# Axogen, Inc. (AXGN) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Axogen, Inc.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/805928/000080592822000026/axgn-20211231.htm
Accession: 0000805928-22-000026
Filing date: 2022-02-25
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/AXGN/
All MD&A years: /company/AXGN/mda/
Next year: /company/AXGN/mda/fy2022/ (FY 2022)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following information should be read in conjunction with our consolidated financial statements and the notes thereto contained in Item 8 of this Form 10-K, “Forward-Looking Statements” contained in Part 1 of this Form 10-K, “Risk Factors” contained in Item 1A of this Form 10-K, and the other information appearing elsewhere in, or incorporated by reference into, this Form 10-K. Dollar amounts referenced in this Item 7 are in thousands, except per share amounts.

Overview

We are the leading company focused specifically on the science, development, and commercialization of technologies for peripheral nerve regeneration and repair. We are passionate about providing the opportunity to restore nerve function and quality of life for patients with peripheral nerve injuries. We provide innovative, clinically proven, and economically effective repair solutions for surgeons and healthcare providers. Peripheral nerves provide the pathways for both motor and sensory signals throughout the body. Every day, people suffer traumatic injuries or undergo surgical procedures that impact the function of their peripheral nerves. Physical damage to a peripheral nerve or the inability to properly reconnect peripheral nerves can result in the loss of muscle or organ function, the loss of sensory feeling, or the initiation of pain.

Our platform for peripheral nerve repair features a comprehensive portfolio of products, including Avance Nerve Graft, a biologically active off-the-shelf processed human nerve allograft for bridging severed peripheral nerves without the comorbidities associated with a second surgical site; Axoguard Nerve Connector, a porcine (pig) submucosa ECM coaptation aid for tensionless repair of severed peripheral nerves; Axoguard Nerve Protector, a porcine submucosa ECM product used to wrap and protect damaged peripheral nerves and reinforce the nerve reconstruction while preventing soft tissue attachments; Axoguard Nerve Cap, a porcine submucosa ECM product used to protect a peripheral nerve end and separate the nerve from the surrounding environment to reduce the development of symptomatic or painful neuroma; Avive Soft Tissue Membrane, a processed human umbilical cord intended for surgical use as a resorbable soft tissue conduit; and Axotouch Two-Point Discriminator, used to measure the innervation density of any surface area of the skin. Our portfolio of products is available in the U.S., Canada, Germany, the UK, Spain, South Korea, and several other countries.

As previously announced, we suspended the market availability of Avive Soft Tissue Membrane ("Avive") effective June 1, 2021 and we continue discussions with the FDA to determine the appropriate regulatory classification and requirements for Avive. The suspension was not based on any safety or product issues or concerns with Avive. We seek to return Avive to the market, although we are unable to estimate the timeframe or provide any assurances that a return to the market will be achievable. Avive has historically represented approximately 5% of our revenues through the second quarter of 2021, and no Avive revenue was recorded in the third and fourth quarters of 2021.

Revenue from the distribution of our nerve repair products, Avance Nerve Graft, Axoguard Nerve Connector, Axoguard Nerve Protector, and Axoguard Nerve Cap, in the U.S. is the main contributor to our total reported sales and has been the key component of our growth to date.

We have experienced that surgeons initially are cautious adopters for peripheral nerve repair products. Surgeons typically start with a few cases and then wait and see the results of these initial cases. Active accounts are usually past this wait period and have developed some level of product reorder. These active accounts have typically gone through the committee approval process, have at least one surgeon who has converted a portion of his or her treatment algorithms of peripheral nerve repair to our portfolio and have ordered our products at least six times in the last twelve months. As of December 31, 2021, we had 951 active accounts, an increase of 6.5% from 893 one year ago. Active accounts are approximately 85% of our revenue. The top 10% of these active accounts continue to represent approximately 35% of our revenue. As our business continues to grow, we have transitioned to reporting a new account metric that we believe demonstrates the strength of adoption and potential revenue growth in accounts that have developed a more consistent use of our products in their nerve repair algorithm. We refer to these as core accounts which we define as accounts that have purchased at least $100,000 in the past 12 months. As of December 31, 2021, we had 294 core accounts, an increase of 9.3% from 269 one year ago. These core accounts represented approximately 60% of our revenue in 2021, which has remained consistent over the past two years.

