Axogen, Inc.: Form 10-Q for the period ended Jun 30, 2024

The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes thereto appearing elsewhere in this report and our consolidated financial statements for the year ended December 31, 2023, included in our Annual Report on Form 10-K. All dollar amounts in the discussion and analysis, unless noted otherwise, are presented in thousands.

Financial information for prior periods has been reclassified to reflect the retrospective application of voluntary changes in the Company’s accounting policy for shipping and handling costs, as discussed under “Note 2 – Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in this Form 10-Q.

Unless the context otherwise requires, all references in this report to “Axogen,” the “Company,” “we,” “us” and “our” refer to Axogen, Inc., and its wholly owned subsidiaries Axogen Corporation (“AC”), Axogen Processing Corporation, Axogen Europe GmbH and Axogen Germany GmbH.

OVERVIEW

We are the leading company focused specifically on the science, development, and commercialization of technologies for peripheral nerve regeneration and repair. We are passionate about providing the opportunity to restore nerve function and quality of life for patients with peripheral nerve injuries. We provide innovative, clinically proven, and economically effective repair solutions for surgeons and healthcare providers. Peripheral nerves provide the pathways for both motor and sensory signals throughout the body. Every day, people suffer traumatic injuries or undergo surgical procedures that impact the function of their peripheral nerves. Physical damage to a peripheral nerve or the inability to properly reconnect peripheral nerves can result in the loss of muscle or organ function, the loss of sensory feeling, or the initiation of pain.

Product Portfolio

• Avance® Nerve Graft, a biologically active off-the-shelf processed human nerve allograft for bridging severed peripheral nerves without the comorbidities associated with a second surgical site.
• Axoguard Nerve Connector®, a porcine (pig) submucosa extracellular matrix ("ECM") coaptation aid for tensionless repair of severed peripheral nerves.
• Axoguard Nerve Protector®, a porcine submucosa ECM product used to wrap and protect damaged peripheral nerves and reinforce the nerve reconstruction while preventing soft tissue attachments.
• Axoguard HA+ Nerve Protector™, is comprised of a processed porcine submucosa ECM base layer with a hyaluronate-alginate gel coating designed to provide short- and long-term protection for peripheral nerve injuries. The gel layer facilitates enhanced nerve gliding to aid in minimizing soft tissue attachments, while the base layer is remodeled into a long-term protective tissue layer.
• Axoguard Nerve Cap®, a porcine submucosa ECM product used to protect a peripheral nerve end and separate the nerve from the surrounding environment to reduce the development of symptomatic or painful neuroma.
• Avive+ Soft Tissue Matrix™, a multi-layer amniotic membrane allograft used to protect and separate tissues in the surgical bed during the critical phase of tissue healing.
• Axotouch® Two-Point Discriminator, used to measure the innervation density of any surface area of the skin.

Our portfolio of products is currently available in the United States ("U.S."), Canada, Germany, United Kingdom, Spain and several other European, Asian and Latin American countries.

Revenue from the distribution of our nerve repair products, Avance® Nerve Graft, Axoguard Nerve Connector®, Axoguard Nerve Protector®, Axoguard HA+ Nerve Protector™, Axoguard Nerve Cap® and Avive+ Soft Tissue Matrix™, in the United States ("U.S.") is the main contributor to our total reported sales and have been the key component of our growth to date.

On June 24, 2024, we announced the full launch of Avive+ Soft Tissue Matrix. Avive+ is processed and distributed in accordance with U.S. Food and Drug Administration ("FDA") requirements for Human Cellular and Tissue-based Products (HCT/P) under 21 CFR Part 1271 regulations and U.S. State regulations as a 361 human tissue product. Products regulated solely under Section 361 of the Public Health Service Act are a product category under close scrutiny by the FDA for compliance with the regulatory requirements and potentially subject to regulatory change in the future. Failure to comply with applicable regulatory requirements could expose us to potential compliance actions by the FDA or state regulators and could risk the commercial availability of the product.

