AXOGEN, INC. Unless the context otherwise requires, all references in this report to "Axogen ," the "Company," "we," "us" and "our" refer toAxogen, Inc. , and its wholly owned subsidiariesAxogen Corporation ("AC"),Axogen Processing Corporation , andAxogen Europe 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 helping to restore peripheral nerve function and quality of life to patients with physical damage or transection to peripheral nerves providing innovative, clinically proven and economically effective repair solutions for surgeons and health care 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. Our platform for peripheral nerve repair features a comprehensive portfolio of products, including 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 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 injured peripheral nerves and reinforce the nerve reconstruction while preventing soft tissue attachments, and 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. Along with these core surgical products, we also offer the Axotouch® Two-Point Discriminator, used to measure the innervation density of any surface area of the skin. Our portfolio of products is available inthe United States ,Canada , theUnited Kingdom , several European countries,South Korea and other international countries. Revenue from the distribution of our nerve repair products, Avance Nerve Graft, Axoguard Nerve Connector, Axoguard Nerve Protector, and Axoguard Nerve Cap inthe United States is the main contributor to our total reported sales and has been the key component of our growth to date. We have experienced that surgeons initially are cautious adopters for 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 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 6 times in the last 12 months. In the third quarter of 2021, we had 954 active accounts, an increase of 9% from 875 one year ago. Active accounts are approximately 85% of our revenue. The top 10% of these active accounts continue to represent approximately 35% of our revenue. As our business continues to grow, we have transitioned to reporting a new account metric that we believe demonstrates the strength of adoption and potential revenue growth in accounts that have developed a more consistent use ofAxogen products in their nerve repair algorithm. We refer to these as "Core Accounts" which we define as accounts that have purchased at least$100,000 in the past 12 months. In the third quarter of 2021, we had 292 Core Accounts, an increase of 18% from 248 one year ago. These Core Accounts represented approximately 60% of our revenue in the quarter, which has remained consistent over the past two years. There have been no significant changes to our critical accounting policies from those disclosed in our 2020 Annual Report on Form 10-K. Avive As previously announced, we suspended the market availability of Avive® Soft Tissue Membrane effectiveJune 1, 2021 and we continue discussions with the FDA to determine the appropriate regulatory classification and requirements for Avive. The suspension was not based on any safety or product issues or concerns with Avive. We seek to return Avive to the market, although we are unable to estimate the timeframe or provide any assurances that a return to the market will be achievable. Avive has historically represented approximately 5% of our revenues through the second quarter of 2021, and no Avive revenue was recorded in the third quarter of 2021. 27 -------------------------------------------------------------------------------- Table of Contents Results of Operations Comparison of the Three Months EndedSeptember 30, 2021 and 2020 Three Months Ended September 30, 2021 2020 % of % of Amount Revenue Amount Revenue (dollars in thousands) Revenues$ 31,204 100.0 %$ 33,428 100.0 % Cost of goods sold 5,239 16.8 5,697 17.0 Gross Profit 25,965 83.2 27,731 83.0 Costs and expenses Sales and marketing 18,370 58.9 17,726 53.0 Research and development 6,404 20.5 4,230 12.7 General and administrative 7,880 25.3 6,820 20.4 Total costs and expenses 32,654 104.6 28,776 86.1 Loss from operations (6,689) (21.4) (1,045) (3.1) Other (expense) income: Investment income 17 0.1 28 0.1 Interest expense (417) (1.3) (397) (1.2) Change in fair value of derivatives (46) (0.1) (71) (0.2) Other expense (6) - 6 - Total other (expense) income, net (452) (1.4) (434) (1.3) Net Loss$ (7,141) (22.9) %$ (1,479) (4.4) % Revenues Revenues for the three months endedSeptember 30, 2021 decreased (7)% to$31,204 as compared to$33,428 for the three months endedSeptember 30, 2020 . The decline in revenues was driven by a decrease in unit volume of approximately 10%, partially offset by the changes in prices of approximately 3%. Prior year revenue included approximately$3.3 million from procedures deferred from the first half of 2020 as a result of the initial impact of the COVID-19 pandemic; and approximately$1.5 million from Avive Soft Tissue Membrane, for which the