Axogen, Inc.: Form 10-Q for the period ended Sep 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.

Our strategy remains focused on deepening our presence in high-potential accounts specifically, Level 1 trauma centers and academic-affiliated hospitals with a high number of trained micro-surgeons. We will drive growth in these accounts through targeted expansion of nerve repair indications, and driving deeper adoption of our Nerve Repair Algorithm across multiple surgical specialties.

Summary of Operational and Business Highlights

• We completed the BLA submission for Avance® Nerve Graft on September 6, 2024. On November 1, 2024 the FDA informed us that they had accepted the BLA for filing and assigned a Prescription Drug User Fee Act (“PDUFA”) goal date of September 5, 2024. The FDA further indicated that it does not currently plan to hold an advisory committee meeting for the application.
• Revenues were $48,644 for the quarter ended September 30, 2024, an increase of $7,373 or 17.9% compared to the quarter ended September 30, 2023.
• Gross profit was $36,438 for the quarter ended September 30, 2024, an increase of $4,734 or 14.9% compared to the quarter ended September 30, 2023.

Results of Operations

Comparison of the Three Months Ended September 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 September 30, 2024, increased by $7,373 or 17.9% to $48,644 as compared to $41,271 for the three months ended September 30, 2023. The increase in revenue was driven by an increase in unit volume of 7.7%, product mix of 6.0% and a 4.2% increase in prices.

Gross Profit

Gross profit for the three months ended September 30, 2024, increased by $4,734 or 14.9% to $36,438 as compared to $31,704 for the three months ended September 30, 2023. Gross margin was 74.9% and 76.8% for the three months ended September 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 increased by $1,025 or 2.9% to $36,754 for the three months ended September 30, 2024, as compared to $35,729 for the three months ended September 30, 2023. The net increase in total costs and expenses was primarily due to compensation costs of $3,552 partially offset by a reduction in royalty fees of $930, R&D projects of $874, and marketing programs of $770.

Sales and marketing expenses decreased by $241 or 1.3% to $18,924 for the three months ended September 30, 2024, as compared to $19,165 for the three months ended September 30, 2023. This decrease was primarily attributable to royalty fees of $930, marketing programs of $770 and travel cost of $80, partially offset by increase in compensation costs of $1,495.

Research and development expenses increased $302 or 4.5% to $6,996 for the three months ended September 30, 2024, as compared to $6,694 for the three months ended September 30, 2023. The increase was primarily due to product development, clinical expenses, as well as non-clinical expenses related to the BLA for Avance Nerve Graft. Product development expenses represented approximately 52% and 62% of total research and development expense for the three months ended September 30, 2024, and 2023, respectively. Clinical trial expenses represented approximately 48% and 38% of total research and development expense the three months ended September 30, 2024, and 2023, respectively.

General and administrative expenses increased by $964 or 9.8% to $10,834 for the three months ended September 30, 2024, as compared to $9,870 for the three months ended September 30, 2023. The increase was primarily due to compensation costs of $1,281 of which $695 was stock compensation related to the departure of the former CEO, bad debt expense of $350, and certain other cost of $133, partially offset by a decrease in professional services of $800.

Other Income and Expense

Other expense, net increased by $1,478 to $1,542 for the three months ended September 30, 2024, as compared to other expense, net of $64 for the three months ended September 30, 2023. The net increase in other expense was due to an increase in interest expense of $1,066, and the change in the fair value of derivatives of $389.

Interest expense increased by $1,066 to $1,893 for the three months ended September 30, 2024, as compared to $827 for the three months ended September 30, 2023. The increase was due to the completion of the APC facility in 2023 resulting in no additional interest expense being capitalized for that facility during 2024. We recognized total interest expense of $1,877 and $1,866 in connection with the Credit Facility for the three months ended September 30, 2024, and 2023, respectively, of which $0 and $1,043 of this interest was capitalized to the construction costs of the APC Facility during the third quarter of 2024 and 2023, respectively.

Income Taxes

We had no income tax expense or benefit during the three months ended September 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 Nine Months Ended September 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 nine months ended September 30, 2024, increased by $21,843 or 18.8% to $137,933 as compared to $116,090 for the nine months ended September 30, 2023. The increase in revenue was driven by an increase in unit volume of 9.4%, product mix of 6.0% and a 3.4% increase in prices.