We have observed that surgeons are initially cautious adopters of nerve repair products. Surgeons typically start with a few cases and then wait and review the results of these initial cases. Active accounts are usually past this wait period and have developed some level of product reorder. These active accounts have typically gone through the Value Analysis Committee approval process, have at least one surgeon who has converted a portion of his or her treatment algorithms of peripheral nerve repair to our portfolio and have ordered our products at least six times in the last twelve months. As of June 30, 2024, we had 1,042 active accounts, an increase of 7.0% from 974 as of June 30, 2023, and an increase of 3.0% from 1,012 compared to March 31, 2024. Active accounts account for approximately 85% of our revenue. The top 10% of these active accounts continue to represent approximately 40% of our revenue.

Core accounts are defined as accounts that have purchased at least $100,000 in the past twelve months. As of June 30, 2024, we had 412 core accounts, an increase of 18.7% from 347 as of June 30, 2023, and an increase of 3.0% from 400 compared to March 31, 2024. These core accounts represent approximately 65% of our revenue in the quarter.

Summary of Operational and Business Highlights

• Revenues were $47,912 for the quarter ended June 30, 2024, an increase of $9,757 or 25.6% compared to the quarter ended June 30, 2023.
• Gross profit was $35,345 for the quarter ended June 30, 2024, an increase of $5,693 or 19.2% compared to the quarter ended June 30, 2023.
• We had 117 and 116 direct sales representatives as of June 30, 2024, and December 31, 2023.
• In May 2024, we submitted to FDA the complete non-clinical data package for the BLA of Avance® Nerve Graft. We anticipate the rolling submission proposal of the BLA to be completed in the third quarter of 2024. We believe the submission timeline will allow for a potential approval in mid- 2025.
• We are pleased with the adoption of Axoguard HA+ Nerve Protector across multiple applications. We expect to drive continued growth within the nerve protection category following the full launch of Avive+ Soft Tissue Matrix in June of 2024.We continue to see strong interest in and adoption of the Resensation® neurotization techniques for autologous and implant-based breast reconstructions driven by expanding surgeon education and patient activation.

Results of Operations

Comparison of the Three Months Ended June 30, 2024, and 2023

The following table sets forth, for the periods indicated, our results of operations expressed as dollar amounts and percentage of total revenue:

(dollars in thousands)

Revenues

Revenues for the three months ended June 30, 2024, increased by $9,757 or 25.6% to $47,912 as compared to $38,155 for the three months ended June 30, 2023. The increase in revenue was driven by an increase in, unit volume of 15.6%, product mix 6.8% and a 3.2% increase in prices.

Gross Profit

Gross profit for the three months ended June 30, 2024, increased by $5,693 or 19.2% to $35,345 as compared to $29,652 for the three months ended June 30, 2023. Gross margin was 73.8% and 77.7% for the three months ended June 30, 2024, and 2023, respectively. The decrease in gross margin is due to the change in our product mix.

Costs and Expenses

Total costs and expenses decreased by $781 or 2.1% to $35,773 for the three months ended June 30, 2024, as compared to $36,554 for the three months ended June 30, 2023. The net decrease in total costs and expenses was primarily the result of a reduction in R&D projects of $1,371 and royalty fees of $867, partially offset by an increase in professional services of $1,055, compensation costs of $359 and other costs of $54.

Sales and marketing expenses increased by $838 or 4.4% to $19,698 for the three months ended June 30, 2024, as compared to $18,860 for the three months ended June 30, 2023. This increase was primarily attributable to compensation costs of $1,685 and occupancy costs of $113 partially offset by a decrease in royalty fees of $867 and other costs of $116.

Research and development expenses decreased $486 or 6.8% to $6,658 for the three months ended June 30, 2024, as compared to $7,144 for the three months ended June 30, 2023. The decrease was primarily due to product development, clinical expenses as well as non-clinical expenses related to the the BLA for Avance Nerve Graft. Product development expenses represented approximately 52% and 58% of total research and development expense for the three months ended June 30, 2024, and 2023, respectively. Clinical trial expenses represented approximately 48% and 42% of total research and development expense the three months ended June 30, 2024, and 2023, respectively.

General and administrative expenses decreased by $1,133 to $9,417 for the three months ended June 30, 2024, as compared to $10,550 for the three months ended June 30, 2023. The decrease was primarily due to compensation costs of $2,295, partially offset by an increase in professional services of $877, occupancy related cost of $204 and other costs of $80.

