Axogen, Inc.: Form 10-Q for the period ended Sep 30, 2023

The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes thereto appearing elsewhere in this report and our consolidated financial statements for the year ended December 31, 2022, included in our Annual Report on Form 10-K. All dollar amounts in the discussion and analysis, unless noted otherwise, are presented in thousands.

Unless the context otherwise requires, all references in this report to “Axogen,” the “Company,” “we,” “us” and “our” refer to Axogen, Inc., and its wholly owned subsidiaries Axogen Corporation (“AC”), Axogen Processing Corporation, Axogen Europe GmbH and Axogen Germany GmbH.

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.

Product Portfolio

• 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 extracellular matrix ("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 HA+ Nerve Protector™, is comprised of a processed porcine submucosa ECM base layer with a hyaluronate-alginate gel coating designed to provide short- and long-term protection for peripheral nerve injuries. The gel layer facilitates enhanced nerve gliding to aid in minimizing soft tissue attachments, while the base layer is remodeled into a long-term protective tissue layer.
• 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.
• Axotouch® Two-Point Discriminator, used to measure the innervation density of any surface area of the skin.

Our portfolio of products is currently available in the United States, Canada, Germany, United Kingdom, Spain and several other European, Asian and Latin American countries.

Revenue from the distribution of our nerve repair products, Avance® Nerve Graft, Axoguard Nerve Connector®, Axoguard Nerve Protector®, Axoguard HA+ Nerve Protector™, and Axoguard Nerve Cap®, in the United States ("U.S.") is the main contributor to our total reported sales and have been the key component of our growth to date.

As previously announced, we suspended the market availability of Avive® Soft Tissue Membrane ("Avive") on June 1, 2021, to have discussions with the U.S. Food and Drug Administration ("FDA") about the appropriate regulatory classification and requirements for Avive. The suspension was not based on any known or reported safety or product performance issues or concerns with Avive. Based on preliminary feedback from FDA on the product classification and regulatory pathway, we have decided not to continue discussions with FDA and will not pursue regulatory approval for Avive. Therefore, we will not seek to return Avive to the market. We are working on developing a replacement product called Avive + that would not require a BLA and would fall under the criteria set forth in 21 CFR 1271.10(a) for regulation solely under Section 361 of the Public Health Service Act and the regulations in 21 CFR Part 1271. We seek to launch Avive+ in the first quarter of 2024. Products regulated solely under Section 361 of the Public Health Service Act are a product category under close scrutiny by FDA for compliance with the regulatory requirements and potentially subject to regulatory change in the future. Failure to comply with applicable regulatory requirements could expose us to potential compliance actions by FDA or state regulators and could risk the commercial availability of the product.

We have observed that surgeons are initially cautious adopters of nerve repair products. Surgeons typically start with a few cases and then wait and review 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 Value Analysis 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 September 30, 2023, we had 1016 active accounts, an increase of 6.7% from 952 as of September 30, 2022, and an increase of 4.3% from 974 compared to June 30, 2023. Active accounts are approximately 85% of our revenue. The top 10% of these active accounts continue to represent approximately 40% of our revenue.

Core accounts are defined as accounts that have purchased at least $100,000 in the past twelve months. As of September 30, 2023, we had 372 core accounts, an increase of 12% from 331 as of September 30, 2022, and an increase of 7.2% from 347 compared to June 30, 2023. These core accounts represented approximately 65% of our revenue in the quarter, which increased from approximately 60% over the past several quarters.

Our business was originally anchored in emergent trauma and over the past several years we have introduced a number of new nerve repair applications that utilize our Avance and Axoguard product lines. These new applications share common characteristics that now lead us to think about our business along two primary categories, scheduled non-trauma (“Scheduled”) procedures, and emergent trauma (“Emergent”) procedures.

Scheduled procedures are generally characterized as procedures where a patient is seeking relief of a condition caused by a nerve defect or surgical procedure. These include breast reconstruction following a mastectomy, nerve reconstruction following the surgical removal of painful neuromas, oral and maxillofacial procedures, and nerve decompression.