Company voluntarily suspended market availability as ofJune 1, 2021 . Gross Profit Gross profit for the three months endedSeptember 30, 2021 decreased (6)% to$25,965 as compared to$27,731 for the three months endedSeptember 30, 2020 , in direct correlation with the decrease in revenues. Gross margin remained consistent at approximately 83% for both the three months endedSeptember 30, 2021 and 2020. Costs and Expenses Total costs and expenses increased 13% to$32,654 for the three months endedSeptember 30, 2021 , as compared to$28,776 for the three months endedSeptember 30, 2020 . Total operating expenses in the third quarter included$2,911 in non-cash stock compensation, compared to$2,947 in the prior year. The increase in total operating expenses over the prior year includes higher facility costs related to our newTampa facility, and increased compensation, travel and project costs as we have returned to more normalized spending levels over the past few quarters following the steep reduction in spend as a result of our cost mitigation initiatives enacted at the beginning of the COVID-19 pandemic, partially offset by lower bonus, commission and stock compensation charges in the third quarter due to lower revenue expectations for 2021. As a percentage of total revenues, total costs and expenses increased to 105% for the three months endedSeptember 30, 2021 , as compared to 86% for the three months endedSeptember 30, 2020 . 28 -------------------------------------------------------------------------------- Table of Contents Sales and marketing expenses increased 4% to$18,370 for the three months endedSeptember 30, 2021 , as compared to$17,726 for the three months endedSeptember 30, 2020 . This increase was primarily due to an increase in travel related expenses as hospital access restrictions improved and increased spend in marketing development programs, partially offset by lower compensation related expenses including sales commissions. As a percentage of total revenues, sales and marketing expenses increased to 59% for the three months endedSeptember 30, 2021 as compared to 53% for the three months endedSeptember 30, 2020 . Research and development expenses increased 51% to$6,404 for the three months endedSeptember 30, 2021 , as compared to$4,230 for the three months endedSeptember 30, 2020 . Research and development costs include our product development efforts, including expenses in support of our biologics license application ("BLA") for Avance Nerve Graft and clinical trials. Product development expenses represented approximately 76% of total research and development expenses in the three months endedSeptember 30, 2021 as compared to 49% in the prior year period. Clinical trial expenses represented approximately 24% of research and development expenses in the three monthsSeptember 30, 2021 as compared to 51% in the prior year period. The increase in product development expenses reflect increased spending in specific programs, including our efforts related to the BLA for Avance Nerve Graft and a next generation Avance product. Additionally, pandemic related restrictions lowered spending on certain of our clinical study programs in the prior year. As a percentage of total revenues, research and development expenses increased to 21% for the three months endedSeptember 30, 2021 as compared to 13% for the three months endedSeptember 30, 2020 . General and administrative expenses increased 16% to$7,880 for the three months endedSeptember 30, 2021 , as compared to$6,820 for the three months endedSeptember 30, 2020 . The increase was primarily due to an increase in compensation and legal fees, partially offset by lower bonus and stock compensation charges in the third quarter due to lower revenue expectations for 2021. As a percentage of total revenues, general and administrative expenses increased to 25% for the three months endedSeptember 30, 2021 , as compared to 20% for the three months endedSeptember 30, 2020 . Income Taxes We had no income tax expense or benefit for each of the three months endedSeptember 30, 2021 and 2020 due to the incurrence of net operating losses in each of these periods, the benefits of which have been fully reserved. We do not believe that there are any additional tax expenses or benefits currently available. 