products,
safety and regulatory compliance. If growth
37
significantly decreases it will negatively impact AxoGen’s cash reserves, and it may be required to obtain
additional financing, which may increase indebtedness or result in dilution to shareholders. Further, there can
be no assurance that AxoGen would be able to obtain additional financing on acceptable terms if all at.
There may be significant fluctuations in AxoGen’s operating results.
Significant quarterly fluctuations in AxoGen’s results of operations may be caused by, among other
factors, its volume of revenues, seasonal changes in nerve repair activity, timing of sales force expansion and
general economic conditions. There can be no assurance that the level of revenues and profits, if any, achieved
by AxoGen in any particular fiscal period, will not be significantly lower than in other comparable fiscal
periods. AxoGen’s expense levels are based, in part, on its expectations as to future revenues. As a result, if
future revenues are below expectations, net income or loss may be disproportionately affected by a reduction
in revenues, as any corresponding reduction in expenses may not be proportionate to the reduction in revenues.
AxoGen’s revenues depend upon prompt and adequate reimbursement from public and private insurers
and national health systems.
Political, economic and regulatory influences are subjecting the healthcare industry in the U.S. to
fundamental change. The ability of hospitals to pay fees for AxoGen’s products depends in part on the extent to
which reimbursement for the costs of such materials and related treatments will continue to be available from
governmental health administration authorities, private health coverage insurers and other organizations. Major
third party payers of hospital services and hospital outpatient services, including Medicare, Medicaid and
private healthcare insurers, annually revise their payment methodologies which can result in stricter standards
for reimbursement of hospital charges for certain medical procedures or the elimination of reimbursement.
Further, Medicare, Medicaid and private healthcare insurer cutbacks could create downward price pressure on
AxoGen’s products.
AxoGen may be subject to future product liability litigation which could be expensive and its insurance
coverage may not be adequate.
Although AxoGen is not currently subject to any product liability proceedings and it has no reserves for
product liability disbursements, it may incur material liabilities relating to product liability claims in the future,
including product liability claims arising out of the usage of AxoGen products. Although AxoGen currently
carries product liability insurance in an amount consistent with industry averages, its insurance coverage and
any reserves it may maintain in the future for product related liabilities may not be adequate and AxoGen’s
business could suffer material adverse consequences.
Technological change could reduce demand for AxoGen’s products.
The medical technology industry is intensely competitive. AxoGen competes with both U.S. and
international companies that engage in the development and production of medical technologies and processes
including:
·
·
·
biotechnology, orthopedic, pharmaceutical, biomaterial, chemical and other companies;
academic and scientific institutions; and
public and private research organizations.
AxoGen products compete with autograft, hollow-tube conduits and commercially available wraps, as well
as with alternative medical procedures. For the foreseeable future, AxoGen believes a significant number of
surgeons will continue to choose to perform autograft procedures when feasible, despite the necessity of
performing a second operation and its drawbacks. In addition, many members of the medical community will
continue to prefer the use of hollow-tube conduits due in part to their familiarity with these products and the
procedures required for their use. Also, steady improvements have been made in synthetic human tissue
substitutes, which could compete with AxoGen’s products. Unlike allografts, synthetic tissue technologies are
not dependent on the availability of human or animal tissue. Although AxoGen’s growth strategy contemplates
the introduction of new technologies, the development of these technologies is a complex and uncertain
process, requiring a high level of innovation, as well as the ability to accurately
38
predict future technology and market trends. AxoGen may not be able to respond effectively to technological
changes and emerging industry standards, or to successfully identify, develop or support new technologies or
enhancements to existing products in a timely and cost effective manner, if at all. Finally, there can be no
assurance that in the future AxoGen’s competitors will not develop products that have superior performance or
are less expensive relative to AxoGen’s products rendering AxoGen’s products obsolete or
noncompetitive. Due to its limited resources, its smaller size and its relatively early stage, AxoGen may face
competitive challenges and barriers that are difficult to overcome and could negatively impact its growth.
AxoGen may be unsuccessful in commercializing its products outside the U.S.
To date, AxoGen has focused its commercialization efforts in the U.S., except for minor revenues in
certain countries outside the U.S. It intends to expand sales beyond these countries outside the U.S. and will
need to comply with applicable foreign regulatory requirements, including obtaining the requisite approvals to
do so. Additionally, AxoGen will need to either enter into distribution agreements with third parties or develop
a direct sales force in these foreign markets. If it does not obtain adequate levels of reimbursement from
third party payers outside of the U.S., it may be unable to develop and grow its product sales internationally.
Outside of the U.S., reimbursement systems vary significantly by country. Many foreign markets have
government-managed healthcare systems that govern reimbursement for medical devices and procedures.
Additionally, some foreign reimbursement systems provide for limited payments in a given period and
therefore result in extended payment periods. If AxoGen is unable to successfully commercialize its products
internationally, its long term growth prospects may be limited.
If AxoGen does not manage tissue and tissue donation in an effective and efficient manner, it could
adversely affect its business.
Many factors affect the supply, quantity and timing of donor medical releases, such as effectiveness of
donor screening (currently performed by donor recovery groups), the effective recovery of tissue, the timely
receipt, recording and review of required medical documentation, and employee loss and turnover in AxoGen’s
and its contractor’s recovery department. AxoGen can provide no assurance that tissue recovery or donor
medical releases will occur at levels that will maximize processing efficiency and minimize AxoGen’s cost per
allograft processed.
If AxoGen does not manage product inventory in an effective and efficient manner, it could adversely
affect profitability.
Many factors affect the efficient use and planning of product inventory, such as effectiveness of predicting
demand, effectiveness of preparing manufacturing to meet demand, efficiently meeting product mix and
product demand requirements and product expiration. AxoGen may be unable to manage its inventory
efficiently, keep inventory within expected budget goals, keep its work-in-process inventory on hand or
manage it efficiently, control expired product or keep sufficient product on hand to meet demand, and AxoGen
can provide no assurance that it can keep inventory costs within its target levels. Failing to do so may require
AxoGen to raise additional cash resources or may harm long term growth prospects.
AxoGen’s payment obligations under the Three Peaks Term Loan Agreement and Three Peaks Revenue
Interest Agreement may adversely affect our financial position and our ability to obtain additional funds,
and may increase our vulnerability to economic or business downturns.
As described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations
— Liquidity and Capital Resources,” AxoGen borrowed $25 million under the term loan agreement (the
“Term Loan Agreement”) dated November 12, 2014, by and among us, as borrower, AC, as guarantor, the
lenders party thereto and Three Peaks Capital S.a.r.l. (“Three Peaks”), an indirect wholly-owned subsidiary of
Oberland Capital Healthcare Master Fund LP, as administrative and collateral agent for the lenders. The Term
Loan Agreement and the indebtedness under the Term Loan Agreement is secured by substantially all of
AxoGen’s tangible and intangible assets.
39
Outstanding debt could have important negative consequences to the holders of AxoGen’s securities,
including the following:
·
a portion of our cash flow from operations will be needed to pay debt service and will not be
available to fund future operations;
· AxoGen has increased vulnerability to adverse general economic and industry conditions; and
· AxoGen may be vulnerable to higher interest rates because interest expense on the Term Loan in
limited circumstances could increase.
In addition, AxoGen also entered into a ten-year Revenue Interest Agreement (the “Revenue Interest
Agreement”) with Three Peaks. Royalty payments are based on a royalty rate of 3.75% of AxoGen’s revenues
up to a maximum of $30 million in revenues in any 12-month period. In the event AxoGen makes any
subsequent borrowing under the Term Loan Agreement, the royalty rate increases proportionally up to a
maximum of 4.80%. In addition, under the Revenue Interest Agreement, AxoGen is required to maintain
certain covenants including those covenants under the Term Loan.
Payment requirements under the Term Loan Agreement and the Revenue Interest Agreement increase
AxoGen’s cash burden. AxoGen’s future operating performance is subject to market conditions and business
factors that are beyond its control. If AxoGen’s cash flows and capital resources are insufficient to allow
AxoGen to make required payments, AxoGen may have to reduce or delay capital expenditures, sell assets,
seek additional capital or restructure or refinance its debt. If AxoGen raises funds by selling additional equity,
such sale would result in dilution to its shareholders. There is no assurance that if AxoGen is required to secure
funding it can do so on terms acceptable to it, or at all. Failure to pay interest or the principal amount when
due would result in a default under the Term Loan Agreement and result in foreclosure on AxoGen’s assets
which would have a material adverse effect.
The Three Peaks Term Loan Agreement and the Three Peaks Revenue Interest Agreement each contain
certain covenants and failure to comply with the terms of such indebtedness could result in a default that
could have material adverse consequences for us.
The Term Loan Agreement and the Revenue Interest Agreement each contain covenants that place
restrictions on AxoGen’s operations, including, without limitation, covenants related to debt restrictions,
investment restrictions, dividend restrictions, restrictions on transactions with affiliates and certain revenue
covenants. AxoGen’s ability to comply with these covenants may be affected by general economic and
industry conditions, as well as market fluctuations and other events beyond AxoGen’s control. AxoGen does
not know if it will be able to satisfy all such covenants in the future. AxoGen’s breach of the covenants could
result in a default under such agreements. In the event of a default under the Term Loan Agreement, the lender
could require AxoGen to repay some of its outstanding debt prior to maturity, and/or to declare all amounts
borrowed by it, together with accrued interest, to be due and payable. In the event that this occurs, AxoGen
may be unable to repay all such accelerated indebtedness. Any indebtedness that it incurs under the Term
Loan Agreement is secured by substantially all of its tangible and intangible assets. If AxoGen defaults under
the indebtedness secured by its assets, those assets would be available to the secured creditors to satisfy
AxoGen’s obligations to the secured creditors.
AxoGen incurs costs as a result of operating as a public company, and its management is required to
devote substantial time to compliance initiatives.
As a public company, AxoGen incurs legal, accounting and other expenses to comply with relevant
securities laws and regulations, including, without limitation, the requirement of establishment and
maintenance of effective disclosure and financial controls and corporate governance practices. AxoGen’s
management devotes substantial time and financial resources to these compliance initiatives. Failure to comply
with public company requirements could have a material adverse effect on AxoGen’s business.
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Our business and stock price may be adversely affected if our internal controls are not effective.
Section 404 of the Sarbanes-Oxley Act of 2002 requires that public companies conduct a comprehensive
evaluation of their internal control over financial reporting. To comply with this statute, each year we are
required to document and test our internal control over financial reporting and our management is required to
assess and issue a report concerning it.
In our annual report for the period ended December 31, 2011, we reported a material weakness in our
internal control over financial reporting which related to an instance in which the accounting for a contract was
inappropriately treated as an expense as opposed to a prepaid asset. Although we believe we took appropriate
actions to remediate the control deficiencies we identified and to strengthen our internal control over financial
reporting, we cannot assure you that we will not discover other material weaknesses in the future or that no
material weakness will result from any difficulties, errors, delays or disruptions while we implement and
transition to new internal systems. The existence of one or more material weaknesses could result in errors in
our financial statements, and substantial costs and resources may be required to rectify these or other internal
control deficiencies. If we cannot produce reliable financial reports, investors could lose confidence in our
reported financial information, the market price of our common stock could decline significantly, we may be
unable to obtain additional financing to operate and expand our business and our business and financial
condition could be harmed.
Our business and financial performance could be adversely affected, directly or indirectly, by disasters,
by terrorist activities or by international hostilities.
Neither the occurrence nor the potential impact of disasters, terrorist activities and international hostilities
can be predicted. However, these occurrences could impact us directly as a result of damage to our facilities or
by preventing us from conducting our business in the ordinary course, or indirectly as a result of their impact
on our customers, suppliers or other counterparties. We could also suffer adverse consequences to the extent
that disasters, terrorist activities or international hostilities affect the financial markets or the economy in
general or in any particular region.
Our ability to mitigate the adverse consequences of such occurrences is in part dependent on the quality of
our resiliency planning, and our ability, if any, to anticipate the nature of any such event that occurs. The
adverse impact of disasters or terrorist activities or international hostilities also could be increased to the extent
that there is a lack of preparedness on the part of national or regional emergency responders or on the part of
other organizations and businesses that we deal with, particularly those that we depend upon but have no
control over.
Risks Related to the Regulatory Environment in which AxoGen Operates
AxoGen’s business is subject to continuing regulatory compliance by the FDA and other authorities
which is costly and could result in negative effects on its business.
AxoGen is subject to extensive regulation by foreign and domestic government entities and healthcare
professionals, such as physicians, hospitals and those to whom and through whom we may market our
products. We are subject to scrutiny under various federal, state and territorial laws in the United States and
other jurisdictions in which we conduct business. These include, for example, anti-kickback laws, physician
self-referral laws, false claims laws, criminal health care fraud laws, and anti-bribery laws such as the United
States Foreign Corrupt Practices Act. Violations of these laws are punishable by criminal and/or civil
sanctions, including, in some instances, fines, imprisonment and, within the United States, exclusion from
participation in government healthcare programs, including Medicare, Medicaid and Veterans Administration
health programs. These laws are administered by, among others, the DOJ, the Office of Inspector General of
the Department of Health and Human Services, state attorneys general, and their respective counterparts in the
applicable foreign jurisdictions in which we conduct business. Many of these agencies have increased their
enforcement activities with respect to medical device manufacturers in recent years.
Our products are also subject to regulation by the FDA in the U.S. The FDA regulates the development,
clinical testing, marketing, distribution, manufacturing, labeling, and promotion of biological products, such as
that of AxoGen’s Avance® Nerve Graft product. The FDA also regulates medical devices, for example the
AxoGuard® products. The FDA
41
requires the approval of a biological product, like the Avance ® Nerve Graft product, through a BLA prior to
marketing. Although the Avance® Nerve Graft product has not yet been approved by FDA through a BLA,
FDA is permitting the product to be distributed, subject to FDA enforcement discretion, provided
that AxoGen: (1) transitions to compliance with section 501(a)(2)(B) of the FD&C Act, the cGMP regulations
in 21 CFR Parts 210 and 211 and the applicable regulations and standards in 21 CFR Parts 600-610 prior to
initiation of a phase 3 clinical trial designed to demonstrate the safety, purity, and potency of the Avance®
Nerve Graft; (2) conducts a phase 3 clinical trial to demonstrate safety, purity and potency of the Avance ®
Nerve Graft under an SPA; (3) continues to comply with the requirements of 21 CFR Part 1271; and
(4) exercises due diligence in executing the transition plan. See “Business — Government Regulations —
U.S. Government Regulation Review.”
The FDA also regulates medical devices and requires certain medical devices, such as the AxoGuard ®
products, be cleared through the 510(k) premarket notification process prior to marketing. The FDA’s
premarket review process for new and modified existing devices that precedes product marketing can be time
consuming and expensive. Some of the future products and enhancements to such products that AxoGen
expects to develop and market may require marketing clearance or approval from the FDA.
There can be no assurance, however, that clearance or approval will be granted with respect to any of
AxoGen’s device products or enhancements of marketed products or that AxoGen’s Avance® Nerve Graft will
achieve an effective IND or ultimately an approved BLA. FDA review of AxoGen’s devices or biological
products may encounter significant delays during FDA’s premarket review process that would adversely affect
AxoGen’s ability to market its products or enhancements. In addition, there can be no assurance that AxoGen
products, including the Avance® Nerve Graft, or enhancements will not be subject to a lengthy and expensive
approval process with the FDA.
It is possible that if regulatory clearances or approvals to market a product are obtained from the FDA, the
clearances or approvals may contain limitations on the indicated uses of such product and other uses may be
prohibited. Product approvals by the FDA can also be withdrawn due to failure to comply with regulatory
standards or the occurrence of unforeseen problems following initial approval. Furthermore, the FDA could
limit or prevent the distribution of AxoGen products and the FDA has the power to require the recall of such
products. FDA regulations depend heavily on administrative interpretation, and there can be no assurance that
future interpretations made by the FDA or other regulatory bodies will not adversely affect AxoGen’s
operations. AxoGen, and its facilities, may be inspected by the FDA from time to time to determine whether it
is in compliance with various regulations relating to specifications, development, documentation, validation,
testing, quality control and product labeling. A determination that AxoGen is in violation of such regulations
could lead to imposition of civil penalties, including fines, product recalls or product seizures and, in certain
cases, criminal sanctions.
The use, misuse or off-label use of AxoGen’s products may harm its reputation or the image of its products
in the marketplace, or result in injuries that lead to product liability suits, which could be costly to AxoGen’s
business or result in FDA sanctions if the company is deemed to have engaged in off-label promotion. AxoGen
is seeking a biologics license through the BLA process for specific uses of Avance® Nerve Graft under specific
circumstances. Its promotional materials and training methods must comply with FDA requirements and other
applicable laws and regulations, including the prohibition against off-label promotion. AxoGen’s promotion of
the AxoGuard® products, which are regulated as medical devices, also must comply with FDA’s requirements
and must only use labeling that is consistent with the specific indication(s) for use included in the FDA
substantial equivalence order that results in marketing the devices. The FDA does not restrict or regulate a
physician’s use of a medical product within the practice of medicine, and AxoGen cannot prevent a physician
from using its products for an off-label use. However, the FD&C Act and the FDA’s regulations restrict the
kind of promotional communications that may be made about AxoGen’s products and if the FDA determines
that AxoGen’s promotional or training materials constitute the unlawful promotion of an off-label use, it could
request that AxoGen modify its training or promotional materials and/or subject the Company to regulatory or
enforcement actions, including the issuance of an untitled letter, a warning letter, civil money penalties,
seizure, injunction or criminal fines and penalties. Other federal, state or foreign governmental authorities
might also take action if they consider AxoGen promotion or training materials to constitute promotion of an
uncleared or unapproved use, which could result in significant fines or penalties under other statutory
authorities, such as laws prohibiting false claims for reimbursement, or exclusion from participation in federal
health programs. In that event, AxoGen’s reputation could be damaged and the use of its products in the
marketplace could be impaired.
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In addition, there may be increased risk of injury if physicians or others attempt to use AxoGen products
off-label. Furthermore, the use of AxoGen’s product for indications other than those for which its products
have been approved, cleared or licensed by the FDA may not effectively treat the conditions not referenced in
product indications, which could harm AxoGen’s reputation in the marketplace among physicians and patients.
Physicians may also misuse AxoGen’s product or use improper techniques if they are not adequately trained in
the particular use, potentially leading to injury and an increased risk of product liability. Product liability claims
are expensive to defend and could divert management’s attention from its primary business and result in
substantial damage awards against AxoGen. Any of these events could harm AxoGen’s business, results of
operations and financial condition.
AxoGen’s Avance® Nerve Graft product is currently allowed to be distributed pursuant to a transition
plan with the FDA and a change in position by the FDA regarding its use of enforcement discretion to
permit the sale of Avance would have a material adverse effect on AxoGen.