Other Income and Expense

Other expense, net increased by $1,735 or 717% to $1,493 for the three months ended June 30, 2024, as compared to other income, net of $242 for the three months ended June 30, 2023. The net increase in other expense was due to an increase in interest expense of $2,037, partially offset by the decrease in other expenses of $279 and the change in the fair value of the derivative of $32.

Interest expense increased by $2,037 to $2,185 for the three months ended June 30, 2024, as compared to $148 for the three months ended June 30, 2023. The increase was due to the completion of the APC facility in 2023 resulting in no interest expense being capitalized for that facility. We recognized total interest expense of $2,162 and $2,184 in connection with the Credit Facility for the three months ended June 30, 2024, and 2023, respectively, of which $0 and $2,049 of this interest was capitalized to the construction costs of the APC Facility during the second quarter of 2024 and 2023, respectively.

Income Taxes

We had no income tax expense or benefit during the three months ended June 30, 2024, and 2023, due to the incurrence of net operating losses in each of these periods, the benefits of which have a full valuation allowance. From time to time, we receive notices of examination of prior tax filings from federal and state authorities. We do not believe that there are currently any material outstanding tax expenses or benefits.

Comparison of the six months ended June 30, 2024, and 2023

The following table sets forth, for the periods indicated, our results of operations expressed as dollar amounts and percentage of total revenue:

(dollars in thousands)

22

Revenues

Revenues for six months ended June 30, 2024, increased by $14,470 or 19.3% to $89,289 as compared to $74,819 for the six months ended June 30, 2023. The increase in revenue was driven by an increase in unit volume of 10.4%, 6.1%in product mix and 2.8% in prices.

Gross Profit

Gross profit for the six months ended June 30, 2024, increased by $9,820 or 17% to 67,964 as compared to $58,144 for the six months ended June 30, 2023. Gross margin was 76.1% and 77.7% for the six months ended June 30, 2024, and 2023, respectively.

Costs and Expenses

Total costs and expenses increased by $564 or 1% to $72,952 for the six months ended June 30, 2024, as compared to $72,388 for the six months ended June 30, 2023. The net increase in total costs and expenses was primarily the result of increased professional services of $1,915, compensation costs of $1,566, and occupancy cost of $174, partially offset by the reduction in royalty fees of $1,703, research projects of $1,205, and marketing programs of $212.

Sales and marketing expenses increased by $1,206 or 3% to $39,513 for the six months ended June 30, 2024, as compared to $38,307 for the six months ended June 30, 2023. This increase was primarily attributable to compensation costs of $2,931, occupancy costs of $195 and professional services of $174, partially offset by the reduction in royalty fees of $1,703, marketing programs of $212 and other costs of $203.

Research and development expenses increased by $596 or 4% to $14,066 for the six months ended June 30, 2024, as compared to $13,470 for the six months ended June 30, 2023. The increase was primarily due to product development and clinical expenses as well as non-clinical expenses related to the BLA for Avance Nerve Graft. Product development expenses represented approximately 57% of total research and development expense for each of the six months ended June 30, 2024, and 2023. Clinical trial expenses represented approximately 43% of total research and development expense for each of the six months ended June 30, 2024, and 2023, respectively.

General and administrative expenses decreased by $1,238 or 6% to $19,373 for the six months ended June 30, 2024, as compared to $20,611 for the six months ended June 30, 2023. The decrease was primarily due to a reduction in net compensation costs of $3,217, partially offset by an increase in professional service costs of $1,343, other costs of $264, occupancy costs of $259, and travel costs of $112.

Other Income and Expense

Other (expense) income, net decreased by $4,078 or 800% to other expense, net $3,568 for the six months ended June 30, 2024, as compared to other income, net of $510 for the six months ended June 30, 2023. The net decrease was driven by an increase in interest expense of $4,348 and decrease in investment income of $264, partially offset by an increase in the change in fair value of derivatives of $282 and other expense of $252.

Investment income decreased by $264 or 34% to $520 for the six months ended June 30, 2024, as compared to investment income of $784 for the six months ended June 30, 2023. This change was primarily due to the decrease in investments.