29 -------------------------------------------------------------------------------- Table of Contents Comparison of the Nine Months EndedSeptember 30, 2021 and 2020 Nine Months Ended September 30, 2021 2020 % of % of Amount Revenue Amount Revenue (dollars in thousands) Revenues$ 95,821 100.0 %$ 79,805 100.0 % Cost of goods sold 17,503 18.3 16,118 20.2 Gross Profit 78,318 81.7 63,687 79.8 Costs and expenses Sales and marketing 55,594 58.0 49,854 62.5 Research and development 17,875 18.7 12,915 16.2 General and administrative 24,912 26.0 18,726 23.5 Total costs and expenses 98,381 102.7 81,495 102.1 Loss from operations (20,063) (20.9) (17,808) (22.3) Other (expense) income: Investment income 80 0.1 576 0.7 Interest expense (1,427) (1.5) (459) (0.6) Change in fair value of derivatives (152) (0.2) (71) (0.1) Other expense (137) (0.1) (14) - Total other (expense) income, net (1,636) (1.7) 32 - Net Loss$ (21,699) (22.6) %$ (17,776) (22.3) % Revenues Revenues for the nine months endedSeptember 30, 2021 increased 20% to$95,821 as compared to$79,805 for the nine months endedSeptember 30, 2020 . Revenue growth was driven by an increase in unit volume of approximately 15%, as well as the net impact of changes in prices and product mix of approximately 5%. The unit volume increase was attributed to growth in our core and active accounts, and also reflects the initial negative impact of the COVID-19 pandemic, which began to negatively impact procedure volumes and revenue in March of 2020. Gross Profit Gross profit for the nine months endedSeptember 30, 2021 increased 23% to$78,318 as compared to$63,687 for the nine months endedSeptember 30, 2020 . Gross margin increased to 82% for the nine months endedSeptember 30, 2021 as compared to 80% for the nine months endedSeptember 30, 2020 as we continue to increase production levels. Prior year gross margin was negatively impacted by lower revenue, a$2,114 increase in period costs resulting from our temporary suspension of tissue processing as a result of the COVID-19 pandemic and a$2,108 provision for inventory write-down. In the nine months endedSeptember 30, 2021 , we recorded a$2,850 provision for inventory write-down, including the reserve for Avive of$1,251 . Costs and Expenses Total costs and expenses increased 21% to$98,381 for the nine months endedSeptember 30, 2021 as compared to$81,495 for the nine months endedSeptember 30, 2020 . Total operating expenses for the nine months endedSeptember 30, 2021 included$9,410 in non-cash stock compensation, compared to$5,725 in the prior year. The increase in total operating expenses, including non-cash stock compensation, over the prior year includes higher facility costs related to our newTampa facility, and increased compensation, travel and project costs as we have returned to more normalized spending levels over the past few quarters following the steep reduction in spend as a result of our cost mitigation initiatives enacted at the beginning of the COVID-19 pandemic. As a percentage of total revenues, total costs and expenses increased to 103% for the nine months endedSeptember 30, 2021 as compared to 102% for the nine months endedSeptember 30, 2020 . Sales and marketing expenses increased 12% to$55,594 for the nine months endedSeptember 30, 2021 , as compared to$49,854 for the nine months endedSeptember 30, 2020 . This increase was primarily due to higher compensation related 30 -------------------------------------------------------------------------------- Table of Contents expenses including sales commissions and increased spend in marketing development programs. As a percentage of total revenues, sales and marketing expenses decreased to 58% for the nine months endedSeptember 30, 2021 as compared to 62% for the nine months endedSeptember 30, 2020 . Research and development expenses increased 38% to$17,875 for the nine months endedSeptember 30, 2021 as compared to$12,915 for the nine months endedSeptember 30, 2020 . Product development expenses represented approximately 75% of total research and development expenses in the nine months endedSeptember 30, 2021 as compared to 47% in the prior year period. Clinical trial expenses represented approximately 25% of research and development expenses in the nine months endedSeptember 30, 2021 as compared to 53% in the prior year period. The increase in product development expenses reflect increased spending in specific programs, including our efforts related to the BLA for Avance Nerve Graft and a next generation Avance product. Additionally, pandemic related restrictions lowered spending on certain of our clinical study programs in 2020, have restarted over the past few quarters and spend on these and other clinical activities continue to increase in 2021. As a percentage of total revenues, research and development expenses increased to 19% for the nine months endedSeptember 30, 2021 as compared to 16% for the nine months endedSeptember 30, 2020 . General and administrative expenses increased 33% to$24,912 for the nine months endedSeptember 30, 2021 as compared to$18,726 for the nine months endedSeptember 30, 2020 . This increase was primarily due to higher compensation, including stock compensation and increased legal fees. As a percentage of total revenues, general and administrative expenses increased to 26% for the nine months endedSeptember 30, 2021 as compared to 23% for the nine months endedSeptember 30, 2020 . Other Expense and Income We recognized total other expense of$1,636 for the nine months endedSeptember 30, 2021 as compared to other income of$32 for the nine months endedSeptember 30, 2020 . The change is primarily due to