The FDA considers the AxoGen’s Avance® Nerve Graft product to be a biological product, subject to BLA
approval requirements. Although the Avance® Nerve Graft product has not yet been approved by FDA through
a BLA, AxoGen’s Avance® Nerve Graft product is currently distributed under the controls applicable to a
HCT/P pursuant to section 361 of the Public Health Service Act and 21 CFR Part 1271 of FDA’s regulations,
subject to FDA’s enforcement discretion and AxoGen’s compliance with a transition plan established by the
FDA. See “Business — Government Regulations — U.S. Government Regulation Review.” AxoGen has
continued to communicate with the FDA’s CBER since the acceptance of the transition plan on clinical trial
design, preclinical studies, Chemistry, Manufacturing, and Controls (“CMC”) for the Avance® Nerve Graft,
and other issues related to the pending IND Subject to the FDA’s enforcement discretion, AxoGen can
commercially distribute the Avance® Nerve Graft until the FDA makes a final determination on an Avance®
Nerve Graft BLA submission, assuming AxoGen remains in compliance with the transition plan and exercises
due diligence in executing the transition plan. In the event that the FDA becomes dissatisfied with AxoGen’s
progress or actions with respect to the transition plan or the FDA changes its position for any reason regarding
its use of enforcement discretion to permit AxoGen to distribute and sell the Avance® Nerve Graft product in
accordance with the transition plan, AxoGen would no longer be able to sell the Avance® Nerve Graft product,
which would have a material adverse effect on AxoGen’s operations and financial viability. In addition, if
AxoGen does not meet the conditions of the transition plan, or fails to comply with applicable regulatory
requirements, the FDA could impose civil penalties, including fines, product seizures, injunctions or product
recalls and, in certain cases, criminal sanctions. These consequences also would have a material adverse effect
on AxoGen’s operations and financial viability.
AxoGen’s AxoGuard® products are subject to FDA and other regulatory requirements.
AxoGen’s AxoGuard® product line is regulated as a medical device under the FD&C Act and subject to
premarket notification and clearance requirements under section 510(k) of the FD&C Act, 21 CFR Part 820
(Quality System Regulation) and other FDA regulations. AxoGen distributes for Cook Biotech Incorporated
the AxoGuard® product line and Cook Biotech is responsible for the regulatory compliance of the AxoGuard ®
product line. Cook Biotech has obtained a 510(k) premarket clearance from the FDA for porcine (pig) small
intestine submucosa for the repair of peripheral nerve discontinuities where gap closure can be achieved by
flexion of the extremity. Cook Biotech has also obtained a 510(k) premarket clearance for the AxoGuard®
Nerve Protector for the repair of peripheral nerve injuries in which there is no gap or where a gap closure is
achieved by flexion of the extremity. If AxoGen or Cook Biotech Incorporated fails to comply with applicable
regulatory requirements, the FDA could deny or withdraw 510(k) clearance for the AxoGuard ® products, or
impose civil penalties, including fines, product seizures or product recalls and, in certain cases, criminal
sanctions.
AxoGen’s AxoTouch and AcroVal
TM
TM
products are subject to FDA and other regulatory requirements.
AxoGen’s AxoTouch and its to-be-launched AcroVal
TM
TM
product are regulated as a medical device under
the FD&C Act and subject to premarket notification and clearance requirements under section 510(k) of the
FD&C Act, 21 CFR Part 820 (Quality System Regulation) and other FDA regulations. If AxoGen fails to
comply with applicable regulatory requirements, the FDA could deny or withdraw 510(k) clearance for these
products, or impose civil penalties, including fines, product seizures or product recalls and, in certain cases,
criminal sanctions.
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Defective AxoGen product could lead to recall or other negative business conditions.
If AxoGen’s products are defective or otherwise pose safety risks, the FDA could require their recall or
AxoGen may initiate a voluntary recall of its products. The FDA may require recall of a marketed medical
device product, such as the AxoGuard® products, in the event that it determines the medical device presents a
reasonable probability of serious adverse health consequences or death. However, most device recalls do not
rise to this level of health significance and result from voluntary action. The FDA has authority to recall
biological products when a batch, lot or other quantity of the product presents an imminent or substantial
hazard to the public health. However, the FDA usually initially requests, voluntary recalls of biological
products, such as the Avance® Nerve Graft. If a company does not comply with an FDA request for a recall,
the FDA can order one under the above-referenced circumstances or take other enforcement actions, such as
product seizure. In addition, manufacturers may, on their own initiative, recall a product to remove or correct a
deficiency or to remedy a violation of the FD&C Act that may pose a risk to health. A government-mandated,
government-requested or voluntary recall could occur as a result of an unacceptable risk to health, reports of
safety issues, failures, manufacturing errors, design or labeling defects or other deficiencies and issues. Recalls
and other field corrections for any of AxoGen’s products would divert managerial and financial resources and
have an adverse effect on its business, results of operations and financial condition. A recall could harm
AxoGen’s reputation with customers and negatively affect its sales. AxoGen may initiate recalls involving
some of its products in the future that it determines do not require notification of the FDA. If the FDA were to
disagree with AxoGen’s determinations, it could request that it report those actions as recalls, and take
regulatory or enforcement action against AxoGen or the product.
If AxoGen’s products cause or contribute to a death, a serious injury or any adverse reaction involving a
communicable disease related to its products, or malfunction in certain ways, it will be subject to reporting
regulations, which can result in voluntary corrective actions or agency enforcement actions. See “Business —
Regulation — Education Grants, U.S. Anti-kickback, False Claims and Other Healthcare Fraud and Abuse
Laws — Pervasive and Continuing Regulation.” If AxoGen fails to report these events to the FDA within the
required timeframes, or at all, the FDA could take regulatory or enforcement action against AxoGen. Any
adverse event involving AxoGen’s products could result in future voluntary corrective actions, such as recalls
or customer notifications, or agency action, such as inspection, mandatory recall or other enforcement action.
Any corrective action, whether voluntary or involuntary, as well as AxoGen defending itself in a lawsuit,
would require the dedication of time and capital, distract management from operating its business, and may
harm AxoGen’s reputation, business, results of operations and financial condition.
AxoGen’s manufacturing operations must comply with FDA and other governmental requirements.
AxoGen’s manufacturing operations require it to comply with the FDA’s and other governmental
authorities’ laws and regulations regarding the manufacture and production of medical products, which is
costly and could subject AxoGen to enforcement action. See Business — Government Regulations —
Education Grants, U.S. Anti-kickback, False Claims and Other Healthcare Fraud and Abuse Laws — Pervasive
and Continuing Regulation. Any of these actions could impair AxoGen’s ability to produce its products in a
cost-effective and timely manner in order to meet customer demands. AxoGen may also be required to bear
other costs or take other actions that may have an adverse impact on its future sales and its ability to generate
profits. Furthermore, AxoGen’s key material suppliers, licensors and or other contractors may not continue to
be in compliance with all applicable regulatory requirements, which could result in AxoGen’s failure to
produce its products on a timely basis and in the required quantities, if at all.
Sales of AxoGen human tissue products outside the U.S. are subject to foreign regulatory requirements
that vary from country to country. In the E.U., human tissue regulations, if applicable, differ from one E.U.
member state to the next. Because of the absence of a harmonized regulatory framework and the proposed
regulation for advanced therapy medicinal products in the E.U., as well as for other countries, the approval
process for human derived cell or tissue based medical products may be extensive, lengthy, expensive and
unpredictable. AxoGen products will be subject to E.U. member states’ regulations that govern the donation,
procurement, testing, coding, traceability, processing, preservation, storage, and distribution of human tissues
and cells and cellular or tissue-based products. In addition, some E.U. member states have their own tissue
banking regulations. The inability to meet foreign regulatory requirements could materially affect AxoGen’s
future growth and compliance with such requirements could place a significant financial burden on AxoGen.
44
Clinical trials can be long, expensive and ultimately uncertain which could jeopardize AxoGen’s ability
to obtain regulatory approval and continue to market its Avance® Nerve Graft product.
AxoGen is required to perform a clinical trial for its Avance® Nerve Graft under FDA’s statutory
requirements to obtain approval of a BLA for the product. This trial is expensive, is expected to take several
years to execute, and is subject to factors within and outside of AxoGen’s control. The outcome of this trial is
uncertain.
AxoGen submitted an IND for the Avance® Nerve Graft in April 2013 and received FDA approval in
March 2015. The phase 3 clinical trial was initiated in the second quarter of 2015. Additionally, AxoGen was
audited by the FDA at its processing facility in March 2013 and March 2015 and its Distribution Facility in
October 2015. The quality system was found to be in compliance with 21 CFR Part 1271. AxoGen is working
to ensure compliance with the applicable regulations by having ongoing discussions on the transition of the
quality system to 21 CFR Parts 210/211 and 600-610 regulations with the FDA and being audited by the FDA
for compliance to 21 CFR Part 1271 of the regulations. Final determination of regulatory compliance will be
made during FDA’s pre-license inspection as part of the BLA review. If the FDA is unable to agree with
AxoGen, or AxoGen is unable to meet the standards required of it by the FDA, regarding preclinical studies,
clinical studies and CMC, the approval of AxoGen’s BLA would not occur or be delayed.
AxoGen continues to work diligently with the FDA and, in this context, continues to distribute the
Avance® Nerve Graft products. The FDA will end the period of enforcement discretion upon a final
determination of AxoGen’s BLA submission or if the FDA finds that AxoGen does not meet the conditions for
the transition plan or is not exercising due diligence in executing the transition (e.g., not progressing toward the
IND submission, study completion, or BLA submission in a timely or adequate fashion). If final action on the
BLA is negative or AxoGen is found to not meet the conditions for the transition plan or its execution,
AxoGen will not be able to continue to distribute the Avance® Nerve Graft, and AxoGen’s business and
financial condition will be materially adversely affected.
The results of non-clinical studies do not necessarily predict future clinical trial results and predecessor
clinical trial results may not be repeated in subsequent clinical trials. Additionally, the FDA may disagree with
AxoGen’s interpretation of the data from its non-clinical studies and clinical trials and may require the
company to pursue additional non-clinical studies or clinical trials, or not approve AxoGen’s BLA. If AxoGen
is unable to demonstrate the safety and efficacy of its product through its clinical trials, it will be unable to
obtain regulatory approval to market the Avance® Nerve Graft and will not be able to continue to sell it.
AxoGen will rely on third parties to conduct its clinical trial and they may not perform as contractually
required or expected.
AxoGen will rely on third parties, such as contract research organizations (“CROs”), medical institutions,
clinical investigators and contract laboratories to conduct its clinical trial and certain nonclinical studies.
AxoGen and its CROs are required to comply with all applicable regulations governing clinical research,
including good clinical practice, or GCP. The FDA enforces these regulations through periodic inspections of
trial sponsors, principal investigators, CROs and trial sites. If AxoGen or its CROs fail to comply with
applicable FDA regulations, the data generated in its clinical trials may be deemed unreliable and the FDA may
require AxoGen to perform additional clinical trials before approving its applications. AxoGen cannot be
certain that, upon inspection, the FDA and similar foreign regulatory authorities will determine that AxoGen’s
clinical trial complies or complied with clinical trial regulations, including GCP. In addition, AxoGen’s clinical
trial must be conducted with product produced under applicable cGMP regulations. Failure to comply with the
clinical trial regulations may require AxoGen to repeat clinical trials, which would delay the regulatory
approval process. If these third parties do not successfully carry out their contractual duties or regulatory
obligations or meet expected deadlines, if these third parties need to be replaced, or if the quality or accuracy
of the data they obtain is compromised due to the failure to adhere to AxoGen’s clinical protocols or regulatory
requirements or for other reasons, AxoGen’s non-clinical development activities or clinical trials may be
extended, delayed, suspended or terminated, and it would not be able to obtain regulatory approval for its
products on a timely basis, if at all, and its business, results of operations, financial condition and growth
prospects would be adversely affected. Furthermore, AxoGen’s third party clinical trial investigators may be
delayed in conducting its clinical trials for reasons outside of their control.
45
U.S. governmental regulation could restrict the use of AxoGen’s Avance® Nerve Graft product, restrict
AxoGen’s procurement of tissue or increase costs.
In addition to the FDA requirements for biological products, the Avance ® Nerve Graft will continue to be
subject to various requirements for human tissue under 21 CFR Part 1271 controls. Human tissues intended for
transplantation have been regulated by the FDA since 1993. In May 2005, three new comprehensive
regulations went into effect that address manufacturing activities associated with HCT/P. The first regulation
requires that companies that produce and distribute HCT/Ps register with the FDA. The second regulation
provides criteria that must be met for donors to be eligible to donate tissues and is referred to as the “Donor
Eligibility” rule. The third regulation governs the processing and distribution of the tissues and is often
referred to as the Current Good Tissue Practices rule. The Current Good Tissue Practices rule covers all stages
of allograft processing, from procurement of tissue to distribution of final allografts. Together, the three basic
requirements of 21 CFR Part 1271 are designed to ensure that sound, high quality practices are followed to
reduce the risk of tissue contamination and of communicable disease transmission to recipients. These
regulations increased regulatory scrutiny within the industry in which AxoGen operates and have led to
increased enforcement actions, which affects the conduct of its business. Additional regulations or guidance
documents may be implemented by the FDA in the future. These changes may require new documentation
requirements, process changes or testing that could increase costs and regulatory burden. See “Business —
Government Regulations.” These regulations can also increase the cost of tissue recovery activities.
Additionally, the Avance® Nerve Graft is subject to certain state and local regulations, as well as compliance
with the standards of the tissue bank industry’s accrediting organization, the American Association of Tissue
Banks (“AATB”).
The procurement and transplantation of allograft nerve tissue is also subject to federal law pursuant to the
National Organ Transplant Act (“NOTA”), a criminal statute which prohibits the purchase and sale of human
organs used in human transplantation, including nerve and related tissue, for “valuable consideration.” NOTA
only permits reasonable payments associated with the removal, transportation, processing, preservation, quality
control, implantation and storage of human nerve tissue. AxoGen makes payments to certain of its clients and
tissue banks for their services related to recovering allograft nerve tissue on its behalf. If NOTA is interpreted
or enforced in a manner which prevents AxoGen from receiving payment for services it renders, or which
prevents it from paying tissue banks or certain of its clients for the services they render for AxoGen, its
business could be materially and adversely affected.
AxoGen has engaged, through its marketing employees, independent sales agents and sales representatives
in ongoing efforts designed to educate the medical community as to the benefits of AxoGen products, and
AxoGen intends to continue its educational activities. Although AxoGen believes that NOTA permits payments
in connection with these educational efforts as reasonable payments associated with the processing,
transportation and implantation of AxoGen products, payments in connection with such education efforts are
not exempt from NOTA’s restrictions and AxoGen’s inability to make such payments in connection with its
education efforts may prevent it from paying AxoGen sales representatives for their education efforts and
could adversely affect AxoGen’s business and prospects. No federal agency or court has determined whether
NOTA is, or will be, applicable to every allograft nerve tissue-based material which AxoGen’s processing
technologies may generate. Assuming that NOTA applies to AxoGen’s processing of allograft nerve tissue,
AxoGen believes that it complies with NOTA, but there can be no assurance that more restrictive
interpretations of, or amendments to, NOTA will not be adopted in the future, which would call into question
one or more aspects of AxoGen’s method of operations.
Other regulatory entities include state agencies with statutes covering tissue banking. Regulations issued
by Florida, New York, California and Maryland, among other states, will be particularly relevant to AxoGen’s
business. Most states do not currently have tissue banking regulations. However, incidents of allograft related
infections in the industry may stimulate the development of regulation in other states. It is possible that third
parties may make allegations against AxoGen or against donor recovery groups or tissue banks about non-
compliance with applicable FDA regulations or other relevant statutes or regulations. Allegations like these
could cause regulators or other authorities to take investigative or other action, or could cause negative
publicity for AxoGen’s business and the industry in which it operates.
46
Healthcare policy changes may have a material adverse effect on AxoGen.
In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act, as
amended by the Health Care and Education Affordability Reconciliation Act, which substantially change the
way healthcare is financed by both governmental and private insurers, and encourages improvements in the
quality of healthcare items and services. This Act significantly impacts the biotechnology and medical device
industries and could have a material adverse impact on numerous aspects of AxoGen’s business.
This Act includes, among other things, the following measures:
·
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a 2.3% excise tax on any entity that manufactures or imports medical devices offered for sale in
the U.S., with limited exceptions, beginning in 2013, referred to as the Device Tax, which has
been suspended through 2017;
a new Patient-Centered Outcomes Research Institute to oversee, identify priorities and conduct
comparative clinical effectiveness research;
new reporting and disclosure requirements on healthcare manufacturers for any “transfer of
value” made or distributed to physicians and teaching hospitals, as well as reporting of certain
physician ownership interests (“Sunshine Act”);
payment system reforms, including a national pilot program on payment bundling to encourage
hospitals, physicians and other providers to improve the coordination, quality and efficiency of
certain healthcare services through bundled payment models;
an independent payment advisory board that will submit recommendations to reduce Medicare
spending if projected Medicare spending exceeds a specified growth rate; and
a new abbreviated pathway for the licensure of biologic products that are demonstrated to be
biosimilar or interchangeable with a licensed biologic product.
There are also a number of states (such as Vermont, Massachusetts, Minnesota) with their own Sunshine
Acts that implement the reporting and disclosure requirements on healthcare manufacturers for any “transfer of
value” made or distributed to physicians and teaching hospitals, as well as reporting of certain physician
ownership interests.
In the future, there may continue to be additional proposals relating to the reform of the U.S. healthcare
system. Certain of these proposals could limit the prices AxoGen is able to charge for its products or the
amounts of reimbursement available for its products and could also limit the acceptance and availability of its
products. The adoption of some or all of these proposals could have a material adverse effect on AxoGen’s
business, results of operations and financial condition.
Additionally, initiatives sponsored by government agencies, legislative bodies and the private sector to
limit the growth of healthcare costs, including price regulation and competitive pricing, are ongoing in markets
where AxoGen does business. AxoGen could experience an adverse impact on operating results due to
increased pricing pressure in the U.S. and in other markets. Governments, hospitals and other third party
payors could reduce the amount of approved reimbursement for AxoGen’s products or deny coverage
altogether. Reductions in reimbursement levels or coverage or other cost-containment measures could
unfavorably affect AxoGen’s future operating results.
Risks Related to AxoGen’s Intellectual Property
Failure to protect AxoGen’s IP rights could result in costly and time consuming litigation and its loss of
any potential competitive advantage.
AxoGen’s success will depend, to a large extent, on its ability to successfully obtain and maintain patents,
prevent misappropriation or infringement of IP, maintain trade secret protection, and conduct operations
without violating or infringing on the IP rights of third parties. See “Business — Intellectual Property.” There
can be no assurance that AxoGen’s patented and patent pending technologies will provide it with a competitive
advantage, that AxoGen will be able to develop or acquire additional technology that is patentable, or that third
parties will not develop and offer technologies which are similar to AxoGen’s. Moreover, AxoGen can provide
no assurance that confidentiality
47
agreements with its employees, consultants and other parties, trade secrecy agreements or similar agreements
intended to protect unpatented technology will provide the intended protection. IP litigation is extremely
expensive and time-consuming, and it is often difficult, if not impossible, to predict the outcome of such
litigation. A failure by AxoGen to protect its IP could have a materially adverse effect on its business and
operating results and its ability to successfully compete in its industry.
Future protection for AxoGen’s proprietary rights is uncertain which may impact its ability to
successfully compete in its industry.
The degree of future protection for AxoGen’s proprietary rights is uncertain. AxoGen cannot ensure that:
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it, or its licensors, were the first to make the inventions covered by each of AxoGen’s patents;
it, or its licensors, were the first to file patent applications for these inventions;
others will not independently develop similar or alternative technologies or duplicate any of
AxoGen’s technologies;
any of AxoGen’s pending patent applications will result in issued patents;
any of AxoGen’s issued patents or those of its licensors will be valid and enforceable;
any patents issued to AxoGen or its collaborators will provide any competitive advantages or
will not be challenged by third parties;
it will develop additional proprietary technologies that are patentable;
the patents of others will not have a material adverse effect on its business rights; or
the measures AxoGen relies on to protect its IP underlying their products may not be adequate to
prevent third parties from using its technology, all of which could harm its ability to compete in
the market.