COVID-19 Impact

In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. The global impact of COVID-19 has had a negative effect on the global economy, disrupting the financial markets and significantly impacting the medical industry. In response to COVID-19, our top priority has been the health and safety of those we serve, including healthcare professionals and their patients, as well as our employees, communities, and suppliers. We ensured employee compliance with state and local mandates as well as implemented certain cost mitigation initiatives in 2020 such as a reduction

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in pay levels, temporary suspension of tissue processing and deferral of certain projects, among other efforts. As economic activity began to normalize, we lifted these cost mitigation initiatives.

Although COVID-19 had a significant impact on our revenue growth in 2020, we were able to increase revenue in 2021 as compared to 2020. The rapid development and fluidity of the situation surrounding COVID-19 prevent any prediction as to the ultimate impact COVID-19 will have on our business as new variants continue to spread, causing global supply chain disruptions, labor shortages, and inflationary conditions.

Results of Operations

Comparison of the Years Ended December 31, 2021 and 2020

The following table sets forth, for the periods indicated, our results of operations expressed as dollar amounts and as percentages of total revenue:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020"],["","","","% of","","","","% of"],["","Amount","","Revenue","","Amount","","Revenue"],["","(dollars in thousands)"],["Revenues","$","127,358","","","100.0","%","","$","112,300","","","100.0","%"],["Cost of goods sold","22,931","","","18.0","","","21,581","","","19.2"],["Gross profit","104,427","","","82.0","","","90,719","","","80.8"],["Costs and expenses:"],["Sales and marketing","73,328","","","57.6","","","69,659","","","62.0"],["Research and development","24,177","","","19.0","","","17,846","","","15.9"],["General and administrative","32,338","","","25.4","","","26,396","","","23.5"],["Total costs and expenses","129,843","","","102.0","","","113,901","","","101.4"],["Loss from operations","(25,416)","","","(20.0)","","","(23,182)","","","(20.6)"],["Other (expense) income:"],["Investment income","93","","","0.1","","","605","","","0.5"],["Interest expense","(1,356)","","","(1.1)","","","(1,054)","","","(0.9)"],["Change in fair value of derivatives","(28)","","","\u2014","","","(117)","","","(0.1)"],["Other expense","(278)","","","(0.2)","","","(38)","","","\u2014"],["Total other (expense) income, net","(1,569)","","","(1.2)","","","(604)","","","(0.5)"],["Net loss","$","(26,985)","","","(21.2)","%","","$","(23,786)","","","(21.1)","%"]]
[[/GREPCENT_TABLE]]

Revenues

Revenues for the year ended December 31, 2021 increased $15,058, or 13.4%, to $127,358 as compared to $112,300 for the year ended December 31, 2020. In 2021, our revenues continued to recover from the initial phases of the COVID-19 pandemic that began in 2020, however revenues in the second half of 2021 were negatively impacted by lower procedure volume due to the impact of COVID-19 variants and related hospital staffing challenges. Revenue growth was driven by an increase in unit volume of approximately 8%, as well as the net impact of changes in prices and product mix of approximately 5%. The unit volume increase was attributed to growth in our core and active accounts. As of December 31, 2021, we had 951 active accounts, an increase of 6.5% from 893 one year ago and we had 294 core accounts, an increase of 9.3% from 269 one year ago.

Gross Profit

Gross profit for the year ended December 31, 2021 increased $13,708, or 15.1%, to $104,427 as compared to $90,719 for the year ended December 31, 2020. Gross margin increased to 82.0% for the year ended December 31, 2021 as compared to 80.8% for the year ended December 31, 2020. In 2021, we recorded a $1,429 charge reflecting the write-down of inventory and related production costs due to the suspension of Avive, which resulted in a 1.1% decrease in our gross margin. Gross margin was negatively impacted during 2020 due to lower revenue, idle facility charges and other increased period costs of

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approximately $2,000 in the second and third quarters resulting from our temporary suspension of tissue processing, as well as approximately $2,242 of inventory write-downs.

Costs and Expenses

Total costs and expenses increased $15,942, or 14.0%, to $129,843 for the year ended December 31, 2021 as compared to $113,901 for the year ended December 31, 2020. The increase in total costs and expenses over the prior year reflects a return to more normalized spending levels following the steep reduction in spend as a result of our cost mitigation initiatives enacted at the beginning of the COVID-19 pandemic, including increases of $4,129 in professional and consulting fees, $3,127 in occupancy-related expenses primarily attributable to our new lab and office facility in Tampa, $2,700 in general corporate expenses, $2,555 in marketing programs and travel as restrictions were lifted and access to hospitals and surgeons resumed and $1,462 in employee compensation where increases in salaries and non-cash stock compensation were partially offset by decreases in bonus' and commissions. As a percentage of total revenues, total costs and expenses increased slightly to 102.0% for the year ended December 31, 2021 as compared to 101.4% for the year ended December 31, 2020.