Interest expense increased by $4,348 to $4,512 for the six months ended June 30, 2024, as compared to $164 for the six months ended June 30, 2023. We recognized total interest expense of $4,465 and $4,332 in connection with the Credit Facility for the six months ended June 30, 2024, and 2023, respectively, of which $0 and $4,196 of this interest was capitalized to the construction costs of the APC Facility during the six months ended June 30, 2024, and 2023, respectively.

Income Taxes

We had no income tax expense or benefit during the six months ended June 30, 2024, and 2023, due to the incurrence of net operating losses in each of these periods, the benefits of which have a full valuation allowance. From time to time, we receive notices of examination of prior tax filings from federal and state authorities. We do not believe that there are any additional tax expenses or benefits currently available.

Critical Accounting Estimates

In preparing financial statements, we follow accounting principles generally accepted in the United States, which require us to make certain estimates and apply judgments that affect our financial position and results of operations. Management regularly reviews our accounting policies and financial information disclosures. A summary of significant accounting estimates that require the use of estimates and judgments in preparing the financial statements was provided in our 2023 Annual Report on Form 10-K. During the quarter covered by this report, there have been no material changes to the accounting estimates and assumptions previously disclosed.

Reclassification of Financial Information

Effective as of the first quarter of 2024, we voluntarily changed our accounting policy for shipping and handling costs. Although the prior method of accounting continues to be an accepted alternative, the new accounting policy is more widely used in the industry and provides improved comparability of the Company’s financial statements to its peers. Accordingly, the financial information for prior periods has been reclassified to reflect retrospective application of the new policy. Effective as of the first quarter of 2024, we ceased allocating certain costs to and from certain departments. Previously such costs had been allocated based on our estimate of the proportionate share of total expense to each line item. We determined that these changes would better reflect industry practice and would provide more meaningful information as well as increased transparency of our operations. See “Note 2 - Summary of Significant Accounting Policies” for additional discussion.

Liquidity and Capital Resources

As of June 30, 2024, our principal sources of liquidity were our cash and cash equivalents and investments totaling $21,133. Our cash equivalents are comprised primarily of a money market mutual fund and our investments consist of U.S. Treasuries. Our cash and cash equivalents and investments decreased by $9,891 from $31,024 at December 31, 2023, primarily as a result of operating activities.

We had working capital of $58,847 and a current ratio of 3.5x at June 30, 2024, compared to working capital of $57,574 and a current ratio of 2.9x at December 31, 2023. The increase in our working capital at June 30, 2024, as compared to December 31, 2023, was primarily due to a decrease in accounts payable and accrued expenses. Based on current estimates, we believe that our existing cash and cash equivalents and investments, as well as cash provided by sales of our products will allow us to fund our operations through at least the next 12 months from the date of the accompanying financial statements.

Cash Flow Information

The following table presents a summary of cash flows from operating, investing and financing activities:

(in thousands)

Net Cash Used in Operating Activities

Net cash used in operating activities was $8,101 and $7,131 during the six months ended June 30, 2024, and 2023, respectively. The unfavorable change in net cash used in operating activities of $970, or 14%, is due to the net unfavorable change of $9,400 in working capital accounts partially offset by the decrease in the net loss of $5,178 and noncash changes of $3,252.

Net Cash (Used in) Provided by Investing Activities

Net cash used in investing activities for the six months ended June 30, 2024, was $4,484 as compared to net cash provided by investing activities of $13,536 for the six months ended June 30, 2023, an increase of $18,020, or 133% of net cash used in investing activities. The increase of net cash used in investing activities is principally due to the decrease in the net proceeds from the sale and purchase of investments totaling $24,682, and the increase in purchases of intangible assets of $223, partially offset by the reduction in purchases of property and equipment of $6,885 during the six months ended June 30, 2024.

Net Cash Provided by Financing Activities

Net cash provided by financing activities was $748 and $1,531 for the six months ended June 30, 2024, and 2023, respectively, a decrease of $783. The unfavorable change in net cash provided by financing activities was primarily due to the decrease in proceeds from the exercise of stock options of $791 during the six months ended June 30, 2024.