AxoGen’s commercial success depends in part on its ability and the ability of its collaborators and
licensors to avoid infringing patents and proprietary rights of third parties which could expose it to litigation or
commercially unfavorable licensing arrangements. Third parties may accuse AxoGen or collaborators and
licensors of employing their proprietary technology in AxoGen products, or in the materials or processes used
to research or develop AxoGen products, without authorization. Any legal action against AxoGen
collaborators, licensors or it claiming damages and/or seeking to enjoin AxoGen’s commercial activities
relating to the affected products, materials and processes could, in addition to subjecting AxoGen to potential
liability for damages, require it or its collaborators and licensors to obtain a license to continue to utilize the
affected materials or processes or to manufacture or market the affected products. AxoGen cannot predict
whether it or its collaborators and licensors would prevail in any of these actions or whether any license
required under any of these patents would be made available on commercially reasonable terms, if at all. If
AxoGen were unable to obtain such a license, it and its collaborators and licensors may be unable to continue
to utilize the affected materials or processes, or manufacture or market the affected products, or AxoGen may
be obligated by a court to pay substantial royalties and/or other damages to the patent holder. Even if AxoGen
were able to obtain such a license, the terms of such a license could substantially reduce the commercial value
of the affected product or products and impair AxoGen’s prospects for profitability. Accordingly, AxoGen
cannot predict whether, or to what extent, the commercial value of the affected product or products or
AxoGen’s prospects for profitability may be harmed as a result of any of the liabilities discussed above.
Furthermore, infringement and other IP claims, with or without merit, can be expensive and time-consuming to
litigate and can divert management’s attention from its core business. AxoGen and its licensors may be unable
to obtain and enforce IP rights to adequately protect its products and related IP.
The patent protection for our products may expire before we are able to maximize their commercial
value which may subject us to increased competition and reduce or eliminate our opportunity to generate
product revenue.
The patents for our commercialized products and products in development have varying expiration dates
and, when these patents expire, we may be subject to increased competition and we may not be able to recover
our development costs. For example, U.S. patents covering the formulations used in our AxoGuard® product
line, which are held by Cook Biotech, are scheduled to expire from August 17, 2017 through November 2018.
Although we expect that Cook Biotech is using best efforts to take any action possible to extend the life of
these patents, there can be no assurance that any action is possible or action taken will be successful. If these
patents expire while we have the right to distribute and market the AxoGuard® products, it could adversely
affect our ability to successfully execute our business strategy to
48
maximize the value of AxoGuard® products and could likely negatively impact our future financial condition
and results of operations.
Others may claim an ownership interest in AxoGen IP which could expose it to litigation and have a
significant adverse effect on its prospects.
A third party may claim an ownership interest in one or more of AxoGen’s patents or other IP. A third
party could bring legal actions against AxoGen claiming it infringes their patents or proprietary rights, and
seek monetary damages and/or enjoin clinical testing, manufacturing and marketing of the affected product or
products. While AxoGen believes it owns the right, title and interest in the patents for which it or its licensors
have applied and AxoGen’s other IP (including that which is licensed from third parties), and is presently
unaware of any claims or assertions by third-parties with respect to AxoGen’s patents or IP, it cannot guarantee
that a third party will not assert a claim or an interest in any of such patents or IP. If AxoGen becomes involved
in any litigation, it could consume a substantial portion of AxoGen’s resources and cause a significant
diversion of effort by AxoGen’s technical and management personnel regardless of the outcome of the
litigation. If any of these actions were successful, in addition to any potential liability for damages, AxoGen
could be required to obtain a license to continue to manufacture or market the affected product, in which case
AxoGen may be required to pay substantial royalties or grant cross-licenses to AxoGen’s patents. AxoGen
cannot, however, assure you that any such license will be available on acceptable terms, if at all. Ultimately,
AxoGen could be prevented from commercializing a product or be forced to cease some aspect of its business
operations as a result of claims of patent infringement or violation of other IP rights, which could have a
material and adverse effect on AxoGen’s business, financial condition, and results of operations. Further, the
outcome of IP litigation is subject to uncertainties that cannot be adequately quantified in advance, including
the demeanor and credibility of witnesses and the identity of the adverse party. This is especially true in IP
cases that may turn on the testimony of experts as to technical facts upon which experts may reasonably
disagree.
AxoGen depends on maintenance of exclusive licenses.
AxoGen depends fundamentally on keeping and satisfying the terms of exclusive licenses of its nerve
repair technologies from UFRF and UT where the original technologies are purported to be invented. Though
AxoGen makes an effort to follow these agreements strictly, a disagreement between AxoGen and either party
could have a negative impact on its ability to operate its business effectively. In addition, AxoGen could learn
that the technologies it has licensed from UFRF and UT do not perform as purported, are not efficacious, or
are not the property of UFRF or UT, or some similar problem with the license, any of which would have an
immediate and negative impact on AxoGen’s business.
Risk Related to Our Common Stock
The price of AxoGen’s common stock could be highly volatile due to a number of factors, which could
lead to losses by investors and costly securities litigation.
Our common stock is listed on the NASDAQ Capital Market under the symbol “AXGN.” The trading
price of our common stock has experienced substantial volatility and is likely to continue to be highly volatile
in response to a number of factors including, without limitation, the following:
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limited daily trading volume resulting in the lack of a liquid market;
fluctuations in price and volume due to investor speculation and other factors that may not be
tied to the financial performance of AxoGen;
performance by AxoGen in the execution of its business plan;
financial viability;
actual or anticipated variations in our operating results;
announcements of developments by us or our competitors;
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· market conditions in our industry;
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announcements by us or our competitors of significant acquisitions, strategic partnerships, joint
ventures or capital commitments;
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adoption of new accounting standards affecting our industry;
additions or departures of key personnel;
introduction of new products by us or our competitors;
sales of our common stock or other securities in the open market;
regulatory developments in both the United States and foreign countries;
performance of products sold and advertised by licensees in the marketplace;
economic and other external factors;
period-to-period fluctuations in financial results; and
other events or factors, many of which are beyond our control.
The stock market is subject to significant price and volume fluctuations. In the past, and several recent
situations, following periods of volatility in the market price of a company’s securities, securities class action
litigation has been initiated against such company. Litigation initiated against us, whether or not successful,
could result in substantial costs and diversion of our management’s attention and resources, which could harm
our business and financial condition.
We do not anticipate paying any cash dividends in the foreseeable future.
The continued operation and expansion of our business will require substantial funding. In addition, the
Term Loan Agreement places certain restrictions on our ability to pay dividends. Accordingly, we do not
anticipate that we will pay any cash dividends on our common stock for the foreseeable future. Any
determination to pay dividends in the future will be at the discretion of our Board of Directors and will depend
upon results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law
and other factors our board of directors deems relevant. Accordingly, if you purchase shares of common stock,
realization of a gain on your investment will depend on the appreciation of the price of our common stock,
which may never occur. Investors seeking cash dividends in the foreseeable future should not purchase our
common stock.
Anti-takeover provisions in Minnesota law may deter acquisition bids for us that you might consider
favorable.
We are governed by the provisions of Sections 302A.671, 302A.673 and 302A.675 of the Minnesota
Business Corporation Act (the “MBCA”). These provisions may discourage a negotiated acquisition or
unsolicited takeover of us and deprive our shareholders of an opportunity to sell their common stock at a
premium over the market price.
In general, Section 302A.671 of the MBCA provides that a corporation’s shares acquired in a control share
acquisition have no voting rights unless voting rights are approved in a prescribed manner. A “control share
acquisition” is a direct or indirect acquisition of beneficial ownership of shares that would, when added to all
other shares beneficially owned by the acquiring person, entitle the acquiring person to have voting power of
20% or more in the election of directors.
In general, Section 302A.673 of the MBCA prohibits a public Minnesota corporation from engaging in a
business combination with an interested shareholder for a period of four years after the date of the transaction
in which the person became an interested shareholder, unless the business combination is approved in a
prescribed manner. The term “business combination” includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested shareholder. An “interested shareholder” is a person who is the
beneficial owner, directly or indirectly, of 10% or more of a corporation’s voting stock or who is an affiliate or
associate of the corporation, and who, at any time within four years before the date in question, was the
beneficial owner, directly or indirectly, of 10% or more of the corporation’s voting stock. Section 302A.673
does not apply if a committee of our Board of Directors consisting of all of its disinterested directors
(excluding current and former officers) approves the proposed transaction or the interested shareholder’s
acquisition of shares before the interested shareholder becomes an interested shareholder.
If a tender offer is made for our common stock, Section 302A.675 of the MBCA precludes the offeror
from acquiring additional shares of stock (including in acquisitions pursuant to mergers, consolidations or
statutory share exchanges) within two years following the completion of the tender offer, unless shareholders
selling their shares in the later acquisition are given the opportunity to sell their shares on terms that are
substantially the same as those contained in the earlier tender offer. Section 302A.675 does not apply if a
committee of our Board of Directors consisting of all of
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its disinterested directors (excluding its current and former officers) approves the proposed acquisition before
any shares are acquired pursuant to the earlier tender offer.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
On November 12, 2013, AC, a wholly owned subsidiary of AxoGen, entered into the Third Amendment to
Lease with SNH Medical Office Properties Trust (“SNH”). SNH was the landlord of AxoGen’s corporate
headquarters leased facility in Alachua, Florida and AxoGen and SNH agreed to the amendment by which
AxoGen relocated and expanded its corporate headquarters to a new space owned by SNH within the same
office park. The lease amendment provides for 11,761 square feet of office space until October 31, 2018,
renewable thereafter by agreement of the parties, subject to AxoGen’s right to earlier termination after three
years from the effective date of the lease. AxoGen’s annual cost of such property ranges from approximately
$194,000 to $214,000 per year.
AxoGen also leases 963 square feet of laboratory space in University of Florida’s Sid Martin
Biotechnology Incubator in Alachua, Florida on a month to month basis.
On October 25, 2013, AxoGen entered into a Commercial Lease with Ja-Cole L.P. (“Ja-Cole”). Under the
terms of the Commercial Lease AxoGen occupied 5,400 square feet of warehouse/office space in Burleson,
Texas until November 30, 2016 at an annual cost of $43,200. On April 21, 2015, AxoGen entered into a new
commercial lease, as amended by Addendum on such date, with Ja-Cole. The new lease superseded and
replaced the original lease with Ja-Cole. Under the terms of the new lease, AxoGen leased an additional 2,100
square feet of warehouse space that was combined with its 5,400 square feet of warehouse/office space in
Burleson, Texas. The new lease is for a three-year term expiring April 21, 2018, renewable thereafter by
agreement of the parties, at an annual cost of $66,000 per year. The expanded Burleson facility houses raw
material storage and product distribution and allow expansion space as required for AxoGen operations.
The Distribution Facility allows AxoGen to fulfill same day orders for both the east and west coasts of the
United States.
On August 6, 2015, we entered into a License and Services Agreement with CTS which provides for the
use of certain clean rooms, office space and warehouse space located in Dayton, Ohio. The CTS agreement is
for a five year term, subject to earlier termination by either party for cause, or after August 6, 2017 without
cause, in either event upon 18 months notice. Under the CTS agreement AxoGen pays CTS a facility fee for
the clean room/manufacturing, storage and office space. CTS also provides services in support of AxoGen’s
manufacturing such as routine sterilization of daily supplies, providing disposable supplies, microbial services
and office support. The service fee is based on a per donor batch rate.
In addition, AxoGen leases space and maintains records at certain facilities, which includes the
Company’s prior corporate headquarters at 1407 South Kings Highway, Texarkana, Texas 75501.
The Company’s aggregate cost of such properties is approximately $351,000 per year. The Company
expects to expand its corporate headquarter space in Alachua, Florida in March 2016 and with this expansion
AxoGen believes that its facilities will be sufficient to operate its business for the next 12 months and that
current lease obligations will not change materially except for the lease to be entered into for such expansion.
ITEM 3. LEGAL PROCEEDINGS
AxoGen does not have any active or pending material legal proceedings.
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ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
AxoGen’s common stock is traded on the NASDAQ Capital Market under the symbol “AXGN.” On
February 25, 2016, the last reported closing sale price of the Company common stock on the NASDAQ
Capital Market was $5.26 per share.
The following table sets forth, for each of the calendar periods indicated, the range of the high and low
closing sales price of the Company’s common stock on the NASDAQ Capital Market.
Year Ended
December 31,
2015
Year Ended
December 31,
2014
High Low High Low
$ 4.10 $ 3.13 $ 4.86 $ 2.87
$ 3.57 $ 3.02 $ 3.08 $ 2.32
$ 5.60 $ 3.16 $ 2.74 $ 2.15
$ 5.64 $ 4.04 $ 3.85 $ 2.40
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Dividend Policy
AxoGen currently intends to retain earnings, if any, to finance the growth and development of its business,
and does not expect to pay any cash dividends to its shareholders in the foreseeable future. In addition, the
Term Loan Agreement and the Revenue Interest Agreement place certain restrictions on AxoGen’s ability to
pay dividends. AxoGen did not declare any cash dividends on its common stock in 2014 and 2015.
Shareholders
As of February 25, 2016, the Company had 29,984,591 shares of common stock outstanding, and
approximately 290 common shareholders of record, based upon information received from our stock transfer
agent. However, this number does not include beneficial owners whose shares were held of record by
nominees or broker dealers. The Company estimates that there are more than 1,000 individual owners.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
We did not repurchase any of our securities in 2015.
Recent Sales of Unregistered Securities
We had no sales of unregistered securities in 2015 that have not been previously disclosed in a Current
Report on Form 8-K or Quarterly Reports on Form 10-Q.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following information should be read in conjunction with “Selected Financial Data” contained in
Item 6 of this Form 10-K, our consolidated financial statements and the notes thereto contained in Item 8 of
this Form 10-K, the “Cautionary Notice Regarding Forward-Looking Statements” contained in Part 1 of
this Form 10-K, “Risk Factors” contained in Item 1A of this Form 10-K, and the other information
appearing elsewhere in, or incorporated by reference into, in this Form 10-K.
Overview
We are a leading medical technology company dedicated to peripheral nerve repair. We provide products
and education to improve surgical treatment algorithms for peripheral nerve injuries. Our portfolio of
regenerative medicine products is available in the United States, Canada and several other countries and
includes (i) Avance® Nerve Graft, an off-the-shelf processed human nerve allograft for bridging severed nerves
without the comorbidities associated with a second surgical site, (ii) AxoGuard® Nerve Connector, a porcine
submucosa extracellular matrix (“ECM”) coaptation aid for tensionless repair of severed nerves, and (iii)
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. Along with these core
surgical products, we also offer the AxoTouch Two-Point Discriminator and expect to launch in March 2016
the AcroVal™ Neurosensory and Motor Testing System. These evaluation and measurement tools assist
healthcare professionals in detecting changes in sensation, assessing return of sensory, grip and pinch function,
evaluating effective treatment interventions, and providing feedback to patients. The introduction of our
evaluation and measurement products further reflects our commitment to bring best practices to the treatment
of peripheral nerve conditions.
TM
Revenue from the distribution of AxoGen’s nerve repair products, the Avance® Nerve Graft, AxoGuard®
Nerve Connector and AxoGuard® Nerve Protector, in the United States is the main contributor to AxoGen’s
total reported sales and has been the key component of its growth to date. AxoGen revenues increased in 2015
compared to 2014 primarily as a result of increased product usage by existing accounts, which is consistent
with its sales plan as AxoGen believes that most of its current accounts are lightly penetrated and to a lesser
extent as a result of new clients which usually have low sales volumes prior to them being considered existing
accounts. AxoGen has continued to broaden its sales and marketing focus which is expected to have a positive
contribution to its revenue growth in the long term. In the near term revenue growth lags behind the expense
increases for market development such as hiring and training of new sales representatives and surgeon
education programs.
Results of Operations
Critical Accounting Policies and Estimates
The discussion and analysis of the Company’s financial condition and results of operations is based upon
the Company’s consolidated financial statements which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation of these financial statements
requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported
amount of expenses during the period reported. Management bases its estimates and judgments on historical
experience, observance of trends in the industry, information provided by outside sources and on various other
factors that are believed to be reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions.
We have identified the following policies as critical to our business operations and the understanding of
our consolidated results of operations:
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Accounts Receivable and Concentration of Credit Risk — Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The carrying
amount of accounts receivable is reduced by an allowance for doubtful accounts which reflects management’s
best estimate of the amounts that are uncollectable. In establishing the required allowance, management
considers customers’ financial condition, credit history and current economic conditions. Account balances are
charged off after all means of collection have been exhausted and the potential for recovery is considered
remote. Our internal financial operations have primary responsibility for billing and collecting our accounts
receivable and utilize various processes and procedures in our collection efforts including monthly statements,
written collection notices and telephonic follow-ups. In the event the current conditions as to doubtful accounts
negatively change, management will consider increasing the reserve for doubtful accounts. Management
judgment as to identifying negative trends is important in its assumption of exposure to uncollectable
receivables requiring a reserve and if revenues expand as expected accounts receivable will rise, potentially
causing management to reevaluate its underlying assumptions.
Effective Interest Rate on Note Payable
The PDL Royalty Contract was accounted for as long-term debt. AxoGen recorded interest using its best
estimate of the effective interest rate. This estimate took into account both the internal rate of return (IRR) of
the PDL agreement and the rate of return as the result of exercise of the put option. The IRR of the PDL
Royalty Contract was based on the actual payments to date, projected future revenues and required minimum
payments, and was calculated at 20.535%. The PDL Royalty Contract put option provided PDL a 20% return,
if exercised. As a result of the return of the put option being higher than the IRR of the PDL agreement,
management believed the best estimate of the effective interest rate on this instrument would be the put rate. As
a result, AxoGen was accruing interest using the specified internal rate of return for the put which was
20%. The PDL Royalty Contract was paid in full on November 12, 2014. The Company has no further
obligation under the PDL Royalty Contract.
The Term Loan Agreement and Revenue Interest Agreement are used in calculating the effective interest
rate. AxoGen records interest using its best estimate of the effective interest rate. This estimate takes into
account both the rate on the Term Loan Agreement and the rate associated with the ten-year Revenue Interest
Agreement with Three Peaks. The effective interest rate is based on actual payments to date, projected future
revenues and the projected royalty payments and the quarterly interest payments due on the Term Loan
Agreement. From time to time, AxoGen will reevaluate the expected cash flows and may adjust the effective
interest rate. Determining the effective interest rate requires judgment and is based on significant assumptions
related to estimates of the amounts and timing of future revenue streams. Determination of these assumptions
is highly subjective and different assumptions could lead to materially different outcomes.
Income Taxes
Deferred income taxes reflect the impact of temporary differences between the reported amounts of assets
and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. The
deferred tax assets and liabilities represent the future tax return consequences of those differences, which will
either be taxable or deductible when the assets and liabilities are recovered or settled. A valuation allowance is
provided for deferred tax assets when management concludes it is more-likely-than-not that some portion of
the deferred tax assets will not be recognized. We have a full valuation allowance established on the deferred
tax asset upon management’s best estimate of final outcomes based upon estimated future revenue and changes
in business capitalization. Factors used to establish the valuation allowance are complicated and could cause
variability in application over time.