The nature of Scheduled procedures affords patients the opportunity to actively search for treatment options and advocate for solutions that may improve quality of life following the procedure. For example, in breast reconstruction, this may include prioritizing neurotization as a part of their treatment plan. These procedures lend themselves to standardization of surgical techniques and more consistent nerve repair algorithms. In addition, these patients are likely to engage in extended follow-up evaluations with their physicians.

Emergent procedures generally result from injuries that initially present in an emergency room. These procedures are typically referred to and completed by a specialist either immediately or within a few days following the initial injury. Given the emergent and diverse nature of traumatic injuries, the required repair algorithm and procedure scheduling can be highly variable, and follow-up evaluations are generally inconsistent.

While the various applications can have unique surgeon customers, the procedures are often performed in the same accounts and use the same family of Axogen products. Scheduled procedures typically have a higher value of Axogen products used per procedure as compared to routine trauma; and, given the planned nature of these procedures, there is a higher level of predictability and are generally additive to our sales rep productivity.

Reporting by application has historically been challenging. However, we have recently developed improved analytical tools that we believe allow us to better monitor product utilization data within accounts and generate improved estimates of our revenue by application. We estimate revenue by application using the information received from hospitals and sales representatives based on assumptions regarding specific surgeon practice and account information. Accordingly, the accuracy of our estimates is subject to the limited data we receive and the accuracy of those assumptions.

We estimate that the mix of Scheduled and Emergent procedures for fiscal year 2022 was approximately 45% Scheduled and 55% Emergent. For the nine months ended September 30, 2023, the mix has shifted to approximately 50% Scheduled and 50% Emergent; and we expect Scheduled procedure growth will continue to outpace Emergent procedure growth and continue to become a larger mix of our revenue over time.

Summary of Operational and Business Highlights

• Revenues were $41,271 for the quarter ended September 30, 2023, an increase of $4,312 or 11.7% compared to the quarter ended September 30, 2022.
• We estimate revenues from Emergent procedures represented approximately half of total revenues for the quarter ended September 30, 2023, and grew in the mid-single digit percent percent range from the quarter ended September 30, 2022.
• We estimate revenues from Scheduled non-trauma procedures represented approximately half of total revenues for the quarter ended September 30, 2023, and grew approximately 20% from the quarter ended September 30, 2022.
• Gross profit was $33,228 for the quarter ended September 30, 2023, an increase of $2,445 or 7.9% compared to the quarter ended September 30, 2022.
• We had 116 and 115 direct sales representatives as of September 30, 2023, and December 31, 2022.
• The Company is continuing to expand its offering in the nerve protection market with the national launch of Axoguard HA+ Nerve Protector™ in August, and expects to launch Avive+ Soft Tissue Matrix™ in the first quarter of 2024
• We ended the quarter with over 200 peer-reviewed clinical publications featuring our nerve repair product portfolio.
• In August. the Company began processing tissue in the new, state-of-the-art APC facility, which provides for up to 3 times current capacity and was designed for future growth and expansion
• The Company continues to anticipate a Pre-BLA meeting with the FDA in the first quarter of 2024 where it will request utilization of a rolling submission process for the Biologics License Application (BLA) for Avance Nerve Graft which would begin later in the first quarter. The Company anticipates completing the submission in the second quarter of 2024 and believes this process will support BLA approval in the first half of 2025.
• The Company has exceeded its initial goal of training 20 new surgical teams on new techniques in implant-based Resensation® and now expects to have more than 30 teams trained by the end of this year.

Results of Operations

Comparison of the Three Months Ended September 30, 2023, and 2022

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

(dollars in thousands)

Revenues

Revenues for the three months ended September 30, 2023, increased $4,312 or 12% to $41,271 as compared to $36,959 for the three months ended September 30, 2022. The increase in revenue was driven by an increase in unit volume of 8%, and a 3.5% increase in prices.