Credit Facilities

As of June 30, 2024, we had $50,000 outstanding in indebtedness under a credit facility $35,000 maturing on June 30, 2027, and $15,000 maturing on June 30, 2028. Quarterly interest only and revenue participation payments are due through each of the maturity dates. Interest is calculated as 7.5% plus the greater of three-month SOFR plus 0.1% ("Adjusted SOFR") or 2.0% (12.90% as of June 30, 2024). Revenue participation payments are calculated as a percentage of our net revenues, up to $70,000 in any given year, adding approximately 1.5% per year of additional interest payments on the outstanding indebtedness. Upon each maturity date or upon such date earlier repayment occurs, we will repay the principal balance and provide a make-whole payment calculated to generate an internal rate of return to the lender equal to 11.5%, less the total of all quarterly interest and revenue participation payments previously paid. See Note 8 - Long-Term Debt, Net of Debt Discount and Financing Fees and Note 12 - Commitments and Contingencies.

Sources of Capital

Our expected future capital requirements may depend on many factors including expanding our customer base and sales force and timing and extent of spending in obtaining regulatory approval and introduction of new products. Additional sources of liquidity available to us include issuance of additional equity securities through public or private equity offerings, debt financings or from other sources. The sale of additional equity may result in dilution to our shareholders. Although we have an effective shelf registration statement, there is no assurance that we will be able to secure funding on terms acceptable to us, or at all. The increasing need for capital could also make it more difficult to obtain funding through either equity or debt. Should additional capital not become available to us as needed, we may be required to take certain actions, such as slowing sales and marketing expansion, delaying regulatory approvals, or reducing headcount.

Contractual Obligations and Commitments

(in thousands)

(1) See Note 8 - Long-Term Debt, Net of Debt Discount and Financing Fees and Note 12 - Commitments and Contingencies in Part I, Item 1 in this Form 10-Q.

(2) Calculated at 12.90%, the interest rate as of June 30, 2024.

(3) See Note 7 - Leases in this Form 10-Q.

(4) Includes CEO's 2024 Salary, 2024 bonus to paid in March of 2025, accrued PTO through January 4, 2025, nine months of senior advisory fees, and eighteen months of COBRA payments. Actual timing of payments is subject to the determination of the end of the CEO Term per the Transition and Separation Agreement. See Note 12 - Commitments and Contingencies in Part I, Item 1 in this Form 10-Q.

(5) See Note 12 - Commitments and Contingencies in Part I, Item 1 in this Form 10-Q.

See Note 7 - Leases and Note 12 - Commitments and Contingencies in the Notes to the Consolidated Financial Statements in this Form 10-Q, for further information.

For a discussion of our market risks, refer to Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” included in our 2023 Annual Report on Form 10-K.

The amount of interest expense on the outstanding debt is based on Adjusted SOFR. Changes in the Adjusted SOFR rate may affect our interest expense associated with the Credit Facility. Based on the outstanding balance of the Credit Facility as of June 30, 2024, a hypothetical 100 basis point increase in the applicable rate would result in an increase to our annual interest expense of approximately $500.

Evaluation of Disclosure Controls and Procedures

We maintain “disclosure controls and procedures” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, and Board of Directors, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable assurance of achieving the desired objectives, and we necessarily are required to apply our judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.

Our management, including our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2024, and concluded that our disclosure controls and procedures were effective.

Changes in Internal Controls Over Financial Reporting

There were no changes in our internal control over financial reporting during the three months ended June 30, 2024, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting (as defined in Rules 13a-15(d) or 15d-15(f) of the Exchange Act).

There have been no material changes to the risk factors disclosed in our 2023 Annual Report on Form 10-K. Any investment in our business involves a high degree of risk. Before making an investment decision, you should carefully consider the information we include in this Quarterly Report on Form 10-Q, including our unaudited interim condensed consolidated financial statements and accompanying notes, our Annual Report on Form 10-K for the year ended December 31, 2023, including our financial statements and related notes contained therein, and the additional information in the other reports we file with the Securities and Exchange Commission. These risks may result in material harm to our business and our financial condition and results of operations. In this event, the market price of our common stock may decline, and you could lose part or all of your investment. Additional risks that we currently believe are immaterial may also impair our business operations. Our business, financial conditions and future prospects and the trading price of our common stock could be harmed as a result of any of these risks.