Comparison of the Years Ended December 31, 2015 and 2014
Revenues
Revenues for the year ended December 31, 2015 increased 62.5% to approximately $27,331,000 as
compared to approximately $16,817,000 for the year ended December 31, 2014. This increase was primarily a
result of our strategy of focusing on growing product usage in our existing accounts and to a lesser extent the
establishment of new accounts.
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With regards to new accounts, each new customer in a defined period has the potential to become an
established customer with repeat orders and increased account penetration. As such, revenue growth primarily
occurs from increased purchasing from established customers, while revenue from new customers is usually
small as they ramp up purchasing and become existing customers. Each new period of measurement is thus
benefited from growth in existing customer accounts which include those that were new customers in the prior
measurement period. In addition, the Company received grant revenue of approximately $433,000 in the year
ended December 31, 2015, as compared to grant revenue of approximately $314,000 in the year ended
December 31, 2014
Gross Profit
Gross profit for the year ended December 31, 2015 increased 68.1% to approximately $22,483,000 as
compared to approximately $13,375,000 for the year ended December 31, 2014. This increase is primarily
attributable to the increased revenues in 2015, manufacturing efficiencies, a favorable product mix and a
product price increase instituted in March 2015. As a result, gross profit margin also improved to 82.3% in
2015 as compared to 79.5% for 2014.
Costs and Expenses
Total cost and expenses increased 37.0% to approximately $31,749,000 for the year ended December 31,
2015 as compared to approximately $23,176,000 for the year ended December 31, 2014. These increases were
primarily due to increasing sales activity, expanded surgeon education programs, increases in compensation
and increased general expenses associated with greater corporate size. As a percentage of revenue, total cost
and expenses decreased 21.6% from 2014 to 2015.
Sales and marketing expenses increased 52.3% to approximately $20,089,000 for the year ended
December 31, 2015 as compared to approximately $13,194,000 for the year ended December 31, 2014. This
increase was primarily due to: (a) increased compensation expenses related to AxoGen’s direct sales force as a
result of increased sales and hiring of additional personnel; (b) increased commissions to independent
distributors as a result of increased sales; (c) expansion of the Company’s surgeon education program; and (d)
increased marketing activity. As a percentage of revenues, sales and marketing expenses were 73.5% for the
year ended December 31, 2015 compared to 78.5% for the year ended December 31, 2014. The decrease in
sales and marketing expenses as a percentage of revenue was a result of the revenues outpacing expenses,
primarily due to the fact that the direct sales force personnel and independent distributors are gaining
penetration into existing and new accounts as the professional education and other marketing events, along
with maturing of the sales force, are contributing to increases in revenues.
General and administrative expenses increased 21.2% to approximately $8,423,000 for the year ended
December 31, 2015 as compared to approximately $6,949,000 for the year ended December 31, 2014. As a
percentage of revenues, general and administrative expenses were 30.8% for the year ended December 31,
2015 compared to 41.3% for the year ended December 31, 2014. The increase in aggregate dollars spent were a
result of increased compensation including non-cash stock option compensation of approximately $360,000,
increased legal and other professional fees and greater general expenses related to a larger organization and
bank credit card fees related to greater sales volume.
Research and development expenses increased 6.7% to approximately $3,237,000 in the year ended
December 31, 2015 as compared to approximately $3,033,000 for the year ended December 31, 2014.
Research and development costs include AxoGen’s product development and clinical efforts substantially
focused on its BLA for the Avance® Nerve Graft. This activity varies from quarter to quarter due to the timing
of certain projects. The increase in expenses for 2015 relate to expenditures for such clinical activity, including
preparation for, and the start of, the pivotal clinical trial to support the BLA, and hiring additional personal to
support both clinical and product development activity, offset by reduced costs of the Company’s RANGER®
Registry and certain projects that have been completed or are near completion. It is expected that costs
associated with the BLA will continue to increase as more patients are enrolled in the trial over approximately
the next two years. Although AxoGen’s products are developed for sale in their current use, it does conduct
research and product development efforts focused on new products and new applications to existing
products. AxoGen is active in pursuing research grants to support this research. This AxoGen product
pipeline development also contributed to a portion of the research and development expenses in 2015, with
grant revenue
56
offsetting a portion of this activity. As a percentage of revenues, research and development expenses declined
from 18.0% in 2014 to 11.8% in 2015.
Other Income and Expenses
Interest expense decreased 41.4% to approximately $3,989,000 in 2015 as compared to approximately
$6,812,000 for the year ended December 31, 2014. This decrease was due to the difference in the interest
related to the Revenue Interest Agreement with Three Peaks as compared to the interest related to the Royalty
Contract and the interest accrued related to PDL. As a result of the accounting treatment for the Three Peaks
and the PDL transactions, interest expense included approximately $462,000 and $88,000 of non-cash expense
for the year ended December 31, 2015 and 2014, respectively, that is expected to be paid in the future based
upon the terms of the Three Peaks transaction and increases in AxoGen revenues. Other than the $462,000 and
$88,000 non-cash expenses, the remaining $3,527,000 and $6,724,000 in interest expense for the years 2015
and 2014, respectively, is related to cash paid for interest on the Term Loan Agreement and note payable.
Interest expense— deferred financing costs decreased to approximately $128,000 for 2015 as compared to
approximately $1,101,000 in 2014. This decrease is primarily due to the write off of the remaining PDL
financing costs of approximately $901,000 in 2014 as the result of the extinguishment of that debt facility.
Income Taxes
AxoGen had no income tax expenses or income tax benefit for 2015 or 2014 due to incurrence of net
operating loss for the year. AxoGen does not believe there are any additional tax expenses or benefits
currently available.
Effect of Inflation
Inflation did not have a significant impact on AxoGen’s operations or cash flows in 2014 or 2015.
Liquidity and Capital Resources
Note Payable
®
®
On October 5, 2012, AxoGen entered into a Revenue Interests Purchase Agreement (the “Royalty
Contract”) with PDL BioPharma, Inc. (“PDL”), pursuant to which the Company sold to PDL the right to
receive royalties equal to 9.95% of the Company’s Net Revenues (as defined in the Royalty Contract)
generated by the sale, distribution or other use of AxoGen’s products Avance Nerve Graft, AxoGuard Nerve
Connector and AxoGuard Nerve Protector. The Royalty Contract had a term of eight years. Under the
Royalty Contract, PDL received royalty payments based on a royalty rate of 9.95% of the Company’s Net
Revenues, subject to certain agreed upon minimum payment requirements, which were anticipated to be
approximately $1.3 million to $2.5 million per quarter to begin in the fourth quarter of 2014 through the third
quarter of 2020 as provided in the Royalty Contract. The Company recorded interest using its best estimate of
the effective interest rate accruing interest using the specified internal rate of return of the put option of
20%. The total consideration PDL paid to the Company was $20,800,000 (the “Funded Amount”), which
included $19,050,000 PDL paid to the Company on October 5, 2012 and $1,750,000 PDL paid to the
Company on August 14, 2012 pursuant to an Interim Revenue Interest Purchase Agreement between the
Company and PDL, dated August 14, 2012 (the “Interim Royalty Contract”). Upon the closing of PDL’s
purchase of the specified royalties described above, which was concurrent with the execution of the Royalty
Contract, the Interim Royalty Contract was terminated. On November 12, 2014, the Company paid PDL $30.3
million to fully extinguish the Royalty Contract. The Company has no further obligations under the Royalty
Contract.
®
On November 12, 2014, the Company sold 643,382 shares of its common stock for a total of $1.75 million
to PDL (“PDL Equity Sale”) at a price of $2.72 per share pursuant to a securities purchase agreement by and
between the Company and PDL. The Company intends to use the proceeds from the PDL Equity Sale for
general corporate purposes.
57
Term Loan Agreement and Revenue Interest Agreement
On the Signing Date, AxoGen, as borrower, and AC, as guarantor, entered into a term loan agreement (the
“Term Loan Agreement”) with the lenders party thereto and Three Peaks, an indirect wholly-owned subsidiary
of Oberland Capital Healthcare Master Fund LP (“Oberland”), as administrative and collateral agent for the
lenders. Under the Term Loan Agreement, Three Peaks has agreed to lend to AxoGen a term loan of $25
million (the “Initial Term Loan”) which has a six year term and requires interest only payments and a final
principal payment due at the end of the term. Interest is payable quarterly at 9.00% per annum plus the greater
of LIBOR or 1.0% which as of November 13, 2014 (“the Initial Closing Date”) resulted in a 10% rate. Under
certain conditions, AxoGen has the option to draw an additional $7 million (“Subsequent Borrowing” and,
together with the Initial Term Loan, the “Term Loan”) during the period of April 1, 2016 through June 29,
2016 (the closing date of each such Subsequent Borrowing, a “Subsequent Closing Date” and, together with
the Initial Closing Date, the “Closing Dates”) under similar terms and conditions. AxoGen has to maintain
certain covenants including limiting new indebtedness, restriction of the payment of dividends and maintain
certain levels of revenue. Three Peaks has a first perfected security interest in the assets of AxoGen.
In addition, AxoGen entered into a ten year Revenue Interest Agreement (the “Revenue Interest
Agreement”) with Three Peaks. Royalty payments are based on a royalty rate of 3.75% of AxoGen’s revenues
up to a maximum of $30 million in revenues in any 12 month period. In the event the Subsequent Borrowing is
drawn, the royalty rate increases proportionally up to a maximum of 4.80%. AxoGen has to maintain certain
covenants including those covenants under the Term Loan.
Under the Term Loan Agreement, AxoGen has the option at any time to prepay the Term Loan, in whole
or in part, and the Revenue Interest Agreement by making the following payment, and Three Peaks has the
right to demand the following payment upon a change of control of AxoGen, sale of the majority of AxoGen’s
assets or a material adverse change to AxoGen: (i) on or prior to the first anniversary of the applicable Closing
Date, 120% of the outstanding principal amount of the Term Loan or any portion being prepaid; (ii) after the
first anniversary but no later than the second anniversary of the applicable Closing Date, 135% of the
outstanding principal amount of the Term Loan or any portion being prepaid; (iii) after the second anniversary
but no later than the third anniversary of the applicable Closing Date, 150% of the outstanding principal
amount of the Term Loan or any portion being prepaid; or (iv) after the third anniversary of the applicable
Closing Date, an amount generating an internal rate of return of 16.25% of the outstanding principal amount of
the Term Loan or any portion being prepaid. In all cases, the amount due is reduced by the sum of interest and
principal previously paid and all amounts received under the Revenue Interest Agreement. In each such case
AxoGen will also owe an additional 3% of the originally advanced Term Loan amount. Upon payment to
Three Peaks, AxoGen would have no further obligations to Three Peaks under the Term Loan or the Revenue
Interest Agreement.
In connection with the Term Loan Agreement, on the Signing Date, the Company and AC entered into the
Security Agreement with Three Peaks, pursuant to which each of the Company and AC grants to Three Peaks a
security interest in certain collateral as specified in the Security Agreement to guarantee the payment in full
when due of the secured obligations. In the event of default per the terms of the Term Loan Agreement Three
Peaks would have the ability to foreclose on the pledged collateral and the Company and AC would not be
able to continue its current business if such foreclosure occurred.
Also in connection with the above transaction, the Company sold 1,375,969 shares of its common stock to
Three Peaks for a total of $3.55 million at a price of $2.58 per share. Pursuant to the equity purchase
provisions in the Term Loan Agreement, in the event that prior to November 12, 2016 we sell our securities at
a lower price per share than the $2.58 per share paid by Three Peaks, or where the terms of such subsequent
sale are otherwise more favorable, then in such case we have agreed to match the more favorable terms of such
subsequent sale with respect to the shares purchased by Three Peaks. A subsequent sale does not include the
issuance of securities or options to our employees, officers, directors or consultants pursuant to our approved
employee option pool or any other employee stock purchase or option plan existing as of November 12, 2014.
As a result of the accounting treatment for the Three Peaks transaction, interest expense for the year ended
December 31, 2015 included approximately $462,000 of non-cash expense that is expected to be paid in the
future based
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upon the terms of the Three Peaks transaction and increases in AxoGen revenues. The $ 462,000 of non-cash
expense was derived from taking the imputed interest on the Revenue Interest Agreement less the actual cash
payment made to Three Peaks for the year. Other than the $462,000 non-cash expense, the remaining
$3,527,000 in interest expense for the year ended December 31, 2015 is related to cash paid for interest on the
Term Loan with Three Peaks.
The Company records interest using its best estimate of the effective interest rate. This estimate takes into
account both the rate on the Term Loan Agreement and the rate associated with the ten year Revenue Interest
Agreement with Three Peaks. The effective interest rate is based on actual payments to date, projected future
revenues and the projected royalty payments and the quarterly interest payments due on the Term Loan
Agreement. From time to time, AxoGen will reevaluate the expected cash flows and may adjust the effective
interest rate. Determining the effective interest rate requires judgment and is based on significant assumptions
related to estimates of the amounts and timing of future revenue streams. Determination of these assumptions
is highly subjective and different assumptions could lead to materially different outcomes.
The Company had no material commitments for capital expenditures at December 31, 2015 or
2014. However, it is anticipated that the Company will have approximately $273,000 of capital expenditures
in the first quarter of 2016 for the placement of equipment and build-out at CTS.
Public Offering of Common Stock
On February 5, 2015, AxoGen entered into an underwriting agreement with Wedbush Securities Inc., as
underwriter (the “Underwriter”), in connection with the offering, issuance and sale of 4,728,000 shares of the
Company’s common stock, par value $0.01 per share, at a price to the public of $2.75 per share (the “February
2015 Offering”). The Company also granted to the Underwriter a 30-day option to purchase up to an aggregate
of 709,200 additional shares of common stock to cover over-allotments, if any.
As of February 13, 2015, the February 2015 Offering was completed with the sale of 5,437,200 shares of
common stock, which included the full exercise of the over-allotment option, at $2.75 per share, resulting in
gross proceeds to AxoGen from the February 2015 Offering of approximately $15.0 million, before deducting
underwriting discounts and commissions and other estimated offering expenses payable by AxoGen estimated
at approximately $1.4 million. The shares of common stock were listed on the NASDAQ Capital Market. The
February 2015 Offering was made pursuant to the Company’s effective shelf registration statement on Form S-
3 (Registration No. 333-195588) previously filed with the SEC on April 30, 2014, and pursuant to the
prospectus supplement and the accompanying prospectus describing the terms of the February 2015 Offering,
dated February 5, 2015.
On August 26, 2015, the Company entered into the Purchase Agreement with Essex Woodlands Fund
IX, L.P. for the purchase of 4,861,111 shares of common stock at a public offering price of $3.60 per share,
raising approximately $17.5 million in gross proceeds (the “August 2015 Offering”) . The expenses directly
related to the August 2015 Offering were approximately $300,000 and were all paid as of December 31, 2015
by the Company. Such expenses include the Company’s legal and accounting fees, printing expenses, transfer
agent fees and miscellaneous fees and costs related to the August 2015 Offering. Proceeds from the August
2015 Offering will be used for sales and marketing and general working capital purposes. The Company has
provided certain demand and “piggy-back” registration rights in connection with this sale of common stock.
The August 2015 Offering was made pursuant to the Company’s effective shelf registration statement on Form
S-3 (Registration No. 333-195588) previously filed with the SEC on April 30, 2014 and pursuant to the
prospectus supplement and the accompanying prospectus describing the terms of the August 2015 Offering,
dated August 26, 2015.
Cash Flow Information
AxoGen had working capital of approximately $31.34 million and a current ratio of 9.45 at December 31,
2015, compared to working capital of $11.97 million and a current ratio of 5.89 at December 31, 2014. The
increase in working capital and the current ratio at December 31, 2015 as compared to December 31, 2015 was
primarily due to the proceeds from the February 2015 Offering and the August 2015 Offering. The Company
believes it has sufficient cash resources to meet its liquidity requirements for at least the next 12 months.
59
AxoGen’s future capital requirements depend on a number of factors including, without limitation,
revenue increases consistent with its business plan, and pursuant to AxoGen’s licensing agreements in
connection with Avance® Nerve Graft, cost of products and acquisition and/or development of new products.
AxoGen could face increasing capital needs. Such capital needs could be substantial depending on the extent to
which AxoGen is unable to increase revenue.
If AxoGen needs additional capital in the future, it may raise additional funds through public or private
equity offerings, debt financings or from other sources. The sale of additional equity would result in dilution
to AxoGen’s shareholders. There is no assurance that AxoGen will be able to secure funding on terms
acceptable to it, or at all. The increasing need for capital could also make it more difficult to obtain funding
through either equity or debt. Should additional capital not become available to AxoGen as needed, AxoGen
may be required to take certain action, such as slowing sales and marketing expansion, delaying regulatory
approvals or reducing headcount.
During the year ended December 31, 2015, the Company had a net increase in cash and cash equivalents
of approximately $17,694,000 as compared to a net decrease of cash and cash equivalents of approximately
$11,854,000 in the year ended December 31, 2014. The Company’s principal sources and uses of funds are
explained below.
Net Cash used in operating activities
AxoGen used approximately $13,052,000 of cash for operating activities in 2015, as compared to using
approximately $10,451,000 of cash for operating activities in 2014.
This increase in cash used in operating activities is primarily attributed to the net loss generated in 2015, an
increase in accounts receivable and inventory offset by an increase in stock based compensation along with an
increase in accounts payable.
Net Cash used in investing activities
Investing activities for 2015 used approximately $556,000 of cash as compared to 2014 which used
approximately $594,000. This decrease in use is principally attributable to less purchases of certain fixed assets
for the headquarters office and the worldwide Distribution Facility in Burleson, Texas when compared to prior
year.
Net Cash provided (used) by financing activities
Financing activities in 2015 provided approximately $31,301,000 of cash as compared to using
approximately $809,000 of cash in 2014. The increase was due to proceeds received from the February 2015
Offering and August 2015 Offering.
The cash use increased in 2014 as a result of the $1,750,000 of cash used as part of the final payment to
fully repay the Royalty Contract with PDL. In addition, in the PDL Equity Sale, we sold an aggregate offering
price of $1.75 million of registered common stock to PDL in November 2014 and we used the proceeds for
general corporate purposes.
Off-Balance Sheet Arrangements
AxoGen does not have any off-balance sheet arrangements.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board, or FASB issued a new standard on revenue
recognition which outlines a single comprehensive model to use in accounting for revenue arising from
contracts with customers and supersedes most current revenue recognition guidance, including industry-
specific guidance. The core principle of the revenue model is that an entity should recognize revenue to depict
the transfer of promised goods or services to customers in an amount that reflects the consideration to which
the entity expects to be entitled in exchange for those goods or services. The standard is designed to create
greater comparability for financial statement users across industries
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and jurisdictions and also requires enhanced disclosures. The guidance is effective for fiscal years, and interim
periods within those years, beginning after December 15, 2016; however, on July 9, 2015, the FASB decided to
delay the effective date of the new revenue standard by one year. The proposed deferral may permit early
adoption, but would not allow adoption any earlier than the original effective date of the standard. We are
currently evaluating the impact this standard will have on our consolidated financial statements.