Gross Profit

Gross profit for the three months ended September 30, 2023, increased $2,445 or 8% to $33,228 as compared to $30,783 for the three months ended September 30, 2022. Gross margin was 80.5% and 83.3% for the three months ended September 30, 2023, and 2022, respectively.

Costs and Expenses

Total costs and expenses increased $1,615 or 5% to $37,253 for the three months ended September 30, 2023, as compared to $35,638 for the three months ended September 30, 2022. The net increase in total costs and expenses was primarily the result of increased compensation costs of $1,024 and marketing programs of $747, professional services of $562, partially offset by reduction in research and development projects of $750.

Sales and marketing expenses increased $1,637 or 8% to $21,429 for the three months ended September 30, 2023, as compared to $19,792 for the three months ended September 30, 2022. This increase was primarily attributable to marketing programs of $747, compensation costs of $354, and travel of $304.

Research and development expenses decreased $61 or 1% to $6,989 for the three months ended September 30, 2023, as compared to $7,050 for the three months ended September 30, 2022. The decrease was primarily due to product development and clinical expenses. Product development costs include spending in a number of specific programs including the non-clinical expenses related to the BLA for Avance Nerve Graft. Product development expenses represented approximately 62% and 50% of total research and development expense for the three months ended September 30, 2023, and 2022, respectively. Clinical trial expenses represented approximately 38% and 50% of total research and development expense the three months ended September 30, 2023, and 2022, respectively.

General and administrative expenses increased by $39 to $8,835 for the three months ended September 30, 2023, as compared to $8,796 for the three months ended September 30, 2022. The increase was primarily due to an increase in professional services of $605 and compensation costs of $178, partially offset by a decrease in bad debt expense of $290, insurance fees of $211, and other, net of $247.

Other Income and Expense

Other expense, net increased $601 or 112% to $64 for the three months ended September 30, 2023, as compared to other income, net of $537 for the three months ended September 30, 2022. The net increase in other expense was due to an increase in interest expense of $766 partially offset by an increase in investment income of $181.

Investment income increased $181 to $367 for the three months ended September 30, 2023, as compared to an investment income of $186 for the three months ended September 30, 2022. This change was primarily due to an increase in interest rates.

Interest expense increased $766 to $827 for the three months ended September 30, 2023, as compared to $61 for the three months ended September 30, 2022. The increase was primarily due to capitalizing less interest expense related to the Credit Facility for the three months ended September 30, 2023. We recognized total interest expense of $1,866 and $1,474 in connection with the Credit Facility for the three months ended September 30, 2023, and 2022, respectively, of which $1,043 and $1,450 of this interest was capitalized to the construction costs of the APC Facility during the third quarter of 2023 and 2022, respectively.

Taxes

We had no income tax expense or benefit during the three months ended September 30, 2023, and 2022 due to the incurrence of net operating losses in each of these periods, the benefits of which have a full valuation allowance. We do not believe that there are any additional tax expenses or benefits currently available.

Comparison of the Nine Months Ended September 30, 2023, and 2022

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

(dollars in thousands)

Revenues

Revenues for nine months ended September 30, 2023, increased $13,670 or 13% to $116,090 as compared to $102,420 for the nine months ended September 30, 2022. The increase in revenue was driven by an increase in unit volume of 8% as well as a 4% increase in prices and 2% in product mix.

Gross Profit

Gross profit for the nine months ended September 30, 2023, increased $9,696 or 11% to $94,110 as compared to $84,414 for the nine months ended September 30, 2022. Gross margin was 81% and 82% for the nine months ended September 30, 2023, and 2022, respectively.

Costs and Expenses

Total costs and expenses increased $3,866 or 4% to $112,379 for the nine months ended September 30, 2023, as compared to $108,513 for the nine months ended September 30, 2022. The net increase in total costs and expenses was primarily the result of increased compensation costs of $4,198, marketing programs of $1,210 and travel costs of $533 partially offset by decreases in projects of $1,612 and other, net of $472.

