Axogen, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; interim financial statements are unaudited. Axogen develops and sells products for peripheral nerve repair, principally in the U.S. Key products include Avance Nerve Graft and the Axoguard product line. Avive has remained unavailable since June 2021 while the company discusses its regulatory status with the FDA.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $36.7 million | $31.0 million |
| Gross profit / margin | $30.0 million / 81.7% | $25.5 million / 82.1% |
| Operating loss | $7.3 million | $11.3 million |
| Net loss | $7.1 million | $11.5 million |
| Loss per share, basic and diluted | $0.17 | $0.27 |
| Cash used in operating activities | $7.4 million | $11.1 million |
Revenue grew 18.2%, driven by 10% higher unit volume and approximately 4% each from pricing and product mix. Gross margin was nearly flat year over year. Operating expenses rose 1% to $37.3 million: sales and marketing increased 3%, R&D increased 6%, and G&A decreased 6%. Operating loss narrowed as revenue growth outpaced expense growth. Other income was $0.3 million, compared with $0.2 million of other expense in Q1 2022; higher investment income and lower reported interest expense contributed, partly offset by derivative fair-value changes.
Cash, liquidity and debt
- At March 31, cash and cash equivalents were $7.7 million, investments were $30.2 million, and restricted cash was $6.3 million. Management cited $37.9 million of cash, cash equivalents and investments available as principal liquidity; restricted cash is separate.
- Working capital was $67.5 million and the current ratio was 4.2x. Cash, cash equivalents and investments fell $10.9 million from year-end 2022.
- Operating cash outflow was $7.4 million; investing outflow was $0.8 million, including $4.3 million of property and equipment purchases offset by investment maturities and sales; financing provided $0.6 million. Cash, cash equivalents and restricted cash declined $7.6 million during the quarter.
- Long-term debt, net of discount and fees, was $45.9 million; gross principal outstanding was $50.0 million, with $35.0 million due in 2027 and $15.0 million due in 2028. The stated interest rate was 12.25% at quarter-end, plus revenue participation payments that management estimates add about 1% annually. The company reported compliance with financial covenants.
- Reported interest expense was only $16,000, but total Credit Facility interest expense was $2.1 million, of which $2.1 million was capitalized into the APC Facility construction costs. The filing estimates a 100-basis-point rate increase would add about $0.5 million to annual interest expense.
Management believes existing cash and investments, together with product-sale cash flows, will fund operations for at least the next 12 months. This is an expectation, not a guarantee; the filing notes that additional financing may be needed and may not be available on acceptable terms.
Material changes, outlook and risks
- Active accounts were 994, up 8.5% year over year; core accounts were 350, up 23%. Core accounts represented approximately 60% of quarterly revenue. The company had 116 direct sales representatives.
- Management expects to submit the Avance Nerve Graft biologics license application by the end of 2023 and, as stated in the filing’s forward-looking statements, expects approval by the end of 2024. Timing and approval are uncertain.
- Management expected APC Facility renovation and validation and the transition of Avance processing to the facility in mid-2023. It expected another $1.7–$2.7 million of APC spending in the remainder of 2023, in addition to other annual capital spending generally ranging from $4–$5 million. The facility is intended to support growth and the planned product transition to a biologic.
- The company remains dependent on its current CTS processing facility until the APC Facility is operational. It expects to reduce CTS use in the second half of 2023. Delays in facility completion, validation or transition could affect capacity and regulatory plans.
- Economic development grants of up to $2.7 million are subject to job-creation milestones by December 31, 2023, with clawback provisions. The company requested extensions and had not received decisions as of the filing.
- A notable debt contingency concerns the lender’s possible alternative interpretation of make-whole calculations. Axogen estimates that interpretation could imply payments of up to approximately $10 million for the first tranche and $4 million for the second if held to maturity, and larger amounts if prepaid. Management disputes that interpretation; the filing describes the liability valuation as dependent on significant unobservable assumptions.
- Avive’s return to market remains dependent on regulatory discussions; Axogen cannot estimate the timing or assure a return. Ordinary-course legal matters are not expected by management to have a material effect, but outcomes are uncertain. No material risk-factor changes from the 2022 Form 10-K were reported.
Important facts for investors to verify
- Progress and timing of the Avance BLA, FDA review and APC Facility validation and transition.
- Operating cash burn, capital spending and whether liquidity continues to support management’s 12-month funding expectation.
- The Credit Facility’s effective cash cost, revenue participation payments, and the disputed make-whole interpretation and potential exposure.
- Grant-extension decisions and compliance with job-creation milestones and other debt covenants.
- Whether account growth, pricing and product mix sustain revenue growth without further gross-margin pressure.