In June 2014, the FASB issued updated guidance related to stock compensation. The amendment requires
that a performance target that affects vesting and that could be achieved after the requisite period, be treated as
a performance condition. The updated guidance became effective for annual reporting periods and interim
periods within those annual periods beginning after December 15, 2015. We do not expect the adoption of this
guidance to have a material impact on our consolidated financial statements.
In January 2015, the FASB issued guidance, which completely eliminates all references to and guidance
concerning the concept of an extraordinary item from GAAP. The updated guidance became effective for
annual reporting periods and interim periods within those annual periods beginning after December 15, 2015.
We do not expect the adoption of this guidance to have a material impact on our consolidated financial
statements.
In April 2015, the FASB issued Accounting Standard Update (“ASU”) No. 2015-03, "Simplifying the
Presentation of Debt Issuance Costs" ("ASU 2015-03") which changes the presentation of debt issuance costs
in financial statements to present such costs as a direct deduction from the related debt liability rather than as
an asset. ASU 2015-03 became effective for public companies during interim and annual reporting periods
beginning after December 15, 2015. Early adoption is permitted. We do not expect the adoption of this
standard will have a material impact on our consolidated financial statements.
In November 2015, the FASB issued an ASU to simplify the presentation of deferred income taxes. The
amendments in this ASU require that deferred tax liabilities and assets be classified as noncurrent in a
classified statement of financial position. The amendments in these ASUs may be applied either prospectively
to all deferred tax liabilities and assets or retrospectively to all periods presented and are effective for interim
and annual reporting periods beginning after December 15, 2016. Earlier application is permitted for all entities
as of the beginning of an interim or annual reporting period. We are currently evaluating the method of
adoption and the impact of the provisions of the ASU.
In January 2016, the FASB, issued ASU 2016-01 “Recognition and Measurement of Financial Assets and
Financial Liabilities,” which requires that most equity instruments be measured at fair value, with subsequent
changes in fair value recognized in net income. The pronouncement also impacts the financial liabilities under
the fair value option and the presentation and disclosure requirements for financial instruments. The ASU does
not apply to equity method investments or investments in consolidated subsidiaries. The new standard will be
effective for us for the year ended December 31, 2018, with early adoption permitted and amendments to be
applied as a cumulative-effect adjustment to the balance sheet in the year of adoption. We are currently in the
process of assessing the impact of the ASU on our consolidated financial statements and disclosures.
The Company’s management has reviewed and considered all other recent accounting pronouncements and
believe there are none that could potentially have a material impact on the Company’s consolidated financial
condition, results of operations, or disclosures.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable
61
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2015 AND 2014
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31,
2015 AND 2014
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT) FOR THE YEARS
ENDED DECEMBER 31, 2015 AND 2014
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
2015 AND 2014
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page
63
64
65
66
67
68
62
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and
Board of Directors of
AxoGen, Inc.
We have audited the accompanying consolidated balance sheets of AxoGen, Inc. and subsidiary as of
December 31, 2015 and 2014, and the related consolidated statements of operations, shareholders’ equity
(deficit), and cash flows for the years then ended. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the consolidated financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of AxoGen, Inc. and subsidiary as of December 31, 2015 and 2014, and the
results of its operations and its cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/ LURIE, LLP
Minneapolis, Minnesota
February 29, 2016
63
AXOGEN, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2015 and 2014
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of
approximately $192,000 and $94,000 respectively
Inventory
Prepaid expenses and other
Total current assets
Property and equipment, net
Intangible assets
Deferred financing costs
Liabilities and Shareholders’ Equity (Deficit)
Current liabilities:
Accounts payable and accrued expenses
Current deferred revenue
Total current liabilities
Note Payable - Revenue Interest Purchase Agreement
Long Term Deferred Revenue
Total liabilities
Commitments and contingencies
Shareholders’ equity (deficit):
Common stock, $.01 par value; 50,000,000 shares authorized;
29,984,591 and 19,488,814 shares issued and outstanding
Additional paid-in capital
Accumulated deficit
Total shareholders’ equity (deficit)
December 31,
December 31,
2015
2014
$ 25,909,500 $ 8,215,791
4,782,989
3,933,960
424,925
2,872,308
3,213,620
109,369
35,051,374 14,411,088
619,028
577,174
793,499
$ 37,546,053 $ 16,400,789
970,870
678,082
845,727
$
3,695,127 $ 2,431,194
14,118
2,445,312
14,118
3,709,245
25,547,420 25,085,777
115,380
29,350,462 27,646,469
93,797
299,846
194,888
111,368,424 78,675,686
(103,472,679) (90,116,254)
8,195,591 (11,245,680)
$ 37,546,053 $ 16,400,789
The accompanying notes are an integral part of these consolidated financial statements.
64
AXOGEN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2015 and 2014
Revenues
Cost of goods sold
Gross profit
Costs and expenses:
Sales and marketing
Research and development
General and administrative
Total costs and expenses
Loss from operations
Other income (expense):
Interest expense
Interest expense — deferred financing costs
Other income (expense)
Total other income (expense)
Net Loss
Weighted Average Common Shares outstanding — basic and diluted
Loss Per Common share — basic and diluted
2015
2014
$ 27,331,092 $ 16,817,403
3,442,183
22,482,696 13,375,220
4,848,396
3,237,171
8,422,866
20,089,369 13,193,795
3,033,325
6,948,890
31,749,406 23,176,010
(9,800,790)
(9,266,710)
(3,988,619)
(127,912)
26,816
(4,089,715)
(6,812,315)
(1,100,520)
3,149
(7,909,686)
(13,356,425) (17,710,476)
26,075,670 17,721,742
(0.99)
$
(0.51) $
The accompanying notes are an integral part of these consolidated financial statements.
65
AXOGEN, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)
Years ended December 31, 2015 and 2014
Balance, December 31, 2013
17,339,561 $ 173,395 $ 72,369,016 $ (72,405,778) $
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Deficit
Total
Stockholders’
Equity/(Deficit)
136,633
Stock-based compensation
Exercise of stock options
Issuance of common shares
Net loss
—
117,402
2,031,851
—
—
1,174
20,319
—
956,449
134,666
5,215,555
—
—
—
—
956,449
135,840
5,235,874
(17,710,476) (17,710,476)
Balance, December 31, 2014
19,488,814
194,888 78,675,686
(90,116,254) (11,245,680)
Stock-based compensation
Exercise of stock options
Issuance of common shares
Net loss
—
197,466
10,298,311
—
—
1,975
1,316,509
510,826
102,983 30,865,403
—
—
1,316,509
—
—
512,801
— 30,968,386
(13,356,425) (13,356,425)
Balance, December 31, 2015
29,984,591
299,846 111,368,424
(103,472,679)
8,195,591
The accompanying notes are an integral part of these consolidated financial statements.
66
AXOGEN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2015 and 2014
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation
Amortization of intangible assets
Amortization of deferred financing costs
Write off of deferred financing costs
Provision for bad debt
Stock-based compensation
Stock grant for service
Interest added to note payable
Change in assets and liabilities:
Accounts receivable
Inventory
Prepaid expenses and other
Accounts payable and accrued expenses
Deferred revenue
2015
2014
$ (13,356,425) $
(17,710,476)
203,140
45,828
127,913
--
125,371
1,316,509
--
461,643
(2,036,052)
(720,340)
(315,556)
1,117,733
(21,583)
153,670
45,224
199,328
901,192
35,478
956,449
60,125
5,022,082
(1,014,087)
184,818
187,350
498,290
29,498
Net cash used for operating activities
(13,051,819)
(10,451,059)
Cash flows from investing activities:
Purchase of property and equipment
Acquisition of intangible assets
Net cash used for investing activities
Cash flows from financing activities:
Proceeds from issuance of common stock
Repayments of long-term debt
Debt issuance costs
Proceeds from exercise of stock options
(408,782)
(146,736)
(542,045)
(52,002)
(555,518)
(594,047)
30,968,386
--
(180,139)
512,799
1,625,748
(1,750,000)
(820,441)
135,840
Net cash provided by (used in) financing activities
31,301,046
(808,853)
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
17,693,709
8,215,791
(11,853,959)
20,069,750
Cash and cash equivalents, end of period
$ 25,909,500 $
8,215,791
Supplemental disclosures of cash flow activity:
Cash paid for interest
Supplemental disclosure of non-cash investing and financing activities:
$
3,525,978 $
3,912,463
Payments of fixed assets in accounts payable
Payments of long term debt with proceeds from note payable of $25,000,000 and issuance
of shares of $3,550,000
$
168,775 $
22,575
--
28,550,000
The accompanying notes are an integral part of these consolidated financial statements.
67
AXOGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015 and 2014
1.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of AxoGen, Inc. (the
“Company” or “AxoGen”) and its wholly owned subsidiary AxoGen Corporation (“AC”) as of December 31,
2015 and December 31, 2014 and for the years then ended. The Company’s consolidated financial statements
have been prepared in accordance with accounting principles generally accepted in the United States of
America. All significant intercompany accounts and transactions have been eliminated in consolidation.
2.
Organization and Business
We are a leading medical technology company dedicated to peripheral nerve repair. We provide products
®
and education to improve surgical treatment algorithms for peripheral nerve injuries. Our portfolio of
regenerative medicine products is available in the United States, Canada and several other countries and
includes Avance Nerve Graft, an off-the-shelf processed human nerve allograft for bridging severed nerves
without the comorbidities associated with a second surgical site, AxoGuard® Nerve Connector, a porcine
submucosa extracellular matrix (“ECM”) coaptation aid for tensionless repair of severed nerves, and
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. Along with these core
surgical products, we also offer the AxoTouch Two-Point Discriminator and expect to launch in March of
2016 the AcroVal™ Neurosensory and Motor Testing System. These evaluation and measurement tools assist
healthcare professionals in detecting changes in sensation, assessing return of sensory, grip and pinch function,
evaluating effective treatment interventions, and providing feedback to patients. The introduction of our
evaluation and measurement products further reflects our commitment to bring best practices to the treatment
of peripheral nerve conditions.
TM
3.
Summary of Significant Accounting Policies
Revenue Recognition
Revenue is recognized when persuasive evidence of an arrangement exists, the price is fixed and
determinable, delivery has occurred and there is a reasonable assurance of collection of the sales proceeds.
Revenues for manufactured products and products sold to a customer or under a distribution agreement are
recognized when the product is delivered to the customer or distributor, at which time title passes to the
customer or distributor, provided, however, that in the case of revenues from consigned sales delivery is
determined when the product is utilized in a surgical procedure. Once a product is delivered, the Company has
no further performance obligations. Delivery is defined as delivery to a customer location or segregation of
product into a contracted distribution location. At such time, this product cannot be sold to any other customer.
Fees charged to customers for shipping are recognized as revenues when products are shipped to the customer,
distributor or end user. Revenues from research grants are recognized in the period the associated costs are
incurred.
Cash and Cash Equivalents and Concentration
For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments
purchased with a maturity of three months or less to be cash equivalents. Cash and cash equivalents are
maintained at financial institutions and, at times, balances may exceed federally insured limits. The Company
has never experienced any losses related to these balances and does not believe it is exposed to any significant
credit risk on cash and cash equivalents.
68
Accounts Receivable and Concentration of Credit Risk
Accounts receivable are carried at the original invoice amount less an estimate made for doubtful accounts
based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for
doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s
financial condition, credit history and current economic conditions. Accounts receivable are written off when
deemed uncollectible. Recoveries of accounts receivable previously written off are recorded when received.
We regularly review all accounts that exceed 60 days from the invoice date and based on an assessment of
current credit worthiness, estimate the portion, if any, of the balance that will not be collected. The analysis
excludes certain government related receivables due to our past successful experience in
collectability. Specific accounts that are deemed uncollectible are reserved at 100% of their outstanding
balance. The remaining balances outstanding over 60 days have a percentage applied by aging category (5%
for balances 61-90 days and 20% for balances over 90 days aged), based on a historical valuation that allows us
to calculate the total reserve required. The reserve balance was determined by applying a percentage to the
cumulative balance between 60 and 90 days and a higher percentage to the balance over 90 days. In the event
that we exhaust all collection efforts and deem an account uncollectible, we would subsequently write off the
account. The write off process involves approval by senior management based on the write off amount. The
allowance for doubtful accounts reserve balance was approximately $192,000 and $94,000 at December 31,
2015 and 2014, respectively.
Concentrations of credit risk with respect to accounts receivable are limited because a large number of
geographically diverse customers make up the Company’s customer base, thus spreading the trade credit risk.
The Company also controls credit risk through credit approvals, credit limits and monitoring procedures.
Inventories
Inventories are comprised of unprocessed tissue, work-in-process, Avance® Nerve Graft, AxoGuard® Nerve
Connector, AxoGuard® Nerve Protector, AxoTouch Two-Point Discriminator and supplies and are valued at
the lower of cost (first-in, first-out) or market and consist of the following:
TM
Finished goods
Work in process
Raw materials
December
31,
December
31,
2015
2014
$2,732,823 $2,072,235
237,108
331,891
809,494
964,029
$3,933,960 $3,213,620
Inventories are net of reserve of approximately $711,000 and $404,000 at December 31, 2015 and 2014,
respectively.
Property and Equipment
Depreciation and amortization is computed using the straight-line method over the estimated useful lives of
the assets as follows:
Furniture and equipment
Leasehold improvements
Processing equipment
2 -5
5
5 -7
years
years (or lease term if
less)
years
Major additions and improvements are capitalized, while replacements, maintenance and repairs, which do
not improve or extend the life of the respective assets, are expensed as incurred. When assets are retired or
otherwise disposed of, related costs and accumulated depreciation and amortization are removed and any gain
or loss is reported as other income or expense.
69
Intangible Assets
Intangible assets consist primarily of license agreements for exclusive rights to use various patented and
patent-pending technologies described in Note 5 and other costs related to the license agreements, including
patent prosecution and protection costs. Such costs are capitalized and amortized on a straight-line basis over
the underlying terms of the license agreements or estimated useful life of patents, ranging from 5 to 20 years.
Impairment of Long-lived Assets, Including License Agreements
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to future undiscounted cash flows
expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the
assets. For the years ended December 31, 2015 and 2014, the Company did not record any impairment loss.
Deferred Financing Costs
The Company capitalizes all third party costs incurred, including equity-based payments, associated with
the issuance of long-term debt. The costs are amortized to interest expense over the term of the debt using the
effective interest method.
Effective lnterest Rate on Note Payable and Term Loan Agreement
The PDL Royalty Contract was accounted for as long-term debt. AxoGen recorded interest using its best
estimate of the effective interest rate. This estimate took into account both the internal rate of return (lRR) of
the PDL agreement and the rate of return as the result of exercise of the put option. The IRR of the PDL
Royalty Contract was based on the actual payments to date, projected future revenues and required minimum
payments, and was calculated at 20.535%. The PDL Royalty Contract put option provided PDL a 20% return,
if exercised. As a result of the return of the put option being higher than the IRR of the PDL agreement,
management believed the best estimate of the effective interest rate on this instrument would be the put rate. As
a result, AxoGen was accruing interest using the specified internal rate of return for the put which was 20%.
The PDL Royalty Contract was paid in full on November 12, 2014. The Company has no further obligation
under the PDL Royalty Contract.
The Three Peaks Capital Term Loan Agreement and Revenue Interest Agreement is used in calculating the
effective interest rate. AxoGen records interest using its best estimate of the effective interest rate. This
estimate takes into account both the rate on the Term Loan Agreement and the rate associated with the ten year
Revenue Interest Agreement with Three Peaks. The effective interest rate is based on actual payments to date,
projected future revenues and the projected royalty payments and the quarterly interest payments due on the
Term Loan Agreement. From time to time, AxoGen will reevaluate the expected cash flows and may adjust the
effective interest rate. Determining the effective interest rate requires judgment and is based on significant
assumptions related to estimates of the amounts and timing of future revenue streams. Determination of these
assumptions is highly subjective and different assumptions could lead to materially different outcomes.
Advertising
Advertising costs are expensed as incurred. Advertising costs were $31 ,000 and $8,000 for the years ended
December 31, 2015 and 2014, respectively, and are included in sales and marketing expense on the
accompanying consolidated statements of operations.
Research and Development Costs
Research and Development costs are expensed as incurred and were approximately $3,237,000 and
$3,033,000 for the years ended December 31, 2015 and 2014, respectively.
70
Income Taxes
The Company has not recorded current income tax expense due to the generation of net operating losses.
Deferred income taxes are accounted for using the balance sheet approach which requires recognition of
deferred tax assets and liabilities for the expected future consequences of temporary differences between the
financial reporting basis and the tax basis of assets and liabilities. A valuation allowance is provided when it is
more likely than not that a deferred tax asset will not be realized. A full valuation allowance has been
established on the deferred tax asset as it is more likely than not that the future tax benefit will not be realized.
In addition, future utilization of the available net operating loss carryforward may be limited under Internal
Revenue Code Section 382 as a result of changes in ownership.
The Company identifies and evaluates uncertain tax positions, if any, and recognizes the impact of
uncertain tax positions for which there is a less than more-likely-than-not probability of the position being
upheld when reviewed by the relevant taxing authority. Such positions are deemed to be unrecognized tax
benefits and a corresponding liability is established on the balance sheet. The Company has not recognized a
liability for uncertain tax positions. If there were an unrecognized tax benefit, the Company would recognize
interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses.
The Company’s remaining open tax years subject to examination by the Internal Revenue Service include the
years ended December 31, 2012 through 2015; there currently are no examinations in process.
Fair Value of Financial Instruments
The respective carrying value of certain on-balance-sheet financial instruments approximated their fair
values due to the short-term nature of these instruments. These financial instruments include cash, accounts
receivable, accounts payable and accrued expenses. The fair value of the Company’s long-term debt
approximates its carrying value based upon current rates available to the Company.
Stock-Based Compensation
Stock-based compensation cost related to stock options granted under the AC 2002 Stock Option Plan and
AxoGen 2010 Stock Incentive Plan (see Note 9) is measured at grant date, based on the fair value of the award,
and is recognized as an expense over the employee’s requisite service period. The Company estimates the fair
value of each option award issued under the Plan on the date of grant using a Black-Scholes-Merton option-
pricing model that uses the assumptions noted in the table below. The Company estimates the volatility of its
common stock at the date of grant based on the volatility of comparable peer companies which are publicly
traded, for the periods prior to the merger, and based on the Company’s common stock for periods subsequent
to the merger. The Company determines the expected life based on historical experience with similar awards,
giving consideration to the contractual terms, vesting schedules and post-vesting forfeitures. The Company
uses the risk-free interest rate on the implied yield currently available on U.S. Treasury issues with an
equivalent remaining term approximately equal to the expected life of the award. The Company has never paid
any cash dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable
future. The Company used the following weighted-average assumptions for options granted during the year
ended December 31:
Year ended December 31,
Expected term (in years)
Expected volatility
Risk free rate
Expected dividends
2015
2014
4
69.08 %
1.40 %
— %
4
78.31 %
1.26 %
— %
The Company estimates forfeitures when recognizing compensation expense and this estimate of
forfeitures is adjusted over the requisite service period based on the extent to which actual forfeitures differ, or
are expected to differ, from such estimates. Changes in estimated forfeitures are recognized through a
cumulative catch-up adjustment, which is recognized in the period of change, and also impact the amount of
unamortized compensation expense to be recognized
71
in future periods. The Company did not apply a forfeiture allocation to its unvested options outstanding during
the years ended December 31, 2015 and 2014 as they were deemed insignificant.