Sales and marketing expenses increased $3,536 or 6% to $63,885 for the nine months ended September 30, 2023, as compared to $60,349 for the nine months ended September 30, 2022. This increase was primarily attributable to other services of $1,238, marketing programs of $1,209, compensation costs of $531 and travel of $508.

Research and development expenses increased $685 or 3% to $21,032 for the nine months ended September 30, 2023, as compared to $20,347 for the nine months ended September 30, 2022. The increase was primarily due to product development and clinical expenses. Product development costs include spending in a number of specific programs including the non-clinical expenses related to the BLA for Avance Nerve Graft. Product development expenses represented approximately 60% and 51% of total research and development expense for the nine months ended September 30, 2023, and 2022, respectively. Clinical trial expenses represented approximately 40% and 49% of total research and development expense for the nine months ended September 30, 2023, and 2022, respectively.

General and administrative expenses decreased $355 or 1% to $27,462 for the nine months ended September 30, 2023, as compared to $27,817 for the nine months ended September 30, 2022. The decrease was primarily due to a reduction in bad debt expense of $877, insurance expense of $763, merchant fees of $743, professional services of $696, other, net of $384, occupancy related costs of $207 and travel of $94 partially offset by an increase in net compensation costs of $3,411.

Other Income and Expense

Other income, net decreased $121 to $445 for the nine months ended September 30, 2023, as compared to other income, net of $566 for the nine months ended September 30, 2022. The net decrease was driven by a reduction in the change in the fair value of the derivative of $506, an increase in interest expense of $326 and other expense of $266, partially offset by the increase in investment income of $979.

Investment income increased $979 to $1,151 for the nine months ended September 30, 2023, as compared to investment income of $172 for the nine months ended September 30, 2022. This change was primarily due to increased interest rates.

Interest expense increased $328 to $992 for the nine months ended September 30, 2023, as compared to $664 for the nine months ended September 30, 2022. The increase was primarily due to capitalizing the interest expense related to APC for the nine months ended September 30, 2023. We recognized total interest expense of $5,442 and $4,304 in connection with the Credit Facility for the nine months ended September 30, 2023, and 2022, respectively, of which $5,240 and $4,474 of this interest was capitalized to the construction costs of the APC Facility during the nine months ended September 30, 2023, and 2022, respectively. The increase in total interest expense over the prior period was the result of higher interest rates on the Credit Facility.

Income Taxes

We had no income tax expense or benefit during the nine months ended September 30, 2023, and 2022 due to the incurrence of net operating losses in each of these periods, the benefits of which have a full valuation allowance. We do not believe that there are any additional tax expenses or benefits currently available.

Critical Accounting Estimates

In preparing financial statements, we follow accounting principles generally accepted in the United States, which require us to make certain estimates and apply judgments that affect our financial position and results of operations. Management regularly reviews our accounting policies and financial information disclosures. A summary of significant accounting estimates that require the use of estimates and judgments in preparing the financial statements was provided in our 2022 Annual Report on Form 10-K. During the quarter covered by this report, there were no material changes to the accounting estimates and assumptions previously disclosed.

Liquidity and Capital Resources

As of September 30, 2023, our principal sources of liquidity were our cash and cash equivalents and investments totaling $32,588. Our cash equivalents are comprised primarily of a money market mutual fund and our investments consist of primarily short-term commercial paper and U.S. Treasuries. Our cash and cash equivalents and investments decreased $16,201 from $48,789 at December 31, 2022, primarily as a result of operating activities and renovating the APC Facility.

We had working capital of $60,793 and a current ratio of 3.3x at September 30, 2023, compared to working capital of $74,322 and a current ratio of 4.1x at December 31, 2022. The decrease in our working capital at September 30, 2023, as compared to December 31, 2022, was primarily due to cash used in operations and to renovate the APC Facility, which is included in non-current assets and used in operations. 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.

Cash Flow Information

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

(In thousands)

Net Cash Used in Operating Activities

Net cash used in operating activities was $5,505 and $17,428 during the nine months ended September 30, 2023, and 2022, respectively. The favorable change in net cash used in operating activities of $11,923, or 68%, is due to the decrease in net loss of $5,710 and the net favorable change of $5,157 in working capital accounts.