interest expense recognized in the current period on our financing agreement withOberland Capital (the "Oberland Facility") that beganJune 30, 2020 , and lower investment income from our asset management program as we lowered our investment balances and increased cash reserves. Income Taxes We had no income tax expense or benefit for each of the nine months endedSeptember 30, 2021 and 2020, due to the incurrence of net operating losses in each of these periods, the benefits of which have been fully reserved. We do not believe that there are any additional tax expenses or benefits currently available. Liquidity and Capital Resources Cash Flow Information As ofSeptember 30, 2021 , we had cash, cash equivalents, and restricted cash of$53,063 , a decrease of$2,546 from$55,609 atDecember 31, 2020 , primarily as a result of renovating the APC and increasing inventory levels, partially offset by the proceeds from long-term debt and sales of investments, as well as cash flow from employee option exercises. We had working capital of$111,609 and a current ratio of 5.8x atSeptember 30, 2021 , compared to working capital of$122,420 and a current ratio of 6.4x atDecember 31, 2020 . The decrease in the current ratio atSeptember 30, 2021 , as compared toDecember 31, 2020 , was primarily due to a decrease in investments year over year. We believe we have sufficient cash resources to meet our liquidity requirements for at least the next 12 months based on our expected level of operations. Our future capital requirements depend on a number of factors including, without limitation, revenue increases consistent with our business plan, cost of products and acquisition and/or development of new products. We could face increasing capital needs. Such capital needs could be substantial depending on the extent to which we are unable to increase revenue. 31 -------------------------------------------------------------------------------- Table of Contents If we need additional capital in the future, we could draw additional debt proceeds of up to an additional$25,000 from our current financing agreement withOberland Capital subject to certain restrictions as set forth in the agreement and described in Note 10 - Long Term Debt in the Notes to Condensed Consolidated Financial Statements. If necessary, we may raise additional funds through public or private equity offerings, debt financings or from other sources. The sale of additional equity would result in dilution to our shareholders. There is no assurance that we will be able to secure funding on terms acceptable to us, or at all. The increasing need for capital could also make it more difficult to obtain funding through either equity or debt. Should additional capital not become available to us as needed, we may be required to take certain action, such as slowing sales and marketing expansion, delaying regulatory approvals or reducing headcount. Nine Months Ended September 30, (In thousands) 2021 2020 Net cash (used in) provided by: Operating activities$ (11,891) $ (12,463) Investing activities (10,064) 2,389 Financing activities 19,409 35,959
Net (decrease) increase in cash, cash equivalents, and restricted cash
$
(2,546)
Cash used in operating activities Operating activities for the nine months endedSeptember 30, 2021 used$11,891 of cash as compared to using$12,463 for the nine months endedSeptember 30, 2020 . The decrease in operating cash outflows primarily relates to higher share-based compensation and depreciation, resulting in an increase in net loss as compared to the prior period, partially offset by an increase in inventory. Cash used in / provided by investing activities Investing activities for the nine months endedSeptember 30, 2021 used$10,064 of cash as compared to providing$2,389 for the nine months endedSeptember 30, 2020 . This decrease in cash provided by investing activities is principally attributable to higher sales of investments in the prior year as part of our asset management program. Cash provided by financing activities Financing activities for the nine months endedSeptember 30, 2021 provided$19,409 of cash as compared to providing$35,959 of cash for the nine months endedSeptember 30, 2020 . The decrease in cash provided by financing activities is due to the drawdown of the$15,000 second tranche of the Oberland Facility in the second quarter of 2021 as compared to a$35,000 drawdown of the first tranche in the same period of the previous year. This decrease is slightly offset by the increase in cash received from the exercise of employee stock options. Operating Cash Requirements APC Commitment OnJuly 9, 2019 , we entered into the Design-Build Agreement with CRB, pursuant to which CRB will renovate and retrofit the APC (See Note 13 - Commitments and Contingencies in the Notes to Condensed Consolidated Financial Statements). Tampa Commitment Pursuant to the Heights Agreement, we are using the leased premises inTampa, Florida for general office, research