Gross Profit

Gross profit for the nine months ended September 30, 2024, increased by $14,554 or 16% to 104,402 as compared to $89,848 for the nine months ended September 30, 2023. Gross margin was 75.7% and 77.4% for the nine months ended September 30, 2024, and 2023, respectively.

Costs and Expenses

Total costs and expenses increased by $1,590 or 1% to $109,706 for the nine months ended September 30, 2024, as compared to $108,116 for the nine months ended September 30, 2023. The net increase in total costs and expenses was primarily the result of increased compensation costs of $5,118, professional services of $1,892 and bad debt expense of $915, partially offset by the reduction in royalty fees of $2,632, research projects of $2,079, marketing programs of $982 and other operating expense totaling $645.

Sales and marketing expenses increased by $966 or 2% to $58,437 for the nine months ended September 30, 2024, as compared to $57,471 for the nine months ended September 30, 2023. This increase was primarily attributable to compensation costs of $4,425, professional services of $272, and occupancy costs of $184, partially offset by the reduction in royalty fees of $2,632, marketing programs of $982, and other costs of $352.

Research and development expenses increased by $899 or 4% to $21,063 for the nine months ended September 30, 2024, as compared to $20,164 for the nine months ended September 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 54% and 60% of total research and development expense for the nine months ended September 30, 2024, and 2023, respectively. Clinical trial expenses represented approximately 46% and 40% of total research and development expense for the nine months ended September 30, 2024, and 2023, respectively.

General and administrative expenses decreased by $275 or 1% to $30,206 for the nine months ended September 30, 2024, as compared to $30,481 for the nine months ended September 30, 2023. The decrease was primarily due to a reduction in net compensation costs of $1,935 of which $695 was stock compensation related to the departure of the former CEO, partially offset by an increase in bad debt of $915, professional service costs of $542, and other costs of $203.

Other Income and Expense

Other (expense), net was $5,110 for the nine months ended September 30, 2024, as compared to other income, net of $445 for the nine months ended September 30, 2023. The decrease was driven by an increase in interest expense of $5,413, a decrease in investment income of $335, and the change in fair value of derivatives of $107, partially offset by the decrease in other expense of $210 and rental income of $90.

Investment income decreased by $335 or 29% to $816 for the nine months ended September 30, 2024, as compared to investment income of $1,151 for the nine months ended September 30, 2023. This change was primarily due to the decrease in investments.

Interest expense increased by $5,413 to $6,405 for the nine months ended September 30, 2024, as compared to $992 for the nine months ended September 30, 2023. We recognized total interest expense of $6,342 and $5,442 in connection with the Credit Facility for the nine months ended September 30, 2024, and 2023, respectively, of which $0 and $5,240 of this interest was capitalized to the construction costs of the APC Facility during the nine months ended September 30, 2024, and 2023, respectively.

Income Taxes

We had no income tax expense or benefit during the nine months ended September 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 September 30, 2024, our principal sources of liquidity were our cash and cash equivalents and investments totaling $24,530. 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 $6,494 to $24,530 from $31,024 at December 31, 2023, primarily as a result of operating activities.

We had working capital of $63,219 and a current ratio of 3.7x at September 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 September 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 $4,200 and $5,505 during the nine months ended September 30, 2024, and 2023, respectively. The unfavorable change in net cash used in operating activities of $1,305, or 24%, is due to the net unfavorable change of $9,656 in working capital accounts partially offset by the decrease in the net loss of $7,409 and noncash changes of $3,552.

Net Cash (Used in) Provided by Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2024, was $9,484 as compared to net cash provided by investing activities of $19,530 for the nine months ended September 30, 2023, a net increase of $29,014, or 149% 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 $38,444, and the increase in purchases of intangible assets of $548, partially offset by the reduction in purchases of property and equipment of $9,978 during the nine months ended September 30, 2024.

Net Cash Provided by Financing Activities

Net cash provided by financing activities was $1,320 and $1,536 for the nine months ended September 30, 2024, and 2023, respectively, a decrease of $216. 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 $217 during the nine months ended September 30, 2024.

Credit Facilities

As of September 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% (12.92% as of September 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 12.92%, the interest rate as of September 30, 2024.

(3) See Note 7 - Leases in Part I, Item I of this Form 10-Q.

(4) Includes former CEO's 2024 bonus to be paid in March of 2025, senior advisory fees through May 2025, and eighteen months of COBRA payments. 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 September 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 September 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 September 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.