Net Cash Provided by (Used in) Investing Activities

Net cash provided by investing activities for the nine months ended September 30, 2023, was $19,530 as compared to net cash used in investing activities of $1,991 for the nine months ended September 30, 2022, an increase of $21,521, or 1081%. The increase of net cash provided by investing activities is principally due to the increase in the net proceeds from the sale and purchase of investments totaling $20,178, the reduction in purchases of property and equipment of $1,047 and the reduction in purchases of intangible assets of $297 during the nine months ended September 30, 2023.

Net Cash Provided by Financing Activities

Net cash provided by financing activities was $1,536 and $981 for the nine months ended September 30, 2023, and 2022, respectively, an increase of $555. The favorable change in net cash provided by financing activities was primarily due to the increase in proceeds from the exercise of stock options of $552 during the nine months ended September 30, 2023.

Sources of Capital

Our expected future capital requirements may depend on many factors including expanding our customer base and sales force and timing and extent of spending in obtaining regulatory approval and introduction of new products. Additional sources of liquidity available to us include issuance of additional equity securities through public or private equity offerings, debt financings or from other sources. The sale of additional equity may 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.

Contractual Obligations and Forward-Looking Cash Requirements

• Capital expenditures on an annual basis generally range from $3,000 to $5,000 as a use of cash.
• We lease facilities in Florida, Ohio and Texas, and as of September 30, 2023, our total remaining obligation related to operating and financing lease payments was $35,726, of which $3,303 is due in the next 12 months. See Note 7 - Leases.

Credit Facilities

As of September 30, 2023, we had $50,000 outstanding in indebtedness under a credit facility: $35,000 maturing on June 30, 2027, and $15,000 maturing on June 30, 2028. Quarterly interest only and revenue participation payments are due through each of the maturity dates. Interest is calculated as 7.5% plus the greater of three-month SOFR plus 0.1% ("Adjusted SOFR") or 2.0% (12.84% as of September 30, 2023). Revenue participation payments are calculated as a percentage of our net revenues, up to $70,000 in any given year, adding approximately 1.0% per year of additional interest payments on the outstanding indebtedness. Upon each maturity date or upon such date earlier repayment occurs, we will repay the principal balance and provide a make-whole payment calculated to generate an internal rate of return to the lender equal to 11.5%, less the total of all quarterly interest and revenue participation payments previously paid. See Note 8 - Long-Term Debt, Net of Debt Discount and Financing Fees and Note 12 - Commitments and Contingencies.

For a discussion of our market risks, refer to Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” included in our 2022 Annual Report on Form 10-K.

The amount of interest expense on the outstanding debt is based on Adjusted SOFR. Changes in the Adjusted SOFR rate may affect our interest expense associated with the Credit Facility. Based on the outstanding balance of the Credit Facility as of September 30, 2023, a hypothetical 100 basis point increase in the applicable rate would result in an increase to our annual interest expense of approximately $500.

Evaluation of Disclosure Controls and Procedures

We maintain “disclosure controls and procedures” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (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 our disclosure controls and procedures as of September 30, 2023, and concluded that our disclosure controls and procedures were effective.

Changes in Internal Controls Over Financial Reporting

There were no changes in our internal control over financial reporting during the three months ended September 30, 2023, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting (as defined in Rules 13a-15(d) or 15d-15(f) of the Exchange Act).

There have been no material changes to the risk factors disclosed in our 2022 Annual Report on Form 10-K, except as set forth below. Any investment in our business involves a high degree of risk. Before making an investment decision, you should carefully consider the information we include in this Quarterly Report on Form 10-Q, including our unaudited interim condensed consolidated financial statements and accompanying notes, our Annual Report on Form 10-K for the year ended December 31, 2022, including our financial statements and related notes contained therein, and the additional information in the other reports we file with the Securities and Exchange Commission. These risks may result in material harm to our business and our financial condition and results of operations. In this event, the market price of our common stock may decline, and you could lose part or all of your investment. Additional risks that we currently believe are immaterial may also impair our business operations. Our business, financial conditions and future prospects and the trading price of our common stock could be harmed as a result of any of these risks.