Sales and marketing expenses increased $3,669, or 5.3%, to $73,328 for the year ended December 31, 2021 as compared to $69,659 for the year ended December 31, 2020. This increase was primarily due to an increase of $2,459 in marketing programs and travel as restrictions were lifted and access to hospitals and surgeons resumed and an increase of $1,353 in occupancy-related expenses, partially offset by lower employee compensation of $667 primarily due to lower commissions. As a percentage of total revenues, sales and marketing expenses were 57.6% for the year ended December 31, 2021 as compared to 62.0% for the year ended December 31, 2020. We expect sales and marketing expenses will increase as pandemic-related restrictions in hospital access and travel normalize.

Research and development expenses increased $6,331, or 35.5%, to $24,177 for the year ended December 31, 2021 as compared to $17,846 for the year ended December 31, 2020. Product development expenses represented approximately 74% of total research and development expenses in the year ended December 31, 2021 as compared to 50% in the prior year. The increase in product development expenses reflect increased spending in specific programs, including our efforts related to the BLA for Avance Nerve Graft and a next generation Avance product. It is expected that costs associated with the BLA will continue to increase as we continue to invest in completing the license application. Additionally, we continue to conduct development efforts focused on both new peripheral nerve products and new peripheral nerve applications for our existing products. We pursue research grants to support research and early product development. Clinical trial expenses represented approximately 26% of research and development expenses in the year ended December 31, 2021 as compared to 50% in the prior year. As a percentage of total revenues, research and development expenses increased to 19.0% for the year ended December 31, 2021 as compared to 15.9% for the year ended December 31, 2020.

General and administrative expenses increased $5,942, or 22.5%, to $32,338 for the year ended December 31, 2021 as compared to $26,396 for the year ended December 31, 2020. The increase was primarily due to higher professional and consulting fees of $3,120, higher general corporate expenses of $2,057, and higher occupancy-related expenses of $585. Increases in salaries and non-cash stock compensation were partially offset by a decrease in incentive compensation. As a percentage of total revenues, general and administrative expenses increased to 25.4% for the year ended December 31, 2021 as compared to 23.5% for the year ended December 31, 2020.

Other Expense and Income

Total other expense increased $965, or 159.8%, to $1,569 for the year ended December 31, 2021 as compared to $604 for the year ended December 31, 2020. The increase in total other expense was primarily due to a decrease of $512 in investment income due to lower investment balances and falling yields and an increase of $302 in interest expense due to our Oberland debt facility, which began on June 30, 2020, with an additional borrowing on June 30, 2021. We capitalized interest of $4,277 and $997 during 2021 and 2020, respectively.

Income Taxes

We had no income tax expense or benefit for the years ended December 31, 2021 and 2020 due to the incurrence of net operating losses in both years, the benefits of which have been fully reserved. We do not believe that there are any additional tax expenses or benefits currently available.

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Comparison of the Years Ended December 31, 2020 and 2019

The following table sets forth, for the periods indicated, our results of operations expressed as dollar amounts and as percentages of total revenue:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2020","","2019"],["","Amount","","% of Revenue","","Amount","","% of Revenue"],["","(dollars in thousands)"],["Revenues","$","112,300","","","100.0","%","","$","106,712","","","100.0","%"],["Cost of goods sold","21,581","","","19.2","","","17,349","","","16.3"],["Gross profit","90,719","","","80.8","","","89,363","","","83.7"],["Costs and expenses:"],["Sales and marketing","69,659","","","62.0","","","71,950","","","67.4"],["Research and development","17,846","","","15.9","","","17,514","","","16.4"],["General and administrative","26,396","","","23.5","","","31,305","","","29.3"],["Total costs and expenses","113,901","","","101.4","","","120,769","","","113.1"],["Loss from operations","(23,182)","","","(20.6)","","","(31,406)","","","(29.4)"],["Other (expense) income:"],["Investment income","605","","","0.5","","","2,364","","","2.1"],["Interest expense","(1,054)","","","(0.9)","","","(40)","","","\u2014"],["Change in fair value of derivatives","(117)","","","(0.1)","","","\u2014","","","\u2014"],["Other expense","(38)","","","\u2014","","","(53)","","","\u2014"],["Total other (expense) income, net","(604)","","","(0.5)","","","2,271","","","2.1"],["Net loss","$","(23,786)","","","(21.1)","%","","$","(29,135)","","","(27.3)","%"]]
[[/GREPCENT_TABLE]]

