Axogen, Inc. — Q2 2022 Form 10-Q
Business context and reporting period. Axogen develops and sells products for peripheral nerve repair. This unaudited report covers the quarter and six months ended June 30, 2022; comparisons are with the same 2021 periods unless noted. Avance Nerve Graft is its largest product, representing approximately half of revenue. Avive Soft Tissue Membrane remained unavailable during the period while the company discussed its regulatory classification with the FDA.
Financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $34.5 million | $33.6 million | $65.5 million | $64.6 million |
| Gross profit / margin | $28.2 million / 81.8% | $26.5 million / 78.9% | $53.6 million / 81.9% | $52.4 million / 81.0% |
| Operating loss | $7.9 million | $7.2 million | $19.2 million | $13.4 million |
| Net loss | $7.7 million | $7.9 million | $19.2 million | $14.6 million |
| Loss per share, basic and diluted | $0.18 | $0.19 | $0.46 | $0.36 |
| Cash used in operating activities | Not separately stated | Not separately stated | $16.7 million | $11.5 million |
- Liquidity: At June 30, cash and cash equivalents were $11.8 million, restricted cash $6.3 million, and investments $46.2 million. Management reported cash, cash equivalents, and investments of $64.3 million, working capital of $83.2 million, and a 4.5x current ratio. The company said these resources, together with product sales, were expected to fund operations for at least 12 months.
- Debt: Oberland Facility principal was $50 million, with $45.3 million reported net of debt discount and fees. The facility bears interest at 9.5% as of June 30, 2022, and also includes revenue-based participation payments. The company reported compliance with covenants.
- Capital spending and cash movement: Cash, cash equivalents, and restricted cash declined $20.9 million in the first half. Investing activities used $5.0 million; property and equipment purchases were $9.1 million. The APC Facility project had $49.1 million of recorded costs to date, including capitalized interest.
Material changes and management commentary
- Q2 revenue rose 3% year over year; first-half revenue rose 1%. Management attributed the Q2 increase to price and product mix, partly offset by a 3.1% volume decline. Excluding Avive revenue recorded in 2021, management said revenue increased approximately 9% in Q2 and 7% for the first half.
- Q2 gross margin improved to 81.8%, partly because the prior-year quarter included an approximately $1.4 million Avive inventory write-down. First-half margin rose to 81.9% from 81.0%.
- Operating expenses increased 7% in Q2 and 11% in the first half. Drivers included higher research and development, compensation, sales travel, marketing, and occupancy costs. First-half operating loss widened to $19.2 million from $13.4 million.
- Active accounts were 941, down 2% from a year earlier but up from 923 in Q1 2022. Core accounts—those with at least $100,000 in trailing 12-month purchases—were 299, down 2% year over year. Active accounts contributed approximately 85% of revenue; the top 10% of active accounts represented approximately 35%.
- The APC Facility was described as substantially complete, with validation and certification anticipated by early 2023 and tissue processing to follow. The company anticipated another $12.4 million of project spending, including projected capitalized interest.
Outlook, risks, contingencies, and unusual items
- No specific revenue, earnings, or margin guidance was provided. Management cautioned that economic uncertainty and potential COVID-19 resurgences could affect results. It identified future capital needs as dependent on growth, development, sales and marketing, and product costs; additional financing, if needed, might not be available on acceptable terms.
- The company identified inflation, geopolitical disruption related to Russia’s invasion of Ukraine, supply-chain interruptions, hospital staffing challenges, and capital-market conditions as risks. It said the conflict and inflation had not materially affected its business to date, but future impact was uncertain.
- A material debt-related uncertainty concerns Oberland’s make-whole payment calculation. Axogen’s estimate under its interpretation is approximately zero if the debt is held to maturity; it estimated potential payments under Oberland’s alternative interpretation of up to approximately $13 million for the first tranche and $5 million for the second tranche at scheduled maturity, with larger amounts possible upon earlier repayment. The company said there had been no update since its 2021 Form 10-K.
- The Eleventh Circuit affirmed dismissal with prejudice of the securities class action on August 1, 2022. The company said the amount of any loss could not be reasonably estimated; it continued to dispute the allegations. Routine legal matters were also disclosed.
- Avive’s market suspension was not attributed to safety or product concerns. Its return is uncertain and the company could not estimate a timeframe.
- A 100-basis-point increase in the applicable debt interest rate would increase annual interest expense by an estimated $0.5 million. Management reported disclosure controls were effective as of June 30, 2022.
Investor facts to verify
- Whether revenue growth and account trends improve, given first-half volume declines and year-over-year decreases in active and core accounts.
- Cash burn, remaining APC Facility costs, and the timing and cost of validation, certification, and production start-up.
- Resolution and potential financial impact of the Oberland make-whole interpretation, including any repayment scenario.
- FDA discussions and any regulatory path or timing for Avive’s possible return to market.
- Whether the stated liquidity runway remains adequate if operating losses, capital requirements, inflation, or financing conditions worsen.