We are currently operating in a period of economic uncertainty and capital markets disruption, which has been significantly impacted by geopolitical instability and tensions, Russia's ongoing invasion of Ukraine and illegal annexation of Ukrainian territories, and record inflation and could materially and adversely affect our business, financial condition and results of operations.

We are exposed to the risk of changes in social, geopolitical, legal, and economic conditions. The global economy has been, and may continue to be, negatively impacted by Russia’s invasion of Ukraine and illegal annexation of Ukrainian territories. The negative impacts arising from the war and sanctions and export restrictions imposed by various countries, including those imposed by Russia, may include reduced consumer demand, supply chain disruptions, increased cybersecurity risks, and increased costs for transportation, energy, and raw materials. Additionally, further escalation of trade tensions between the U.S. and China, escalation of tensions between China and Taiwan, further escalation in the conflict between the State of Israel and Hamas, as well as further escalation of tensions between the State of Israel and various countries in the Middle East and North Africa, could result in a global economic slowdown and long-term changes to global trade. Although we do not have material operations in Russia, Ukraine, China, Taiwan, Israel or other countries in the Middle East and North Africa, further escalation of geopolitical tensions could have a broader impact that expands into other markets where we have material operations, which may adversely affect our business, financial condition and results of operations.

Further, changes in domestic and global economic conditions, supply chain disruptions, labor shortages, as well as other stimulus and spending programs, have led to higher inflation, which is likely to lead to increased costs and may cause changes in fiscal and monetary policy. Additionally, our ability to access capital markets and other funding sources in the future may not be available on commercially reasonable terms, if at all. Impacts from inflationary pressures, such as increasing costs for research and development of our products, administrative and other costs of doing business, could adversely affect our business, financial condition and results of operations.

Additionally, our customers could experience financial and operational pressures as a result of labor shortages, the supply chain disruptions, and increased inflation, which could impact their ability to access capital markets and other funding sources, increase cost of funding, or impede their ability to comply with debt covenants, which in turn could impede their ability to provide patient care, conduct further research and development, marketing and commercialization efforts, or impact their profitability. To the extent that our customers continue to face such financial pressures, it could impact their willingness to spend on our products and services, which could adversely affect our business, financial condition and results of operations.

Although, to date, our business has not been materially impacted by Russia's ongoing invasion of Ukraine and illegal annexation of Ukrainian territories, geopolitical tensions between China and the U.S., geopolitical tensions between China and Taiwan, the escalation of the conflict between the State of Israel and Hamas, or record inflation, it is impossible to predict the extent to which our operations could be impacted in the short and long term, or the ways in which such matters may impact our business.

Our failure to protect our technology systems and comply with data protection laws and regulations could lead to government enforcement actions and significant penalties against us, and adversely impact our business, results of operations, financial condition, and prospects.

We rely on information technology systems, including technology from third-party vendors, to process, transmit and store electronic information in our day-to-day operations. Similar to other companies, the size and complexity of our information technology systems makes them vulnerable to a cyber-attack, malicious intrusion, breakdown, destruction, loss of data privacy, or other significant disruption. Our information systems require an ongoing commitment of resources to maintain, protect and enhance existing systems and develop new systems to keep pace with continuing changes in information processing technology, evolving systems and regulatory standards and the increasing need to protect patient and customer information. We expend significant resources to comply with applicable data privacy and security laws and regulations (together with applicable industry standards) and minimize the risk of security breaches, including deploying additional personnel and protection technologies, training employees annually, and engaging third-party experts and contractors. Significant and increasing investments of time and resources by management and Board have been, and will continue to be, required to anticipate and address cybersecurity risks and incidents. However, given that the techniques used to obtain unauthorized access or to sabotage systems change frequently, and often are not identified until they are launched against a target, we may be unable to anticipate these techniques or implement adequate preventative measures in time to stop a cyber incident. Any failure by us to maintain or protect our information technology systems and data integrity could result in the unauthorized access to patient data and personally identifiable information, theft of intellectual property or other misappropriation of assets, or otherwise compromise our confidential or proprietary information and disrupt our operations. Cyber-attacks, intrusions, or other breaches could adversely impact our business, results of operations, financial condition, and prospects and potentially subject us to fines and penalties.