Earnings (Loss) Per Share of Common Stock
Earnings (loss) per share of common stock (EPS) is calculated for basic EPS by dividing net income (loss)
available to common stockholders by the weighted average number of shares of common stock outstanding
during the period.
There were no dilutive instruments as of December 31, 2015 and 2014. The basic and diluted weighted
average shares outstanding were 26,075,670 and 17,721,742 for the years ended December 31, 2015 and 2014.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board, or FASB issued a new standard on revenue
recognition which outlines a single comprehensive model to use in accounting for revenue arising from
contracts with customers and supersedes most current revenue recognition guidance, including industry-
specific guidance. The core principle of the revenue model is that an entity should recognize revenue to depict
the transfer of promised goods or services to customers in an amount that reflects the consideration to which
the entity expects to be entitled in exchange for those goods or services. The standard is designed to create
greater comparability for financial statement users across industries and jurisdictions and also requires
enhanced disclosures. The guidance became effective for fiscal years, and interim periods within those years,
beginning after December 15, 2016; however, on July 9, 2015, the FASB decided to delay the effective date of
the new revenue standard by one year. The proposed deferral may permit early adoption, but would not allow
adoption any earlier than the original effective date of the standard. We are currently evaluating the impact this
standard will have on our consolidated financial statements.
In June 2014, the FASB issued updated guidance related to stock compensation. The amendment requires
that a performance target that affects vesting and that could be achieved after the requisite period, be treated as
a performance condition. The updated guidance became effective for annual reporting periods and interim
periods within those annual periods beginning after December 15, 2015. We do not expect the adoption of this
guidance to have a material impact on our consolidated financial statements.
In January 2015, the FASB issued guidance, which completely eliminates all references to and guidance
concerning the concept of an extraordinary item from GAAP. The updated guidance is effective for annual
reporting periods and interim periods within those annual periods beginning after December 15, 2015. We do
not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In April 2015, the FASB issued Accounting Standard Update (“ASU”) No. 2015-03, "Simplifying the
Presentation of Debt Issuance Costs" ("ASU 2015-03") which changes the presentation of debt issuance costs
in financial statements to present such costs as a direct deduction from the related debt liability rather than as
an asset. ASU 2015-03 became effective for public companies during interim and annual reporting periods
beginning after December 15, 2015. Early adoption is permitted. We do not expect the adoption of this
standard will have a material impact on our consolidated financial statements.
In November 2015, the FASB issued an ASU to simplify the presentation of deferred income taxes. The
amendments in this ASU require that deferred tax liabilities and assets be classified as noncurrent in a
classified statement of financial position. The amendments in these ASU may be applied either prospectively
to all deferred tax
72
liabilities and assets or retrospectively to all periods presented and are effective for interim and annual
reporting periods beginning after December 15, 2016. Earlier application is permitted for all entities as of the
beginning of an interim or annual reporting period. We are currently evaluating the method of adoption and the
impact of the provisions of the ASU.
January 2016, the FASB, issued ASU 2016-01 “Recognition and Measurement of Financial Assets and
Financial Liabilities,” which requires that most equity instruments be measured at fair value, with subsequent
changes in fair value recognized in net income. The pronouncement also impacts the financial liabilities under
the fair value option and the presentation and disclosure requirements for financial instruments. The ASU does
not apply to equity method investments or investments in consolidated subsidiaries. The new standard will be
effective for us for the year ended December 31, 2018, with early adoption permitted and amendments to be
applied as a cumulative-effect adjustment to the balance sheet in the year of adoption. We are currently in the
process of assessing the impact of the ASU on our consolidated financial statements and disclosures.
The Company’s management has reviewed and considered all other recent accounting pronouncements and
believe there are none that could potentially have a material impact on the Company’s consolidated financial
condition, results of operations, or disclosures.
4.
Property and Equipment
Property and equipment consist of the following:
Furniture and equipment
Leasehold improvements
Processing equipment
Less: accumulated depreciation and amortization
Property and equipment
5.
Intangible Assets
The Company’s intangible assets consist of the following:
License agreements
Patents
Less: accumulated amortization
Intangible assets, net
December 31, December 31,
2015
2014
$ 1,186,815 $
346,642
873,824
285,697
1,375,759 1,194,712
(1,938,346) (1,735,205)
$
970,870 $
619,028
December
31,
December
31,
2015
2014
$ 897,594 $ 850,859
179,997
79,996
(399,509) (353,681)
$ 678,082 $ 577,174
License agreements are being amortized over periods ranging from 17-20 years. Patent costs were being
amortized over three years. As of December 31, 2015, the patents were fully amortized, the remaining patents
of $179,997 are pending patent costs and are not amortizable. Amortization expense for 2015 and 2014 was
approximately $46,000 and $45,000, respectively. As of December 31, 2015, future amortization of license
agreements is expected to be $64,000 for 2016 through 2020.
73
License Agreements
The Company has entered into license agreements (the “License Agreements”) with the University of
Florida Research Foundation (“UFRF”) and University of Texas at Austin (“UTA”). Under the terms of the
License Agreements, the Company acquired exclusive worldwide licenses for underlying technology used in
repairing and regenerating nerves. The licensed technologies include the rights to issued patents and patents
pending in the United States and international markets. The effective term of the License Agreements extends
through the term of the related patents and the agreements may be terminated by the Company with 60 days
prior written notice. Additionally, in the event of default, licensors may terminate an agreement if the
Company fails to cure a breach after written notice. The License Agreements contain the key terms listed
below:
· AxoGen pays royalty fees ranging from 1% to 3% under the License Agreements based on
net sales of licensed products. One of the agreements also contains a minimum royalty of
$12,500 per quarter, which may include a credit in future quarters in the same calendar year
for the amount the minimum royalty exceeds the royalty fees. Also, when AxoGen pays
royalties to more than one licensor for sales of the same product, a royalty stack cap
applies, capping total royalties at 3.75%;
·
If AxoGen sublicenses technologies covered by the License Agreements to third parties,
AxoGen would pay a percentage of sublicense fees received from the third party to the
licensor. Currently, AxoGen does not sublicense any technologies covered by License
Agreements. The Company is not considered a sub-licensee under the License Agreements
and does not owe any sub-licensee fees for its own use of the technologies;
· AxoGen reimburses the licensors for certain legal expenses incurred for patent prosecution
and defense of the technologies covered by the License Agreements; and
·
Currently, under one of the License Agreements, AxoGen would owe a $15,000 milestone
fee upon receiving a Phase II Small Business Innovation Research or Phase II Small
Business Technology Transfer grant involving the licensed technology. The Company has
not received either grant and does not owe such a milestone fee. Other milestone fees are
due if AxoGen develops certain pharmaceutical or medical device products under the
License Agreements. No such products are currently under development.
Royalty fees were approximately $526,000 and $329,000 during 2015 and 2014 and are included in sales
and marketing expense on the accompanying consolidated statements of operations.
6.
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consists of the following:
Accounts payable
Miscellaneous accruals
Accrued compensation
Accounts Payable and Accrued Expenses
74
December
31,
December 31,
2015
2014
15,183
$2,090,874 $1,160,859
105,315
1,589,070 1,165,020
$3,695,127 $2,431,194
7.
Note Payable and Term Loan Agreement
Note payable and Term Loan Agreement consists of the following:
Term Loan and Revenue Interest Agreement with Three Peaks Capital S.a.r.l.
(“Three Peaks”) for a total term loan amount of $25,000,000 which has a six
year term and requires interest only payments and a final principal payment
due at the end of the term. Interest is payable quarterly at 9.00% per annum
plus the greater of LIBOR or 1.0% which as of December 31, 2015 and
December 31, 2014 resulted in a 10% rate. The Revenue Interest Agreement
is for a period of ten years. Royalty payments are based on a royalty rate of
3.75% of revenues up to a maximum of $30 million in revenues in any 12
month period.
Long-term portion
Note Payable
December 31, December 31,
2015
2014
$25,547,420 $25,085,777
$25,547,420 $25,085,777
On October 5, 2012, AxoGen entered into a Revenue Interests Purchase Agreement (the “Royalty
Contract”) with PDL BioPharma, Inc. (“PDL”), pursuant to which the Company sold to PDL the right to
receive royalties equal to 9.95% of the Company’s Net Revenues (as defined in the Royalty Contract)
generated by the sale, distribution or other use of AxoGen’s products Avance® Nerve Graft, AxoGuard® Nerve
Connector and AxoGuard® Nerve Protector. The Royalty Contract had a term of eight years. Under the Royalty
Contract, PDL received royalty payments based on a royalty rate of 9.95% of the Company’s Net Revenues,
subject to certain agreed upon minimum payment requirements, which were anticipated to be approximately
$1.3 to $2.5 million per quarter to begin in the fourth quarter of 2014 through the third quarter of 2020 as
provided in the Royalty Contract. The Company recorded interest using its best estimate of the effective
interest rate accruing interest using the specified internal rate of return of the put option of 20%. The total
consideration PDL paid to the Company was $20,800,000 (the “Funded Amount”), which included
$19,050,000 PDL paid to the Company on October 5, 2012, and $1,750,000 PDL paid to the Company on
August 14, 2012 pursuant to an Interim Revenue Interest Purchase Agreement between the Company and PDL,
dated August 14, 2012 (the “Interim Royalty Contract”). Upon the closing (the “Closing”) of PDL’s purchase
of the specified royalties described above, which was concurrent with the execution of the Royalty Contract,
the Interim Royalty Contract was terminated. On November 12, 2014, the Company paid PDL $30.3 million to
fully extinguish the Royalty Contract. The Company has no further obligations under the Royalty Contract.
As a result of the accounting treatment for the Three Peaks transaction, interest expense included
approximately $462,000 and $86,000 of non cash expense for the years ended December 31, 2015 and 2014,
respectively, that is expected to be paid in the future based upon the terms of the Three Peaks transaction and
increases in AxoGen revenues. These interest amounts are derived from taking the inputed interest for 2015
and 2014 on the Three Peaks agreement less the actual cash payments made to Three Peaks each year. Other
than the $462,000 and $86,000 non-cash expense, the remaining $3,526,000 and $6,724,000 in interest
expense for the years 2015 and 2014, respectively, is related to cash paid for interest on the Term Loan
Agreement and note payable.
On November 12, 2014, the Company sold 643,382 shares of common stock for a total of $1.75 million to
PDL (“PDL Equity Sale”) at a price of $2.72 per share pursuant to a Securities Purchase Agreement by and
between the Company and PDL. The Company intends to use the proceeds from the PDL Equity Sale for
general corporate purposes.
Term Loan Agreement and Revenue Interest Agreement
On November 12, 2014 (the “Signing Date”), AxoGen, as borrower, and AC, as guarantor, entered into a
term loan agreement (the “Term Loan Agreement”) with the lenders party thereto and Three Peaks Capital
S.a.r.l. (“Three Peaks”), an indirect wholly-owned subsidiary of Oberland Capital Healthcare Master Fund LP
(“Oberland”), as administrative and collateral agent for the lenders. Under the Term Loan Agreement, Three
Peaks has agreed to lend to AxoGen a term loan of $25 million (the “Initial Term Loan”) which has a six year
term and requires interest only payments and a final
75
principal payment due at the end of the term. Interest is payable quarterly at 9.00% per annum plus the greater
of LIBOR or 1.0% which as of November 13, 2014 (“the Initial Closing Date”) resulted in a 10% rate. Under
certain conditions, AxoGen has the option to draw an additional $7 million (“Subsequent Borrowing” and,
together with the Initial Term Loan, (the “Term Loan”) during the period of April 1, 2016 through June 29,
2016 (the closing date of each such Subsequent Borrowing, a (“Subsequent Closing Date” and, together with
the Initial Closing Date, the “Closing Dates”) under similar terms and conditions. AxoGen has to maintain
certain covenants including limiting new indebtedness, restriction of the payment of dividends and maintain
certain levels of revenue. Three Peaks has a first perfected security interest in the assets of AxoGen.
In addition, AxoGen entered into a 10 year Revenue Interest Agreement (“Revenue Interest Agreement”)
with Three Peaks. Royalty payments are based on a royalty rate of 3.75% of AxoGen’s revenues up to a
maximum of $30 million in revenues in any 12 month period. In the event the Subsequent Borrowing is drawn,
the royalty rate increases proportionally up to a maximum of 4.80%. AxoGen has to maintain certain
covenants including those covenants under the Term Loan.
Under the Term Loan Agreement, AxoGen has the option at any time to prepay the Term Loan, in whole or
in part, and the Royalty Interest Agreement, defined below, by making the following payment, and Three
Peaks has the right to demand the following payment upon a change of control of AxoGen, sale of the majority
of AxoGen’s assets or a material adverse change to AxoGen: (i) on or prior to the first anniversary of the
applicable Closing Date, 120% of the outstanding principal amount of the Term Loan or any portion being
prepaid; (ii) after the first anniversary but no later than the second anniversary of the applicable Closing Date,
135% of the outstanding principal amount of the Term Loan or any portion being prepaid ; (iii) ) after the
second anniversary but no later than the third anniversary of the applicable Closing Date, 150% of the
outstanding principal amount of the Term Loan or any portion being prepaid; or (iv) after the third anniversary
of the applicable Closing Date, an amount generating an Internal Rate of Return of 16.25% of the outstanding
principal amount of the Term Loan or any portion being prepaid. In all cases, the amount due is reduced by the
sum of interest and principal previously paid and all amounts received under the Revenue Interest Agreement.
In each such case AxoGen will also owe an additional 3% of the originally advanced Term Loan amount.
Upon payment to Three Peaks, AxoGen would have no further obligations to Three Peaks under the Term
Loan or the Revenue Interest Agreement.
In connection with the Term Loan Agreement, on the Signing Date, the Company and its wholly owned
subsidiary, AC entered into a Security Agreement (the “Security Agreement”) with Three Peaks, pursuant to
which each of the Company and AC grants to Three Peaks a security interest in certain collateral as specified in
the Security Agreement to guarantee the payment in full when due of the Secured Obligations.
Also in connection with the above transaction, the Company sold 1,375,969 shares of common stock to
Three Peaks for a total of $3.55 million (“Three Peaks Equity Sale”) at a price of $2.58 per share. Pursuant to
the equity purchase provisions in the Term Loan Agreement, in the event that we sell prior to November 12,
2016 our securities at a lower price per share than the $2.58 per share paid by Three Peaks, or where the terms
of such subsequent sale are otherwise more favorable, then in such case we have agreed to match the more
favorable terms of such subsequent sale with respect to the shares purchased by Three Peaks. A subsequent
sale does not include the issuance of securities or options to our employees, officers, directors or consultants
pursuant to our approved employee option pool or any other employee stock purchase or option plan existing
as of November 12, 2014.
The Company records interest using its best estimate of the effective interest rate. This estimate takes into
account both the rate on the Term Loan Agreement and the rate associated with the ten year Revenue Interest
Agreement with Three Peaks. The effective interest rate is based on actual payments to date, projected future
revenues and the projected royalty payments and the quarterly interest payments due on the Term Loan
Agreement. From time to time, AxoGen will reevaluate the expected cash flows and may adjust the effective
interest rate. Determining the effective interest rate requires judgment and is based on significant assumptions
related to estimates of the amounts and the timing of future revenue streams. Determination of these
assumptions is highly subjective and different assumptions could lead to materially different outcomes.
76
8.
Shareholders’ Equity (Deficit) and Temporary Equity
AxoGen, Inc. Classes of Stock
AxoGen, Inc.’s authorized capital stock consists of 50,000,000 shares of common stock, par value $0.01
per share. The authorized capital stock is divisible into the classes and series, has the designation, voting rights,
and other rights and preferences and is subject to the restrictions that the AxoGen Board of Directors may from
time to time establish. Unless otherwise designated by the AxoGen Board of Directors, all shares are common
stock. AxoGen has not designated any shares other than common stock.
Warrants
Pursuant to a retired financing agreement, certain lenders received a ten-year warrant to purchase 89,686
shares of AxoGen’s common stock at $2.23 per share. The warrants have an effective date of September 30,
2011. On November 13, 2015, 44,843 of these warrants were exercised in a cashless exchange resulting in
25,903 shares being issued to the warrant holder.
9.
Stock Options
AxoGen, Inc. has a AxoGen 2010 Stock Incentive Plan (the “AxoGen Plan”), which allows for issuance of
incentive stock options and non-qualified stock options to employees, directors and consultants at an exercise
price equal to fair market value on the date of grant. On September 27, 2011, AxoGen, Inc., formerly LecTec
Corporation, amended and restated the AxoGen Plan to, among other things, increase the number of shares of
common stock authorized for issuance under the plan by 2,300,000 shares. At the 2014 Annual Meeting of
Shareholders the AxoGen Plan was amended and restated to, among other things, increase the number of
shares of common stock authorized for issuance under the plan by 750,000 shares so that the total number of
shares authorized for issuance under the AxoGen Plan is 3,500,000 shares. As a result of the merger, options
granted under the AC Plan were assumed by the Company so that each stock option pursuant to the AC Plan so
assumed continued to have, and be subject to, the same terms and conditions of such stock option immediately
prior to the merger, except that (i) each AC Plan stock option is exercisable for that number of shares of
Company common stock equal to the product of the number of shares of AC common stock that were issuable
upon exercise of such stock option immediately prior to the merger multiplied by the Closing Ratio (“as
defined in the merger agreement”) and (ii) the per share exercise price for the shares of Company common
stock issuable upon the exercise of such assumed stock option will be equal to the quotient determined by
dividing the exercise price per share of AC common stock at which such stock option was exercisable
immediately prior to the merger by the Closing Ratio. The options to employees typically vest 25% one year
after the grant date and 12.5% every six months thereafter for the remaining three-year period until fully
vested after four years and those to directors and certain executive officers have vested 25% per quarter over
one year or had no vesting period. Options issued to consultants have vesting provisions based on the
engagement ranging from no vesting to vesting over the service period ranging from three to ten years. Options
have terms ranging from seven to ten years.
Stock-based compensation expense was $1,316,509 and $956,449 for 2015 and 2014, respectively.
77
The following is a summary of stock option activity:
Outstanding at December 31, 2013:
Granted
Forfeited
Exercised
Outstanding at December 31, 2014:
Granted*
Forfeited
Exercised
Outstanding at December 31, 2015
Exercisable at December 31, 2015
Weighted
Average
Weighted
Average
Remaining
Contractual
Exercise Price Term(Years)
6.61
Options
1,969,492
935,750
(44,023)
(117,401)
2,743,818
946,250
(290,478)
(171,563)
3,228,027
2,048,052
2.68
3.57
(3.78)
(1.16)
3.03
4.31
(3.12)
(2.99)
3.40
2.93
5.94
5.43
4.92
*Includes 478,500 options granted during the year ended December 31, 2015 which are contingent upon
Shareholders approving an increase in the number of common shares authorized for issuance under the AC
Plan.
The average fair value of options granted at market during 2015 and 2014 was $4.31 and $3.57 per option,
respectively.
The intrinsic value of options exercised during the years ended December 31, 2015 and 2014 was
approximately $370,000 and $266,000, respectively. The intrinsic value of options outstanding at
December 31, 2015 and 2014 was approximately $5,167,000 and $1,535,000, respectively. The intrinsic value
of options exercisable at December 31, 2015 and 2014 was approximately $4,265,000 and $1,278,000,
respectively.
