Axogen, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Axogen develops and sells products for peripheral nerve repair. Unless noted otherwise, financial amounts below are in millions of dollars.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $31.2 | $33.4 | $95.8 | $79.8 |
| Gross profit | $26.0 | $27.7 | $78.3 | $63.7 |
| Gross margin | 83.2% | 83.0% | 81.7% | 79.8% |
| Operating loss | $(6.7) | $(1.0) | $(20.1) | $(17.8) |
| Net loss | $(7.1) | $(1.5) | $(21.7) | $(17.8) |
| Loss per share, basic and diluted | $(0.17) | $(0.04) | $(0.53) | $(0.45) |
- Q3 revenue fell 7% year over year as unit volume declined about 10%, partly offset by roughly 3% from price changes. The prior-year quarter included about $3.3 million of deferred pandemic procedures and $1.5 million of Avive sales.
- Nine-month revenue grew 20%, reflecting approximately 15% higher unit volume and a roughly 5% net price and product-mix contribution. Gross margin improved for the period as production levels increased; 2021 inventory write-downs were $2.85 million, including a $1.25 million Avive reserve.
- Operating expenses rose 13% in Q3 and 21% year to date. Higher compensation, facility, travel, project, product-development, and legal costs contributed. Nine-month stock-based compensation was $9.4 million, versus $5.7 million a year earlier.
Cash, liquidity, and debt
- At September 30, cash and cash equivalents were $46.7 million, restricted cash $6.3 million, and investments $45.0 million. Working capital was $111.6 million and the current ratio was 5.8x, versus $122.4 million and 6.4x at year-end 2020.
- Nine-month operating cash use was $11.9 million; investing cash use was $10.1 million; financing provided $19.4 million. Cash, cash equivalents, and restricted cash decreased $2.5 million. Capital expenditures were $20.6 million, mainly associated with the processing center project.
- Long-term debt, net of financing fees, was $46.2 million. The Oberland facility had $50 million principal outstanding across two tranches, with a stated interest rate of 9.5% at quarter-end and additional revenue-participation payments that management estimates add about 1% annually. A further $25 million tranche may be drawn after two consecutive quarters of revenue of at least $28 million. The company reported compliance with covenants.
- Management stated that available cash resources should meet liquidity requirements for at least the next 12 months. It noted that additional capital needs could arise; equity financing could dilute shareholders, and funding may not be available on acceptable terms.
Material developments, outlook, and risks
- Axogen suspended Avive market availability effective June 1, 2021 while discussing its regulatory classification and requirements with the FDA. The company said the suspension was not due to safety or product concerns, hopes to return Avive to market, but cannot estimate timing or assure a return. Avive historically represented about 5% of revenue through Q2; no Q3 Avive revenue was recorded.
- Q3 active accounts increased 9% to 954, and Core Accounts—defined as accounts purchasing at least $100,000 in the preceding 12 months—increased 18% to 292. Core Accounts represented about 60% of quarterly revenue.
- The Axogen Processing Center renovation was targeted for substantial completion in late 2021, subject to adjustment; processing transition was expected to begin in early 2023. Estimated renovation/design-build costs were $29.3 million, with another $13.6 million estimated for equipment, validation, and certification. The company had recorded $30.9 million of project costs to date, excluding capitalized interest. Grants of up to $2.685 million were expected, subject to job-creation milestones and potential clawbacks; approximately $1.188 million had been received.
- COVID-19 remained a source of uncertainty. The company also cited dependence on key products, a concentrated contribution from Avance Nerve Graft, reliance on external tissue-processing capacity and the Cook Biotech supply/distribution relationship, and the possibility that facility disruption could affect service and revenue.
- Several shareholder and securities-related matters remained unresolved. The securities class action had been dismissed with prejudice, but the plaintiff appealed; the company disputes the allegations and said potential loss could not be reasonably estimated. Other derivative matters were dismissed or remained pending, including one complaint not yet served. Management said it intended to defend against the claims.
- No formal forward revenue or earnings guidance was provided in the filing. Management’s liquidity statement and project expectations are not a guarantee of results.
Most important facts for investors to verify
- Whether revenue and procedure volumes recover after Q3’s year-over-year decline, and the extent of pricing, product-mix, and account-growth contributions.
- FDA discussions and potential timing or feasibility of returning Avive to the market; monitor any further inventory or regulatory charges.
- Processing Center remaining costs, completion and validation timeline, planned transition, and grant milestone or clawback exposure.
- Cash burn, capital spending, covenant compliance, and the cost and conditions of the Oberland debt, including revenue participation and access to the final tranche.
- Developments in the securities appeal and derivative litigation, and any resulting financial or governance impacts.