Revenues

Revenues for the year ended December 31, 2020 increased $5,588, or 5.2%, to $112,300 as compared to $106,712 for the year ended December 31, 2019. During the on-set of COVID-19, certain hospitals and surgery centers discontinued elective surgeries and our sales force was not allowed to enter the hospitals. This significantly reduced our revenue growth. Once elective surgeries resumed, hospitals allowed our sales representatives to begin entering their facilities once again. As a result, we began to experience a return in revenues as these facilities began scheduling surgeries, although restrictions continued to limit our access in certain accounts as local communities addressed resurgences of COVID-19. Revenue growth was driven by an increase in unit volume of approximately 2%, as well as the net impact of changes in prices and product mix of approximately 3%. The growth in unit volume was primarily attributed to unit growth in our active accounts. In the fourth quarter of 2020, we had 893 active accounts, an increase of 12% from 797 at the end of 2019.

Gross Profit

Gross profit for the year ended December 31, 2020 increased $1,356, or 1.5%, to $90,719 as compared to $89,363 for the year ended December 31, 2019. Gross profit increased during 2020 due to an increase in revenue, offset by the impact of COVID-19. Gross profit margin in 2020 decreased to 80.8% as compared to 83.7% in 2019. Gross margin was negatively impacted during 2020 due to idle facility charges and other increased period costs of approximately $2,000 in the second and third quarters resulting from our temporary suspension of tissue processing, as well as approximately $2,242 of inventory write-downs.

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Costs and Expenses

Total costs and expenses decreased $6,868, or 5.7%, to $113,901 for the year ended December 31, 2020 as compared to $120,769 for the year ended December 31, 2019. The decrease in operating expenses was primarily attributable to the impact of our lower travel and in-person surgeon education programs of $9,807 as a result of restrictions associated with COVID-19, as well as decreased litigation expenses of $2,467 as a result of reaching deductible limits with respect to certain litigation matters. These decreases were slightly offset by higher sales commissions and other compensation-related costs of $5,519. As a percentage of revenues, total costs and expenses decreased to 101.4% in 2020 compared to 113.1% in 2019.

Sales and marketing expenses decreased $2,291, or 3.2%, to $69,659 for the year ended December 31, 2020 as compared to $71,950 for the year ended December 31, 2019. This decrease was driven by lower travel, surgeon education and conference expenses as we cancelled in-person education programs, and experienced restrictions in hospital access and travel directly related to the impact of COVID-19. The decrease in expenses was slightly offset by salaries and benefits from increased sales commissions. As a percentage of revenues, sales and marketing expenses were 62.0% for the year ended December 31, 2020 compared to 67.4% for the year ended December 31, 2019.

General and administrative expenses decreased $4,909, or 15.7%, to $26,396 for the year ended December 31, 2020 as compared to $31,305 for the year ended December 31, 2019. The decrease was primarily due to lower litigation expenses as a result of reaching deductible limits with respect to certain litigation matters as well as a decrease in stock compensation. As a percentage of revenues, general and administrative expenses decreased to 23.5% for the year ended December 31, 2020 compared to 29.3% for the year ended December 31, 2019.

Research and development expenses slightly increased to $17,846 for the year ended December 31, 2020 as compared to $17,514 for the year ended December 31, 2019. Research and development costs include our product development efforts as well as non-clinical spend in support of our BLA for Avance Nerve Graft, and clinical trials. Product development expenses represented approximately 50% of total research and development expense in the year ended December 31, 2020 as compared to 52% in the prior year period. Clinical trial expenses represented approximately 50% of research and development expense in the year ended December 31, 2020 as compared to 48% in the prior year period. COVID-19 negatively impacted certain of our clinical study programs as certain study sites restricted access and reallocated their resources to focus on COVID-19 related care. Included within clinical trial expenses are clinical trial costs associated with the BLA. Our continued efforts related to the BLA drove the slight increase in research and development expenses year over year. As a percentage of revenues, research and development expenses decreased to 15.9% in 2020 from 16.4% in 2019.