In the U.S., federal and state privacy and security laws require certain of our operations to protect the confidentiality of personal information, including patient medical records and other health information. Limiting and/or restricting the use of certain personal data and information, as well as added transparency obligations to data subjects is becoming an increasing focus as evidenced by the implementation of the California Consumer Privacy Act (“CCPA”) which became effective on January 1, 2020. In Europe, E.U. member states and other foreign jurisdictions, including Switzerland, have adopted data protection laws and regulations which impose significant compliance obligations. Moreover, the collection and use of personal health data in the E.U. is governed by the European Union General Data Protection Regulation (“GDPR”). The GDPR imposes several requirements relating to the consent of the individuals to whom the personal data relates, the information provided to the individuals, the security and confidentiality of the personal data, data breach notification and the use of third-party processors in connection with the processing of personal data. The GDPR also imposes strict rules on the transfer of personal data out of the E.U. to the U.S., provides an enforcement authority and imposes large penalties for noncompliance, including the potential for fines of up to 4% of the annual global revenue of the noncompliant company. The recent implementation of the GDPR has increased our responsibility and liability in relation to personal data that we process, including in clinical trials, and we may in the future be required to put in place additional mechanisms to ensure compliance with the GDPR, which could divert management’s attention and increase our cost of doing business. Additionally, we expect that there will be other proposed laws, regulations and industry standards relating to privacy and data protection in the U.S., the E.U. and other jurisdictions, and we cannot determine the impact such future laws, regulations and standards may have on our business results of operations, financial condition, and prospects.

We are dependent on internal information and telecommunications systems, and any failure of these systems, including system security breaches, data protection breaches or other cybersecurity attacks, may negatively impact our business and results of operations.

Cyber-attacks and other tactics designed to gain access to and exploit sensitive information by breaching mission critical systems of large organizations are constantly evolving and have been increasing in sophistication in recent years. High profile security breaches leading to unauthorized release of sensitive information have occurred with increasing frequency at a number of major U.S. companies, despite widespread recognition of the cyber-attack threat and improved data protection methods. While to date we have not experienced a significant data loss, significant compromise or any material financial losses related to cybersecurity attacks, our systems, those of our customers, and those of our third-party service providers are under constant threat. Cybercrime, including phishing, social engineering, attempts to overload our servers with denial-of-service attacks, or similar disruptions from unauthorized access to our systems, could cause us critical data loss or the disclosure or use of personal or other confidential information. Outside parties may attempt to fraudulently induce employees to disclose personally identifiable information or other confidential information which could expose us to a risk of loss or misuse of this information. Although we incur significant expenses to minimize the risk of security breaches, given that the techniques used to obtain unauthorized access or to sabotage systems change frequently, and often are not identified until they are launched against a target, we may be unable to anticipate these techniques of implement adequate preventive measures in time to stop or effectively mitigate a cyber incident.

We are dependent on internal information and telecommunications systems, and we are vulnerable to failure of these systems, including through system security breaches, data protection breaches or other cybersecurity attacks. If these events occur, the unauthorized disclosure, loss or unavailability of data and disruption to our business may have a material adverse effect on our reputation and harm our relationships with vendors and customers. Additionally, these events may lead to financial losses from remedial actions, or potential liability from fines, including in relation to noncompliance with the GDPR, as well as possible litigation and punitive damages. Failures of our internal information or telecommunications systems may prevent us from taking customer orders, shipping products and billing customers. Sales may also be impacted if our customers are unable to access our pricing and product availability information. The occurrence of any of these events could have a material adverse impact on our business and results of operations.