Total future compensation expense related to nonvested awards is expected to be approximately $2,534,000
at December 31, 2015 which is expected to be recognized over a weighted average period of 2.92 years. The
following table represents non-vested share-based payment activity with employees for the years ended
December 31, 2015 and 2014:
Number of Options Exercise Price
Weighted Average
Nonvested options - December 31, 2013:
Granted
Vested
Forfeited
Nonvested options - December 31, 2014:
Granted*
Vested
Forfeited
Nonvested options - December 31, 2015:
675,196
935,750
(407,437)
(44,023)
1,159,486
946,250
(635,289)
(290,478)
1,179,969
2.88
3.57
(3.03)
(3.78)
3.37
4.31
(3.32)
(3.12)
4.21
*Includes 478,500 options granted during the year ended December 31, 2015 which are contingent upon
Shareholders approving an increase in the number of common shares authorized for issuance under the AC
Plan.
78
10. Income Taxes
The Company has temporary differences between the carrying amount of assets and liabilities for financial
reporting purposes and their respective income tax basis, as measured by enacted state and federal rates as
follows:
December 31
Deferred tax assets:
Net operating loss carryforwards
Charitable contributions
Inventory reserves
Amortization
Allowance for doubtful accounts
Stock-based compensation
Total deferred tax assets
Deferred tax liabilities:
Depreciation
Total deferred tax assets (liabilities)
Net deferred tax assets
Valuation allowance
2015
2014
33,424,100 29,263,100
500
152,000
123,500
35,400
107,900
34,076,600 29,682,400
500
267,700
51,400
72,300
260,600
(62,400)
(62,400)
(85,700)
(85,700)
34,014,200 29,596,700
(34,014,200) (29,596,700)
As of December 31, 2015, the Company had net operating loss carry forwards of approximately $88.8
million to offset future taxable income which expire in various years through 2035. A valuation allowance is
recorded to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely
than not that a portion or none of the deferred tax assets will be realized. After consideration of all the
evidence, including reversal of deferred tax liabilities, future taxable income and other factors, management
has determined that a full valuation allowance is necessary as of December 31, 2015 and 2014. The valuation
allowance increased by $4,452,000 and $6,202,700 during 2015 and 2014, respectively.
The Company had no income tax expense or income tax benefit for 2014 and 2015 due to incurrence of net
operating losses. The Company does not believe there are any additional tax refund opportunities currently
available.
11. Employee Benefit Plan
The Company adopted the AxoGen Simple IRA plan (the “IRA Plan”) in 2007. All full-time employees
who attained the age of 18 were eligible to participate in the Plan. Eligibility was immediate upon employment
and enrollment was available any time during employment. Participating employees could make annual pretax
contributions to their accounts up to a maximum amount as limited by law. The IRA Plan required the
Company to make matching contributions of between 1% and 3% of the employee’s annual salary as long as
the employee participated in the IRA Plan. Additionally, the matching was to be at least 3% for three of the
first five years of the IRA Plan. Both employee contributions and Company contributions vested immediately.
In 2015 and 2014, the Company match was 3% of the participating employee’s annual salary. The Company
contributed $172,089 and $146,681 in matching funds during 2015 and 2014, respectively. The Company
terminated this IRA Plan in December 2015.
The Company adopted the AxoGen 401(k) plan (the “401(k) Plan”) in December 2015 with contributions
starting in January 2016. All full-time employees who have attained the age of 18 are eligible to participate in
the 401(k) Plan. Eligibility is immediate upon employment and enrollment is available any time during
employment. Participating employees may make annual pretax contributions to their accounts up to a
maximum amount as limited by law. The 401(k) Plan requires the Company to make matching contributions
of 3% on the first 3% of the employee’s annual salary and 1% of the next 2% of the employee’s annual salary
as long as the employee participates in the 401(k) Plan and contributes at least 5% of the annual salary. Both
employee contributions and Company contributions vest immediately.
79
12. Commitments and Contingencies
Operating Leases
On November 12, 2013, AxoGen entered into the Third Amendment to Lease with SNH Medical Office
Properties Trust (“SNH”). SNH was the landlord of AxoGen’s corporate headquarters leased facility in
Alachua, Florida and AxoGen and SNH agreed to the amendment by which AxoGen relocated and expanded
its corporate headquarters to a new space owned by SNH within the same office park. The lease amendment
provides for 11,761 square feet of office space until October 31, 2018, renewable thereafter by agreement of
the parties, subject to AxoGen’s right to earlier termination after three years from the effective date of the
lease. AxoGen’s annual cost of such property ranges from approximately $194,000 to $214,000 per year.
In addition, on October 25, 2013, AxoGen entered into a Commercial Lease with Ja-Cole. Under the terms
of the Commercial Lease, AxoGen leased 5,400 square feet of warehouse/office space in Burleson, Texas until
November 30, 2016 at an annual cost of $43,200 per year. On April 21, 2015, AxoGen entered into a new
commercial lease, as amended by Addendum on such date, with Ja-Cole. The new lease superseded and
replaced the original lease with Ja-Cole. Under the terms of the new lease, AxoGen leased an additional 2,100
square feet of warehouse space that will be combined with its current 5,400 square feet of warehouse/office
space in Burleson, Texas. The new lease is for a three-year term expiring April 21, 2018, renewable thereafter
by agreement of the parties, at an annual cost of $66,000 per year. The expanded Burleson facility will house
raw material storage and product distribution and allow expansion space as required for AxoGen operations.
The Burleson facility houses raw material storage and product distribution, allowing AxoGen to fulfill
same day orders for both coasts of the United States.
The Company leases its lab space on a month to month basis.
Estimated future minimum rental payments on the leases are as follows:
Year Ending December 31
2016
2017
2018
2019
2020
TOTAL
Amount
279,648
206,455
194,488
--
--
$680,591
Total rent expense for the Company’s leased office and lab space for the years ended December 31, 2015
and 2014 was approximately $351,000 and $288,000, respectively.
Service Agreements
Since 2009, AxoGen has processed and packaged Avance Nerve Graft using its employees and equipment
®
located at LifeNet Health, Virginia Beach, Virginia (“LifeNet Health”). Business requirements of LifeNet
Health led to their need for additional space and they notified AxoGen that AxoGen would need to transition
out of the Virginia Beach facility on or before February 27, 2016. On August 6, 2015, AxoGen entered into a
License and Services Agreement with Community Blood Center (d/b/a Community Tissue Services) (“CTS”),
Dayton, Ohio, an FDA registered tissue establishment. Processing of the Avance Nerve Graft pursuant to the
CTS agreement began in February 2016. The CTS agreement is for a five year term, subject to earlier
termination by either party for cause, or after August 6, 2017 without cause, upon 18 months notice. Under the
CTS agreement AxoGen pays CTS a facility fee for clean room/manufacturing, storage and office space. CTS
also provides services in support of AxoGen’s manufacturing such as routine sterilization of daily supplies,
providing disposable supplies, microbial services and office support.
®
80
In August 2008, the Company entered into an agreement to distribute the AxoGuard ® product worldwide in
the field of peripheral nerve repair, and the parties subsequently amended the agreement in March, 2012. The
agreement expires in August 2022. The Cook Biotech agreement also requires certain minimum purchases,
although through mutual agreement the parties have not established such minimums and to date have not
enforced such provision, and establishes a formula for the transfer cost of the AxoGuard products. Under the
agreement, AxoGen provides purchase orders to Cook Biotech, and Cook Biotech fulfills the purchase orders.
®
In December 2011, the Company also entered into a Master Services Agreement for Clinical Research and
Related Services. The Company was required to pay $151,318 upon execution of this agreement and $20,416
per month for 42 months starting in January 2012 through August 2015.
Certain executive officers of the Company are parties to employment contracts. All such contracts have
severance payments for certain conditions including change of control.
Concentrations
Vendor
Substantially all of AxoGen’s revenue is currently derived from three products, Avance® Nerve Graft,
AxoGuard® Nerve Protector and AxoGuard® Nerve Connector. AxoGen has an exclusive distribution
agreement with Cook Biotech for the purchase of AxoGuard ® which expires August 27, 2022 The Cook
Biotech agreement also requires certain minimum purchases, although through mutual agreement the parties
have not established such minimums and to date have not enforced such provision, and establishes a formula
for the transfer cost of the AxoGuard® products.
The agreement allows for termination provisions for both parties. Although there are products that AxoGen
believes it could develop or obtain that would replace the AxoGuard® products, the loss of the ability to sell
the AxoGuard® products could have a material adverse effect on AxoGen’s business until other replacement
products would be available.
Processor
AxoGen is highly dependent on the continued availability of its processing facilities at CTS and could be
harmed if the physical infrastructure of this facility is unavailable for any prolonged period of time. In
addition, disruptions could lead to significant costs and reductions in revenues, as well as a potential harm to
the AxoGen’s business reputation and financial results. . The CTS agreement is for a five year term, subject to
earlier termination by either party for cause, or after August 6, 2017 without cause, upon 18 months notice.
Although AxoGen believes it can find and make operational a new facility in less than six months, and did so
with its move from LifeNet Health to CTS, the regulatory process for approval of facilities is time-consuming
and unpredictable. AxoGen’s ability to rebuild or find acceptable lease facilities would take a considerable
amount of time and expense and could cause a significant disruption in service to its customers. Although
AxoGen has business interruption insurance which would, in instances other than lease termination, cover
certain costs, it may not cover all costs nor help to regain AxoGen’s standing in the market.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
81
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company maintains “disclosure controls and procedures” as defined in Rules 13a-15(e) and 15d-
15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that
information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that
such information is accumulated and communicated to our management, including our principal executive
officer and principal financial officer, and Board of Directors, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating our disclosure controls and procedures,
management recognizes that disclosure controls and procedures, no matter how well conceived and operated,
can provide only reasonable assurance of achieving the desired objectives, and we necessarily are required to
apply our judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.
Our management, including our principal executive officer and principal financial officer, evaluated the
effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2015
and concluded that our disclosure controls and procedures were effective as of December 31, 2015.
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
Our management is responsible for establishing and maintaining internal control over financial reporting,
as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. The Company’s internal control
system is designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting
principles and includes those policies and procedures that:
·
·
·
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the
transactions and dispositions of our assets;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that our
receipts and expenditures are being made only in accordance with authorizations of our
management and directors; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect on the financial
statements.
Because of inherent limitations, a system of internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate due to change in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
Our management, including our Chief Executive Officer and Chief Financial Officer, conducted an
evaluation of the effectiveness of our internal control over financial reporting using the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework.
Based on its evaluation, management concluded that internal control over financial reporting was effective
as of December 31, 2015 based on the criteria in Internal Control-Integrated Framework (2013) issued by the
COSO.
This Form 10-K does not include an attestation report of the Company’s registered public accounting firm
regarding internal control over financial reporting. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to rules of the SEC that permit the Company to provide
only management’s report in this annual report.
82
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
During the year ended December 31, 2015, there were no changes in the Company’s internal control over
financial reporting (as defined in Rule 13a-15(f) and 15d—15(f) under the Exchange Act) that have materially
affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
83
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Information required by this item concerning our directors will be set forth under the caption “Election of
Directors” in our definitive proxy statement for our 2016 annual meeting, and is incorporated herein by
reference.
Information required by this item concerning compliance with Section 16(a) of the Exchange Act, as
amended, will be set forth under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in
our definitive proxy statement for our 2016 annual meeting, and is incorporated herein by reference.
Information required by this item concerning the audit committee of the Company, the audit committee
financial expert of the Company and any material changes to the way in which security holders may
recommend nominees to the Company’s Board of Directors will be set forth under the caption “Corporate
Governance” in our definitive proxy statement for our 2016 annual meeting, and is incorporated herein by
reference.
The Board of Directors adopted a Code of Ethics, which is posted on our website
http://ir.axogeninc.com/governance.cfm that is applicable to all employees and directors. We will provide
copies of our Code of Business Conduct and Ethics without charge upon request. To obtain a copy, please visit
our website or send your written request to Investors Relations, 13631 Progress Blvd., Suite 400, Alachua, FL
32615. With respect to any amendments or waivers of this Code of Business Conduct and Ethics (to the extent
applicable to the Company’s chief executive officer, principal accounting officer or controller, or persons
performing similar functions) the Company intends to either post such amendments or waivers on its website
or disclose such amendments or waivers pursuant to a Current Report on Form 8-K.
ITEM 11. EXECUTIVE COMPENSATION.
Information required by this item will be set forth under the caption “Executive Compensation” in our
definitive proxy statement for our 2016 annual meeting, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED SHAREHOLDER MATTERS
Information required by this item concerning ownership will be set forth under the caption “Security
Ownership of Certain Beneficial Owners”, “Security Ownership of Directors and Executive Officers” and “
Equity Compensation Plan Information” in our definitive proxy statement for our 2016 annual meeting, and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Information required by this item concerning ownership will be set forth under the caption “Corporate
Governance — Director Independence” and “Certain Relationships and Related Transactions” in our definitive
proxy statement for our 2016 annual meeting, and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by this item concerning ownership will be set forth under the caption “Proposal 3 —
Ratification of Appointment of Independent Registered Public Accounting Firm” in our definitive proxy
statement for our 2016 annual meeting, and is incorporated herein by reference.
84
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this Report
PART IV
(1) The following financial statements are filed herewith in Item 8 of Part II of this annual report on Form
10-K:
Consolidated Balance Sheets
Consolidated Statement of Operations
(i)
(ii)
(iii) Consolidated Statements of Shareholders’ Equity (Deficit)
(iv) Consolidated Statements of Cash Flows
(v)
Notes to Consolidated Financial Statements
(2) Exhibits
Exhibit
Number
Description
3.1
3.2
4.1
*10.1
*10.2
*10.3
Amended and Restated Articles of Incorporation of AxoGen, Inc. (incorporated by reference to
Appendix B to the Proxy Statement/Prospectus included as part of LecTec Corporation’s
Amendment No. 2 to Registration Statement on Form S-4 filed on August 29, 2011)
AxoGen, Inc. Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the
Current Report on Form 8-K filed on August 26, 2015)
Warrants to purchase Common Stock of Company attached as exhibits to Loan and Security
Agreement, dated as of September 30, 2011, by and among AxoGen, Inc. and AxoGen
Corporation, as borrower, Midcap Financial SBIC, LP, as administrative agent, and the
Lenders listed on Schedule 1 thereto (Incorporated by reference to the Company’s Current
Report on Form 8-K filed on October 6, 2011)
Patent License Agreement, dated as of August 3, 2005, by and between AxoGen Corporation
and the Board of Regents of the University of Texas System (incorporated by reference to the
Company’s Current Report on Form 8-K filed on October 6, 2011)
Amended and Restated Standard Exclusive License Agreement with Sublicensing Terms, dated
as of February 21, 2006, by and between AxoGen Corporation and the University of Florida
Research Foundation, Inc. (incorporated by reference to the Company’s Current Report on
Form 8-K filed on October 6, 2011)
Sid Martin Biotechnology Development Institute Incubator License Agreement, dated as of
September 26, 2006, by and between AxoGen, Inc. and the University of Florida Research
Foundation, Inc. (incorporated by reference to the Company’s Current Report on Form 8-K
filed on October 6, 2011)
*10.4.1
Amended and Restated Nerve Tissue Processing Agreement, dated as of February 27, 2008, by
and between AxoGen Corporation and LifeNet Health (incorporated by reference to the
Company’s Current Report on Form 8 K filed on October 6, 2011)
*10.4.2
Second Amendment to Amended and Restated Nerve Tissue Processing Agreement, dated as of
August 9, 2011, by and between AxoGen Corporation and LifeNet Health (incorporated by
reference to the Company’s Current Report on Form 8-K filed on October 6, 2011)
*10.4.3
Third Amendment to Amended and Restated Nerve Tissue Processing Agreement, dated as of
March 12, 2012, by and between AxoGen Corporation and LifeNet Health (incorporated by
reference to the Company’s Annual Report on Form 10-K filed for the year ended December
31, 2011)
85
Exhibit
Number
*10.4.4
Description
Fourth Amendment to Amended and Restated Nerve Tissue Processing Agreement, dated as of
September 8, 2014, by and between AxoGen Corporation and LifeNet Health (incorporated by
reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September
30, 2014)
*10.5.1
Distribution Agreement, dated as of August 27, 2008, by and between AxoGen, Inc. and Cook
Biotech Incorporated (incorporated by reference to the Company’s Current Report on Form 8-
K filed on October 6, 2011)
10.5.2
Amendment dated March 14, 2012 to Distribution Agreement, dated as of August 27, 2008, by
and between AxoGen, Inc. and Cook Biotech Incorporated (incorporated by reference to the
Company’s Annual Report on Form 10-K for the year ended December 31, 2011)
*10.6.1
Revenue Interests Purchase Agreement, dated as of October 5, 2012, by and among AxoGen,
Inc. and PDL BioPharma, Inc. (incorporated by reference to the Company’s Amendment No. 1
on Form 10-K/A filed on August 7, 2013 to the Company’s Annual Report on Form 10-K for
the year ended December 31, 2012)
*10.6.2
Guarantee and Collateral Agreement, dated as of October 5, 2012, by and among AxoGen, Inc.
and AxoGen Corporation and PDL BioPharma, Inc. (incorporated by reference to the
Company’s Amendment No. 1 on Form 10-K/A filed on August 7, 2013 to the Company’s
Annual Report on Form 10-K for the year ended December 31, 2012)
10.6.3
Interim Revenue Interests Purchase Agreement dated August 14, 2012, by and between
AxoGen, Inc. and PDL BioPharma, Inc. (incorporated by reference to the Company’s
Quarterly Report on Form 10-Q for the quarter ended September 30, 2012)
10.6.4
Amendment dated July 26, 2013 to Revenue Interests Purchase Agreement, dated, dated as of
October 5, 2012, by and between AxoGen, Inc. and PDL BioPharma, Inc. (incorporated by
reference to the Company’s Amendment No. 3 to Registration Statement on Form S-1
(registration No. 333-188597) filed with the Securities and Exchange Commission on July 30,
2013)
10.7
LecTec Corporation 2010 Stock Incentive Plan, Amended and Restated on September 27, 2011
(incorporated by reference to Appendix E to the Proxy Statement/Prospectus included as part
of LecTec Corporation’s Amendment No. 2 to Registration Statement on Form S-4 filed on
August 29, 2011)
**10.8.1
Executive Employment Agreement, effective as of October 15, 2007, by and between AxoGen
Corporation and Karen Zaderej (incorporated by reference to the Company’s Current Report
on Form 8-K filed on October 6, 2011)
**10.8.2
Amendment to Executive Employment Agreement, effective as of September 29, 2011, by and
between AxoGen Corporation and Karen Zaderej (incorporated by reference to the Company’s
Current Report on Form 8-K filed on October 6, 2011)
**10.9.1
Executive Employment Agreement, effective as of May 6, 2003, by and between AxoGen
Corporation and John P. Engels (incorporated by reference to the Company’s Current Report
on Form 8-K filed on October 6, 2011)
**10.9.2
Amendment to Executive Employment Agreement, effective as of September 29, 2011, by and
between AxoGen Corporation and John P. Engels (incorporated by reference to the
Company’s Current Report on Form 8-K filed on October 6, 2011)
86
Exhibit
Number
10.10.1
Lease dated as of February 6, 2007, by and between AxoGen Corporation and WIGSHAW,
LLC, its successors and assigns (incorporated by reference to the Company’s Quarterly Report
on Form 10-Q filed on November 14, 2011)
Description
10.10.2
Second Amendment dated February 27, 2013 to lease dated as of February 6, 2007, by and
between AxoGen Corporation and WIGSHAW, LLC, its successors and assigns (incorporated
by reference to the Company’s Annual Report on Form 10-K for the year ended December 31,
2012)
10.10.3
**10.11
**10.12.1
Third Amendment dated November 12, 2013 to lease dated as of February 6, 2007, by and
between AxoGen Corporation and SHN Medical Office Properties, its successors and assigns
(incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended
December 31, 2013)
Form of Employee Incentive Stock Option Agreement (incorporated by reference to the
Company’s Current Report on Form 8-K filed on September 26, 2007)
Executive Employment Agreement, effective as of October 1, 2011, by and between AxoGen,
Inc. and Gregory G. Freitag (incorporated by reference to the Company’s Annual Report on
Form 10-K for the year ended December 31, 2011)
**10.12.2
Amendment to Executive Employment Agreement, effective as of May 11, 2014, by and
between AxoGen, Inc. and Greg Freitag (incorporated by reference to the Company’s
Quarterly Report on Form 10-Q filed on August 4, 2014)
**10.12.3
Amendment No. 2 to Employment Agreement, dated as of August 6, 2015, by and between
Gregory G. Freitag and AxoGen, Inc. (incorporated by reference to the Company’s Quarterly
Report on Form 10-Q filed on November 5, 2015)
**10.13
Executive Employment Agreement, effective as of February 27, by and between AxoGen, Inc.
and Jill Schiaparelli (incorporated by reference to the Company’s Annual Report on Form 10-
K for the year ended December 31, 2011)
10.14.1
Commercial Lease dated October 25, 2013 by and between AxoGen Corporation and Ja-Cole,
as amended December 10, 2013. (incorporated by reference to the Company’s Annual Report
on Form 10-K for the year ended December 31, 2013)
10.14.2
Commercial Lease dated April 21, 2015 by and between AxoGen Corporation and Ja-Cole,
L.P. (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on
April 22, 2015)
10.14.3
Amendment No. 1 to Boone Business Park Commercial Lease dated April 21, 2015 by and
between AxoGen Corporation and Ja-Cole, L.P. (incorporated by reference to Exhibit 10.2 to
the Current Report on Form 8-K filed on April 22, 2015).