laboratory, training and meeting purposes. We began occupying the premises in September of 2020. The lease term includes several months of free rent, and these free periods will cease in the second half of fiscal 2021. We recorded a right-of-use asset and lease liability at the commencement of the lease term as discussed in Note 13 - Commitments and Contingencies in the Notes to the Consolidated Financial Statements. OnJuly 12, 2021 , we entered into the First Amendment to the Office Lease (the "First Amendment") to the Heights Agreement. The First Amendment revises the commencement date of the Office Lease to meanOctober 30, 2020 and revises the termination date of the Office Lease to beOctober 31, 2034 . Pursuant to the First Amendment, we were entitled to an additional 1 ½ months of free rent periods. 32 --------------------------------------------------------------------------------
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Credit Facilities
OnJune 30, 2020 , we entered into the Oberland Facility and obtained the first tranche of$35,000 at closing. OnJune 30, 2021 , the second tranche of$15,000 was drawn down by the Company. The third and final tranche of$25,000 may be drawn at our option upon achieving two consecutive quarters with revenue of$28,000 . The financing costs for this facility were approximately$642 and were recorded as a contra liability to the debt facility. The Oberland Facility requires quarterly interest payments for seven years. Interest is calculated as 7.5% plus the greater of LIBOR or 2.0% (9.5% as ofSeptember 30, 2021 ). Each tranche of the Oberland Facility, if and when issued, will have a term of seven years from the date of issuance with the first tranche issued onJune 30, 2020 and maturing onJune 30, 2027 and the second tranche issued onJune 30, 2021 and maturing onJune 30, 2028 . In connection with the Oberland Facility, we entered into a revenue participation agreement withOberland Capital , which provides that, among other things, an additional quarterly royalty payment as a percentage of our net revenue, up to$70,000 in any given fiscal year, subject to certain limitations set forth therein, during the period commencing on the later of (i)April 1, 2021 and (ii) the date of funding of a tranche of the loan, and ending on the date upon which all amounts owed under the Oberland Facility have been paid in full (the "Revenue Participation Agreement"). Payments commenced onSeptember 30, 2021 . This royalty structure results in approximately 1.0% per year of additional interest payments on the outstanding loan amount. Material Commitments As previously disclosed in Note 13 - Commitments and Contingencies, inJuly 2018 , we purchased a 70,000 square foot facility, the APC, on approximately 8.6 acres of land inVandalia, Ohio . OnJuly 9, 2019 , we entered into the Design-Build Agreement with CRB (which was subsequently amended onOctober 6, 2020 ), pursuant to which CRB will renovate and retrofit the APC. The Design-Build Agreement contains several design phase milestones that began inJuly 2019 and sets the date for Substantial Completion (as defined in the Design-Build Agreement) by late 2021, subject to adjustment in accordance with the terms of the Design-Build Agreement. The estimated cost pursuant to the Design-Build Agreement is$29,300 . Additional costs associated with the renovation, purchasing of furniture and equipment, validation and certification of the APC are estimated to be$13,600 . These capital expenditure costs will be incurred as they arise until material processing is transitioned to APC, expected to begin in early 2023. As ofSeptember 30, 2021 , we have recorded$15,165 in the current year and$30,855 to date related to renovations and design build in projects in progress. These renovations included providing a second floor over a portion of the facility which increases the total usable space to 107,000 square feet. These items are recorded as projects in process as part of the property and equipment in our condensed consolidated balance sheet. In addition, we capitalize interest expense from our debt facility based on the amount of accumulated expenditures of this asset during the period that is required to get the asset ready for its intended use. During the three and nine months endedSeptember 30, 2021 , we capitalized interest of$1,338 and$2,526 to projects in progress. To date, the Company has capitalized interest of$3,495 related to this project. We expect to receive certain economic development grants from state and local authorities totaling up to$2,685 including$1,250 of cash grants to offset costs to acquire and develop the APC. The economic development grants are subject to certain job creation milestones by 2023 and related contingencies. We have received approximately$1,188 from these grants. These grants have claw back clauses if we do not meet these job creation milestones by 2023.
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