Axogen, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Unaudited consolidated results. Axogen develops and sells peripheral nerve repair products, primarily in the United States.
Financial performance
Amounts in $ millions except per-share data; comparisons are with the prior-year period.
| Metric | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 |
|---|---|---|---|---|
| Revenue | $38.2 | $34.5 | $74.8 | $65.5 |
| Gross profit | $30.9 | $28.2 | $60.9 | $53.6 |
| Gross margin | 81.1% | 81.8% | 81.4% | 81.9% |
| Operating loss | $(6.9) | $(7.9) | $(14.2) | $(19.2) |
| Net loss | $(6.7) | $(7.7) | $(13.7) | $(19.2) |
| Loss per share | $(0.16) | $(0.18) | $(0.32) | $(0.46) |
Q2 revenue grew 10.7%, attributed to 6% unit-volume growth, 4.0% higher prices and 1.2% product-mix improvement. H1 revenue grew 14.3%, from 8% volume growth, 4% pricing and 3% mix. Gross margin eased slightly in both comparisons. H1 operating expenses rose 3% to $75.1 million; higher compensation, marketing and occupancy costs were partly offset by lower project and professional-services costs.
- Cash flow, H1: Operating cash used was $7.1 million, versus $16.7 million used in H1 2022. Investing activities provided $13.5 million, mainly reflecting investment sales net of purchases; financing provided $1.5 million. Cash, cash equivalents and restricted cash increased $7.9 million to $29.5 million.
- Liquidity: Cash and cash equivalents plus investments totaled $34.5 million at June 30, down from $48.8 million at year-end 2022. Working capital was $62.2 million and the current ratio was 3.6x, compared with $74.3 million and 4.1x at year-end.
- Debt and leases: $50.0 million principal was outstanding under the credit facility; its balance-sheet carrying amount, net of discounts and fees, was $46.2 million. Interest was 12.68% at quarter-end, plus revenue participation payments adding approximately 1% annually. Lease liabilities totaled $21.2 million; remaining lease payments were $36.2 million.
- Balance sheet: Total assets were $191.6 million, liabilities $94.5 million and shareholders’ equity $97.2 million. Inventory was $21.2 million; property and equipment, net, was $87.5 million.
Business developments and outlook
- Management estimated Scheduled procedures represented about half of Q2 revenue and grew more than 20% year over year; Emergent procedures were also about half and grew in the low single digits. These application estimates rely on limited customer and representative data.
- The company reported 974 active accounts, up 3.5% year over year, and 347 core accounts, up 16%. Active accounts generated approximately 85% of revenue; the top 10% of active accounts contributed about 35%.
- Axogen piloted Axoguard HA+ Nerve Protector in Q2 and expected a full launch later in 2023. Construction of its Axogen Processing Center (APC) was completed; management expected final validation and tissue-processing operations to begin in Q3 2023. It anticipated another $2–$3 million of APC costs in the remainder of 2023.
- Management planned to request FDA permission for a rolling BLA submission for Avance Nerve Graft at a pre-BLA meeting expected by early Q1 2024. Subject to FDA acceptance and the stated timetable, it expected to begin the submission in Q1 2024, complete it in Q2 2024 and potentially receive approval in H1 2025. These are forward-looking expectations, not assured outcomes.
- Management believed existing cash, investments and product-sale cash flows would fund operations for at least the next 12 months. It noted that additional capital may be needed depending on growth and regulatory spending, and may not be available on acceptable terms.
- Avive Soft Tissue Membrane remained unavailable while the company discussed regulatory classification and requirements with the FDA. Axogen stated the suspension was not due to known safety or performance concerns, but gave no assured return-to-market timeframe.
Risks, contingencies and unusual items
- Debt make-whole uncertainty: Axogen and its lender may interpret the credit facility’s make-whole calculation differently. Axogen estimated alternative-interpretation payments at scheduled maturity could reach approximately $9 million on the first tranche and $4 million on the second; earlier repayment could produce larger payments. The company’s recorded debt derivative liability was $4.3 million. Axogen said it had consistently applied its own calculation approach.
- APC grants: Up to $2.7 million of economic-development grants are subject to job-creation milestones due December 31, 2023, with potential clawbacks. Axogen requested extensions and had not received decisions. It had received $1.2 million in cash grants and recorded a $0.3 million receivable.
- Facility dependence: Avance processing depended on the CTS facility in Ohio while the APC was brought online. Axogen expected to reduce CTS utilization in H2 2023; the CTS agreement ends December 31, 2023, subject to its termination terms.
- Rate and liquidity exposure: A hypothetical 100-basis-point increase in the credit facility rate would increase annual interest expense by approximately $0.5 million. Management also noted that additional funding, if required, could dilute shareholders or be unavailable.
- The company reported compliance with all financial covenants, no material changes to its previously disclosed risk factors, and effective disclosure controls. It reported ordinary-course legal matters that management did not expect to have a material adverse effect, while acknowledging outcomes are uncertain.
Important facts for investors to verify
- Whether APC validation and tissue processing began as scheduled, and whether additional costs stayed within management’s estimate.
- FDA progress on the rolling BLA request, submission schedule and approval expectations for Avance Nerve Graft.
- Operating cash burn, available liquidity and the pace of APC and other capital spending.
- The lender’s make-whole interpretation, potential payment exposure and any related developments.
- Whether grant milestone extensions were granted and whether job-creation conditions can be met.
- Revenue growth and margins, including the company’s estimated Scheduled/Emergent mix and concentration among large accounts.