Other Expense and Income

Interest expense increased to $1,054 for the year ended December 31, 2020 as compared to $40 for the year ended December 31, 2019. The change is primarily due to interest expense from our Oberland debt facility, which began on June 30, 2020. We recognized total interest charges of $1,941 in connection with the Oberland debt facility in the current year, but $997 of this interest was capitalized to the construction costs of the APC Facility. For the year ended December 31, 2020, we recognized $605 of investment income from our asset management and cash investment sweep accounts as compared to $2,364 for the year ended December 31, 2019. The decrease is primarily due to lower investment income from our asset management program as a result of lower interest rates from COVID-19 and as we lowered investment balances and increased cash reserves.

Income Taxes

We had no income tax expense or benefit for 2020 or 2019 due to the incurrence of net operating losses in both years, the benefits of which have been fully reserved. We do not believe that there are any additional tax expenses or benefits currently available.

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Liquidity and Capital Resources

General

As of December 31, 2021, our principal sources of liquidity were our cash and cash equivalents and investments totaling $84,086. Our cash equivalents are comprised of a money market mutual fund and our investments are comprised of short-term commercial paper and U.S. Treasuries. Our cash and cash equivalents and investments decreased $19,880 from $103,966 at December 31, 2020 primarily as a result of renovating the APC Facility and increasing the inventory level, partially offset by cash flow from employee stock option exercises and ESPP stock purchases and sales of investments.

We had working capital of $102,756 and a current ratio of 5.2x at December 31, 2021, compared to working capital of $122,420 and a current ratio of 6.4x at December 31, 2020. The decrease in working capital at December 31, 2021 as compared to December 31, 2020, was primarily due to the decrease in cash and cash equivalents used to renovate the APC Facility, which is a non-current asset, and the year over year improvement in the cash collections cycle, as accounts receivable increased 2.2% with revenue growth of 13.4%. The decrease in the current ratio at December 31, 2021, as compared to December 31, 2020, was primarily due to a decrease in cash and cash equivalents.

As of December 31, 2021, total current liabilities were $24,293. Based on current estimates, we believe that our existing cash and cash equivalents and investments, as well as cash provided by sales of our products will allow us to fund our operations through at least the next 12 months. Our future capital requirements depend on a number of factors including, without limitation, our growth rate, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the acquisition and/or development of new products and the cost of products. We could face increasing capital needs. Such capital needs could be substantial depending on the extent to which we are unable to increase revenue.

If we need additional capital in the future, we 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 our shareholders. There is no assurance that we will be able to secure funding on terms acceptable to us, or at all. The increasing need for capital could also make it more difficult to obtain funding through either equity or debt. Should additional capital not become available to us as needed, we may be required to take certain actions, such as slowing sales and marketing expansion, delaying regulatory approvals, or reducing headcount.

Cash Flow Information

The following table presents a summary of our cash flows from operating, investing and financing activities:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["(in thousands)","","2021","","2020","","2019"],["Net cash (used in) provided by:"],["Operating activities","","$","(13,405)","","","$","(9,626)","","","$","(19,872)"],["Investing activities","","(23,649)","","","(16,963)","","","27,271"],["Financing activities","","20,452","","","40,474","","","4,031"],["Net (decrease) increase in cash and cash equivalents","","$","(16,602)","","","$","13,885","","","$","11,430"]]
[[/GREPCENT_TABLE]]

Net Cash Used in Operating Activities

Operating activities for the year ended December 31, 2021 used $13,405 of cash, as compared to $9,626 and $19,872 for the years ended December 31, 2020 and 2019, respectively. The increase in operating cash outflows in 2021 was primarily due to unfavorable changes in working capital, as well as an increase in the net loss year over year. Net cash used in operations decreased in 2020 as compared to 2019 due primarily to favorable changes in working capital as well as a decrease in the net loss year over year.

Net Cash Used in/Provided by Investing Activities

Investing activities for the year ended December 31, 2021 used $23,649 of cash, as compared to $16,963 for the year ended December 31, 2020 and providing $27,271 of cash for the year ended December 31, 2019. The increase in investing cash outflows in the current year as compared to 2020 is principally attributable to higher levels of capital expenditures related to the renovation of the APC Facility. The increase in investing cash outflows in 2020 as compared to 2019 primarily related to

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capital expenditures for the APC Facility and our Tampa facility, partially offset by higher proceeds from the sale of investments in the prior year.

