Axogen, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Unaudited consolidated results; dollar amounts are in millions unless stated otherwise. Axogen develops and sells products for peripheral nerve repair. Avance Nerve Graft is its largest product, representing approximately half of revenue. Avive Soft Tissue Membrane remained unavailable for sale.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $36.959 | $31.204 | $102.420 | $95.821 |
| Gross profit | $30.783 | $25.965 | $84.414 | $78.318 |
| Gross margin | 83.3% | 83.2% | 82.4% | 81.7% |
| Operating loss | $(4.855) | $(6.689) | $(24.099) | $(20.063) |
| Net loss | $(4.318) | $(7.141) | $(23.533) | $(21.699) |
| Loss per share | $(0.10) | $(0.17) | $(0.56) | $(0.53) |
Q3 revenue increased 18%, driven by 12% higher unit volume and 3% each from price and product mix. Nine-month revenue increased 7%; volume rose 1%, price 3%, and mix 2%. Excluding $3.575 million of Avive revenue in the 2021 period, nine-month revenue growth would have been approximately 11%. Nine-month operating costs and expenses rose 10% to $108.513 million, exceeding gross profit and contributing to a larger operating and net loss.
Cash flow and liquidity: Operating cash use was $17.428 million for the nine months, versus $11.891 million in 2021. Capital spending on property and equipment was $13.456 million; investing cash use totaled $1.991 million. Cash, cash equivalents, and restricted cash fell $18.438 million to $20.569 million. Cash, cash equivalents, and investments totaled $59.361 million at September 30. Working capital was $78.907 million and the current ratio was 4.4x, down from $102.756 million and 5.2x at year-end 2021.
Debt and balance sheet: Oberland debt had $50 million principal outstanding and a $45.487 million carrying value, net of discounts and fees; the facility bears interest at 9.8% as of quarter-end and matures in 2027 and 2028. Total liabilities were $94.075 million. Operating and finance lease liabilities totaled $22.164 million. Shareholders’ equity was $101.445 million.
Material developments, outlook, and risks
- Management said existing cash, investments, and expected product-sale cash flows should fund operations for at least the next 12 months, while noting capital needs could rise and future financing may be required. No specific revenue or earnings guidance was provided.
- The Axogen Processing Center renovation was substantially complete; validation and certification were expected by early 2023, followed by tissue processing. Management estimated $7.245 million of remaining spending, including projected capitalized interest, with $2.585 million expected in 2023.
- Active accounts were 952, up 2.4% year over year; 331 core accounts, defined as accounts with at least $100,000 of purchases over the prior 12 months, were up 17%. Core accounts generated approximately 60% of quarterly revenue.
- Avive sales remain suspended while the company discusses regulatory classification and requirements with the FDA. Management said it cannot estimate when, or whether, the product will return to market.
- A dispute with Oberland Capital over the calculation of debt make-whole payments remains a material uncertainty. Under the alternative interpretation described in the filing, estimated make-whole payments at scheduled maturity could reach approximately $9.2 million for the first tranche and $3.6 million for the second; earlier repayment could result in larger amounts.
- The company reported a $1.155 million noncash gain from changes in the fair value of debt derivatives for the nine months. It also capitalized $4.474 million of debt interest to the APC project. The nine-month results therefore include significant noncash valuation effects and interest capitalization.
- Other risks include reliance on a concentrated product portfolio and on Avance, dependence on external processing capacity until the APC is operational, inflation and geopolitical or supply-chain disruption, and potential need for additional capital. A securities class action dismissal was affirmed by the Eleventh Circuit on August 1, 2022. Management reported disclosure controls were effective and no material change in internal controls during the quarter.
Investor verification priorities
- Track operating cash burn, cash and investments, and whether management’s stated 12-month liquidity expectation remains supportable.
- Verify APC validation, certification, remaining costs, and the timing of transition from the CTS facility.
- Monitor FDA discussions and any regulatory path or timeline for Avive.
- Review the Oberland make-whole interpretation dispute, potential repayment exposure, and the effect of variable-rate interest.
- Assess whether revenue growth and core-account expansion can outpace rising sales, R&D, and administrative expenses.