10.15
License and Services Agreement, dated as of August 6, 2015, by and between AxoGen
Corporation and Community Blood Center (d/b/a Community Tissue Services) (incorporated
by reference to the Company’s Quarterly Report on Form 10-Q filed on November 5, 2015)
**10.16
Executive Employment Agreement, effective as of February 25, 2013, by and between
AxoGen, Inc. and Shawn McCarrey (incorporated by reference to the Company’s Quarterly
Report on Form 10-Q for the quarter ended March 31, 2013)
**10.17
Executive Employment Agreement, dated May 12, 2014, between Lee R. Johnston, Jr. and
AxoGen Corporation, a wholly owned subsidiary of AxoGen, Inc. (incorporated by reference
to the Company’s Quarterly Report on Form 10-Q filed on August 4, 2014)
87
Exhibit
Number
*10.18.1
Description
Term Loan Agreement dated as of November 12, 2014 among AxoGen, Inc. as Borrower,
AxoGen Corporation, as Guarantor, the Lenders party hereto and Three Peaks Capital S.a.r.l.,
as Administrative Agent and Collateral Agent (incorporated by reference to Amendment No. 1
on Form 8-K/A (to the Company’s Current Report on Form 8-K filed on November 13, 2014)
filed on February 4, 2015)
10.18.2
Revenue Interest Agreement dated as of November 12, 2014 among AxoGen, Inc., AxoGen
Corporation and Three Peaks Capital S.a.r.l. (incorporated by reference to Amendment No. 1
on Form 8-K/A (to the Company’s Current Report on Form 8-K filed on November 13, 2014)
filed on February 4, 2015)
**10.18.3
Security Agreement dated as of November 12, 2014 among AxoGen, Inc., AxoGen
Corporation and Three Peaks Capital S.a.r.l. (incorporated by reference to Amendment No. 1
on Form 8-K/A (to the Company’s Current Report on Form 8-K filed on November 13, 2014)
filed on February 4, 2015)
10.19
Securities Purchase Agreement dated as of November 12, 2014, between AxoGen, Inc., and
PDL BioPharma, Inc. (incorporated by reference to Amendment No. 1 on Form 8-K/A (to the
Company’s Current Report on Form 8-K filed on November 13, 2014) filed on February 4,
2015)
10.20
Securities Purchase Agreement, dated as of August 26, 2015, between AxoGen, Inc and
Essex Woodlands Fund IX, L.P.
10.21
Asset Assignment Agreement, dated November 4, 2014 by and between AxoGen Corporation
and Sensory Management Services LLC.
+21.1 Subsidiary of the Registrant
+23.1 Consent of Lurie, LLP
++24.1 Power of Attorney
+31.1 Certification of Principal Executive Officer
+31.2 Certification of Principal Financial Officer
+++32.1
Chief Executive Officer Certification Pursuant to 18 U.S.C. 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002.
+101.INS XBRL Instance 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.
*
Confidential treatment has been granted for portions of this Exhibit pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934 as amended. The confidential portions have been deleted and filed
separately with the United States Securities and Exchange Commission.
** Management contract or compensatory plan or arrangement.
+
Filed herewith.
88
++
Included on signature page.
+++ Furnished herewith.
89
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
AXOGEN, INC
/s/ Karen Zaderej
Karen Zaderej
Chief Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Karen Zaderej (with full power to act alone), as his or her true and lawful attorney-in-
fact and agent, with full powers of substitution and re-substitution, for him or her and in his or her name, place
and stead, in any and all capacities, to sign any and all amendments to the Annual Report on Form 10-K of
AxoGen, Inc., and to file the same, with all exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or their substitute or substitutes, lawfully do or cause to be
done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
/s/ Karen Zaderej
Karen Zaderej Chief Executive Officer and Director
(Principal Executive Officer)
February 29, 2016
/s/ Greg Freitag
Greg Freitag, CFO, General Counsel, SVP Business
Development
(Principal Financial Officer)
(Principal Accounting Officer)
Director
/s/ Jamie Grooms
Jamie Grooms
Director
/s/ Robert Rudelius
Robert Rudelius
Director
/s/ Dr. Mark Gold
Mark Gold, M.D.
Director
/s/ Guido Neels
Guido Neels
Director
/s/ Joe Mandato
Joe Mandato
Director
February 29, 2016
February 29, 2016
February 29, 2016
February 29, 2016
February 29, 2016
February 29, 2016
90
EXHIBIT INDEX
Exhibit
Number
3.1
3.2
4.1
Description
Amended and Restated Articles of Incorporation of AxoGen, Inc. (incorporated by reference
to Appendix B to the Proxy Statement/Prospectus included as part of LecTec Corporation’s
Amendment No. 2 to Registration Statement on Form S-4 filed on August 29, 2011)
AxoGen, Inc. Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the
Current Report on Form 8-K filed on August 26, 2015
Warrants to purchase Common Stock of Company attached as exhibits to Loan and Security
Agreement, dated as of September 30, 2011, by and among AxoGen, Inc. and AxoGen
Corporation, as borrower, Midcap Financial SBIC, LP, as administrative agent, and the
Lenders listed on Schedule 1 thereto (Incorporated by reference to the Company’s Current
Report on Form 8-K filed on October 6, 2011)
*10.1
Patent License Agreement, dated as of August 3, 2005, by and between AxoGen Corporation
and the Board of Regents of the University of Texas System (incorporated by reference to the
Company’s Current Report on Form 8-K filed on October 6, 2011)
*10.2
*10.3
Amended and Restated Standard Exclusive License Agreement with Sublicensing Terms,
dated as of February 21, 2006, by and between AxoGen Corporation and the University of
Florida Research Foundation, Inc. (incorporated by reference to the Company’s Current
Report on Form 8-K filed on October 6, 2011)
Sid Martin Biotechnology Development Institute Incubator License Agreement, dated as of
September 26, 2006, by and between AxoGen, Inc. and the University of Florida Research
Foundation, Inc. (incorporated by reference to the Company’s Current Report on Form 8-K
filed on October 6, 2011)
*10.4.1
Amended and Restated Nerve Tissue Processing Agreement, dated as of February 27, 2008,
by and between AxoGen Corporation and LifeNet Health (incorporated by reference to the
Company’s Current Report on Form 8-K filed on October 6, 2011)
*10.4.2
Second Amendment to Amended and Restated Nerve Tissue Processing Agreement, dated as
of August 9, 2011, by and between AxoGen Corporation and LifeNet Health (incorporated by
reference to the Company’s Current Report on Form 8-K filed on October 6, 2011)
*10.4.3
Third Amendment to Amended and Restated Nerve Tissue Processing Agreement, dated as of
March 12, 2012, by and between AxoGen Corporation and LifeNet Health (incorporated by
reference to the Company’s Annual Report on Form 10-K filed for the year ended December
31, 2011)
*10.4.4
Fourth Amendment to Amended and Restated Nerve Tissue Processing Agreement, dated as
of September 8, 2014, by and between AxoGen Corporation and LifeNet
Health (incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2014)
*10.5.1
Distribution Agreement, dated as of August 27, 2008, by and between AxoGen, Inc. and Cook
Biotech Incorporated (incorporated by reference to the Company’s Current Report on Form 8-
K filed on October 6, 2011)
10.5.2
Amendment dated March 14, 2012 to Distribution Agreement, dated as of August 27, 2008,
by and between AxoGen, Inc. and Cook Biotech Incorporated (incorporated by reference to
the Company’s Annual Report on Form 10-K for the year ended December 31, 2011)
91
Exhibit
Number
*10.6.1
Description
Revenue Interests Purchase Agreement, dated as of October 5, 2012, by and among
AxoGen, Inc. and PDL BioPharma, Inc. (incorporated by reference to the Company’s
Amendment No. 1 on Form 10-K/A filed on August 7, 2013 to the Company’s Annual Report
on Form 10-K for the year ended December 31, 2012)
*10.6.2
Guarantee and Collateral Agreement, dated as of October 5, 2012, by and among
AxoGen, Inc. and AxoGen Corporation and PDL BioPharma, Inc. (incorporated by reference
to the Company’s Amendment No. 1 on Form 10-K/A filed on August 7, 2013 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 2012)
10.6.3
10.6.4
Interim Revenue Interests Purchase Agreement dated August 14, 2012, by and between
AxoGen, Inc. and PDL BioPharma, Inc. (incorporated by reference to the Company’s
Quarterly Report on Form 10-Q for the quarter ended September 30, 2012)
Amendment dated July 26, 2013 to Revenue Interests Purchase Agreement, dated, dated as of
October 5, 2012, by and between AxoGen, Inc. and PDL BioPharma, Inc. (incorporated by
reference to the Company’s Amendment No. 3 to Registration Statement on Form S-1
(registration No. 333-188597) filed with the Securities and Exchange Commission on
July 30, 2013)
10.7
LecTec Corporation 2010 Stock Incentive Plan, Amended and Restated on September 27,
2011 (incorporated by reference to Appendix E to the Proxy Statement/Prospectus included
as part of LecTec Corporation’s Amendment No. 2 to Registration Statement on Form S-4
filed on August 29, 2011)
**10.8.1
Executive Employment Agreement, effective as of October 15, 2007, by and between
AxoGen Corporation and Karen Zaderej (incorporated by reference to the Company’s
Current Report on Form 8-K filed on October 6, 2011)
**10.8.2
Amendment to Executive Employment Agreement, effective as of September 29, 2011, by
and between AxoGen Corporation and Karen Zaderej (incorporated by reference to the
Company’s Current Report on Form 8-K filed on October 6, 2011)
**10.9.1
Executive Employment Agreement, effective as of May 6, 2003, by and between AxoGen
Corporation and John P. Engels (incorporated by reference to the Company’s Current Report
on Form 8-K filed on October 6, 2011)
**10.9.2
Amendment to Executive Employment Agreement, effective as of September 29, 2011, by
and between AxoGen Corporation and John P. Engels (incorporated by reference to the
Company’s Current Report on Form 8-K filed on October 6, 2011)
10.10.1
Lease dated as of February 6, 2007, by and between AxoGen Corporation and WIGSHAW,
LLC, its successors and assigns (incorporated by reference to the Company’s Quarterly
Report on Form 10-Q filed on November 14, 2011)
10.10.2
Second Amendment dated February 27, 2013 to lease dated as of February 6, 2007, by and
between AxoGen Corporation and WIGSHAW, LLC, its successors and assigns
(incorporated by reference to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2012)
92
Exhibit
Number
10.10.3
Description
Third Amendment dated November 12, 2013 to lease dated as of February 6, 2007, by and
between AxoGen Corporation and SHN Medical Office Properties, its successors and assigns
(incorporated by reference to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2013)
**10.11
Form of Employee Incentive Stock Option Agreement (incorporated by reference to the
Company’s Current Report on Form 8-K filed on September 26, 2007)
**10.12.1
Executive Employment Agreement, effective as of October 1, 2011, by and between
AxoGen, Inc. and Gregory G. Freitag (incorporated by reference to the Company’s Annual
Report on Form 10-K for the year ended December 31, 2011)
**10.12.2
Amendment to Executive Employment Agreement, effective as of May 11, 2014, by and
between AxoGen, Inc. and Greg Freitag (incorporated by reference to the Company’s
Quarterly Report on Form 10-Q filed on August 4, 2014)
**10.12.3 Amendment No. 2 to Employment Agreement, dated as of August 6, 2015, by and between
Gregory G. Freitag and AxoGen, Inc. (incorporated by reference to the Company’s Quarterly
Report on Form 10-Q filed on November 5, 2015)
**10.13
Executive Employment Agreement, effective as of February 27, by and between
AxoGen, Inc. and Jill Schiaparelli (incorporated by reference to the Company’s Annual
Report on Form 10-K for the year ended December 31, 2011)
10.14.1
Commercial Lease dated October 25, 2013 by and between AxoGen Corporation and Ja-Cole,
as amended December 10, 2013. (incorporated by reference to the Company’s Annual Report
on Form 10-K for the year ended December 31, 2013)
10.14.2 Commercial Lease dated April 21, 2015 by and between AxoGen Corporation and Ja-Cole,
L.P. (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on
April 22, 2015)
10.14.3 Amendment No. 1 to Boone Business Park Commercial Lease dated April 21, 2015 by and
between AxoGen Corporation and Ja-Cole, L.P. (incorporated by reference to Exhibit 10.2 to
the Current Report on Form 8-K filed on April 22, 2015).
10.15 License and Services Agreement, dated as of August 6, 2015, by and between AxoGen
Corporation and Community Blood Center (d/b/a Community Tissue Services) (incorporated
by reference to the Company’s Quarterly Report on Form 10-Q filed on November 5, 2015)
**10.16
Executive Employment Agreement, effective as of February 25, 2013, by and between
AxoGen, Inc. and Shawn McCarrey (incorporated by reference to the Company’s Quarterly
Report on Form 10-Q for the quarter ended March 31, 2013)
**10.17
Executive Employment Agreement, dated May 12, 2014, between Lee R. Johnston, Jr. and
AxoGen Corporation, a wholly owned subsidiary of AxoGen, Inc. (incorporated by reference
to the Company’s Quarterly Report on Form 10-Q filed on August 4, 2014)
*10.18.1
Term Loan Agreement dated as of November 12, 2014 among AxoGen, Inc. as Borrower,
AxoGen Corporation, as Guarantor, the Lenders party hereto and Three Peaks Capital S.a.r.l.,
as Administrative Agent and Collateral Agent. (incorporated by reference to Amendment No.
1 on Form 8-K/A (to the Company’s Current Report on Form 8-K filed on November 13,
2014) filed on February 4, 2015)
93
Exhibit
Number
10.18.2
Description
Revenue Interest Agreement dated as of November 12, 2014 among AxoGen, Inc., AxoGen
Corporation and Three Peaks Capital S.a.r.l. (incorporated by reference to Amendment No. 1
on Form 8-K/A (to the Company’s Current Report on Form 8-K filed on November 13,
2014) filed on February 4, 2015)
10.18.3
Security Agreement dated as of November 12, 2014 among AxoGen, Inc., AxoGen
Corporation and Three Peaks Capital S.a.r.l. (incorporated by reference to Amendment No. 1
on Form 8-K/A (to the Company’s Current Report on Form 8-K filed on November 13,
2014) filed on February 4, 2015)
10.19
Securities Purchase Agreement dated as of November 12, 2014, between AxoGen, Inc., and
PDL BioPharma, Inc. (incorporated by reference to Amendment No. 1 on Form 8-K/A (to
the Company’s Current Report on Form 8-K filed on November 13, 2014) filed on February
4, 2015)
10.20 Securities Purchase Agreement, dated as of August 26, 2015, between AxoGen, Inc and
Essex Woodlands Fund IX, L.P.
10.21 Asset Assignment Agreement, dated November 4, 2014 by and between AxoGen
Corporation and Sensory Management Services LLC.
+21.1 Subsidiary of the Registrant
+23.1 Consent of Lurie, LLP
++24.1 Power of Attorney
+31.1 Certification of Principal Executive Officer
+31.2 Certification of Principal Financial Officer
+++32.1
Chief Executive Officer Certification Pursuant to 18 U.S.C. 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002.
+101.INS XBRL Instance 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.
*
Confidential treatment has been granted for portions of this Exhibit pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934 as amended. The confidential portions have been deleted and filed
separately with the United States Securities and Exchange Commission.
** Management contract or compensatory plan or arrangement.
+
Filed herewith.
94
++
Included on signature page.
+++ Furnished herewith.
95
SUBSIDIARY OF AXOGEN, INC.
EXHIBIT 21.1
As of December 31, 2015, AxoGen Inc.’s sole subsidiary was AxoGen Corporation, a Delaware corporation.
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements of AxoGen, Inc. on Form S-3
(File No. 333-195588) and Form S-8 (File Nos. 333-201238 and 333-177980) of our report dated February 29,
2016, appearing in this annual report on form 10-K of AxoGen, Inc. as of and for the years ended
December 31, 2015 and 2014.
EXHIBIT 23.1
/s/ LURIE, LLP
Minneapolis, Minnesota
February 29, 2016
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
EXHIBIT 31.1
I, Karen Zaderej, certify that:
1. I have reviewed this annual report on Form 10-K of AxoGen, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have;
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: February 29, 2016
/s/ Karen Zaderej
Karen Zaderej
Chief Executive Officer
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
EXHIBIT 31.2
I, Greg Freitag, certify that:
1. I have reviewed this annual report on Form 10-K of AxoGen, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have;
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: February 29, 2016
Ge
/s/ Greg Freitag
Greg Freitag
Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES —OXLEY ACT OF 2002
In connection with the Annual Report of AxoGen, Inc. (the “Company”) on Form 10-K for the year ended
December 31, 2015 as filed with the Securities and Exchange Commission (the “Report”), I, Karen Zaderej,
Chief Executive Officer and Greg Freitag, Chief Financial Officer, certify, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act
of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.
/s/ Karen Zaderej
Karen Zaderej
Chief Executive Officer
February 29, 2016
/s/ Greg Freitag
Greg Freitag
Chief Financial Officer
February 29, 2016