Net Cash Provided by Financing Activities

Financing activities for the year ended December 31, 2021 provided $20,452 of cash as compared to $40,474 and $4,031 for the years ended December 31, 2020 and 2019, respectively. The decrease in financing cash inflows in the current year as compared to 2020 was primarily due to the drawdown of the $15,000 second tranche of the long-term debt facility in the second quarter of 2021, as compared to a $35,000 drawdown of the first tranche in the second quarter of 2020, as well as $3,500 of proceeds from the exercise of the stock options related to the long-term debt in 2020. The 2020 improvement over 2019 was primarily the result of long-term borrowings of $35,000 as well as $3,500 of proceeds from the exercise of the stock options related to the long-term debt, see "Note 10 - Long-Term Debt, Net of Financing Fees in the Notes to the Consolidated Financial Statements" for further discussion. Proceeds from the exercise of stock options and ESPP stock purchases, excluding the stock options exercised related to the long-term debt, provided $5,467, $3,300, and $4,002 of cash for the years ended December 31, 2021, 2020, and 2019, respectively.

Operating Cash Requirements

On July 9, 2019, we entered into a Standard Form of Agreement Between Owner and Design-Builder (the “Design-Build Agreement”) with CRB Builders, L.L.C., a Missouri limited liability company (“CRB”), pursuant to which CRB will renovate and retrofit the APC Facility (See "Note 14 - Commitments and Contingencies in the Notes to the Consolidated Financial Statements"). The estimated cost pursuant to the Design-Build Agreement was $29,300. Additional costs associated with the renovation, validation and certification of the APC Facility are estimated to be $20,900, plus projected capitalized interest of $11,300. We have recorded $40,544 to date related to this project, including capitalized interest of $5,274. We anticipate spending $19,300, including projected capitalized interest of $6,100 in 2022 and an additional $1,700 in 2023. We anticipate that this building will be completed in early 2022, followed by a year-long process to validate and certify the facility by early 2023. We anticipate commencing tissue processing in the facility upon completion of the validation and certification process.

Credit Facilities

On June 30, 2020, we entered into a seven-year financing agreement with Oberland Capital (the “Oberland Facility”) and obtained the first tranche of $35,000 at closing. On June 30, 2021, we drew down the second tranche of $15,000. The financing costs for this facility were $642 and were recorded as a contra liability to the debt facility. As of December 31, 2021, we have paid all of the financing costs.

The Oberland Facility requires quarterly interest payments for seven years. Interest is calculated as 7.5% plus the greater of the London Interbank Offered Rate ("LIBOR") or 2.0% (9.5% as of December 31, 2021). Each tranche of the Oberland Facility has a term of seven years from the date of issuance (with the first tranche issued on June 30, 2020, maturing on June 30, 2027 and the second tranche issued on June 30, 2021, maturing on June 30, 2028). In connection with the Oberland Facility, we entered into a revenue participation agreement with Oberland Capital, which provides that, among other things, a quarterly royalty payment as a percentage of our net revenues, up to $70 million in any given year, subject to certain limitations set forth therein, during the period commencing on the later of (i) April 1, 2021 and (ii) the date of funding of a tranche of the loan, and ending on the date upon which all amounts owed under the Oberland Facility have been paid in full (the “Revenue Participation Agreement”). Royalty payments commenced on September 30, 2021. This royalty structure results in approximately 1.0% per year of additional interest payments on the outstanding loan amount. Upon maturity or upon such earlier repayment of the Oberland Facility, we will repay the principal balance and provide a make-whole payment calculated to generate an internal rate of return to Oberland Capital equal to 11.5%, less the total of all quarterly interest and royalty payments previously paid to Oberland Capital.

Contractual Obligations and Commitments

See "Note 14 - Commitments and Contingencies in the Notes to the Consolidated Financial Statements" for further information.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the U.S. (“US GAAP”). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and

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reported amount of expenses during the period reported. Management bases its estimates and judgments on historical experience, observance of trends in the industry, information provided by outside sources and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We have described the critical accounting policies regarding inventory, derivative instruments and stock-based compensation and our significant accounting policies in Note 3 - Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements included in this Form 10-K.

Recent Accounting Pronouncements

See "Note 3 - Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements" for further information.