AXOGEN : MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q) – marketscreener.com

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Unless the context otherwise requires, all references in this report to"Axogen," the "Company," "we," "us" and "our" refer to Axogen, Inc., and itswholly owned subsidiaries Axogen Corporation ("AC"), Axogen ProcessingCorporation, and Axogen Europe GmbH.OVERVIEWWe are the leading company focused specifically on the science, development andcommercialization of technologies for peripheral nerve regeneration and repair.We are passionate about helping to restore peripheral nerve function and qualityof life to patients with physical damage or transection to peripheral nervesproviding innovative, clinically proven and economically effective repairsolutions for surgeons and health care providers. Peripheral nerves provide thepathways for both motor and sensory signals throughout the body. Every daypeople suffer traumatic injuries or undergo surgical procedures that impact thefunction of their peripheral nerves. Physical damage to a peripheral nerve, orthe inability to properly reconnect peripheral nerves, can result in the loss ofmuscle or organ function, the loss of sensory feeling or the initiation of pain.Our platform for peripheral nerve repair features a comprehensive portfolio ofproducts, including Avance Nerve Graft, a biologically active off-the-shelfprocessed human nerve allograft for bridging severed peripheral nerves withoutthe comorbidities associated with a second surgical site, Axoguard NerveConnector, a porcine submucosa extracellular matrix ("ECM") coaptation aid fortensionless repair of severed peripheral nerves, Axoguard Nerve Protector, aporcine submucosa ECM product used to wrap and protect injured peripheral nervesand reinforce the nerve reconstruction while preventing soft tissue attachments,Axoguard Nerve Cap, a porcine submucosa ECM product used to protect aperipheral nerve end and separate the nerve from the surrounding environment toreduce the development of symptomatic or painful neuroma and Avive Soft TissueMembrane, a processed human umbilical cord intended for surgical use as aresorbable soft tissue barrier. Along with these core surgical products, we alsooffer the Axotouch Two-Point Discriminator, used to measure the innervationdensity of any surface area of the skin. Our portfolio of products is availablein the United States, Canada, the United 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, Axoguard Nerve Cap and AviveSoft Tissue Membrane, in the United States is the main contributor to our totalreported sales and has been the key component of our growth to date.We have experienced that surgeons initially are cautious adopters for nerverepair products. Surgeons typically start with a few cases and then wait andreview the results of these initial cases. Active accounts are usually past thiswait period and have developed some level of product reorder. These activeaccounts have typically gone through the committee approval process, have atleast one surgeon who has converted a portion of his or her treatment algorithmsof peripheral nerve repair to the our portfolio and have ordered our products atleast six times in the last 12 months. In the first quarter, we had 919 activeaccounts, an increase of 26% from 731 one year ago. Active accounts areapproximately 85% of our revenue. The top 10% of these active accounts continueto represent approximately 35% of our revenue. As our business continues togrow, we will transition to reporting a new account metric that we believedemonstrates the strength of adoption and potential revenue growth in accountsthat have developed a more consistent use of Axogen products in their nerverepair algorithm. We refer to these as "Core Accounts" which we define as activeaccounts that have purchased at least $100,000 in the past 12 months. In thefirst quarter, we had 274 Core Accounts, an increase of 13% from 243 one yearago. These Core Accounts represented approximately 60% of our revenue in thequarter, which has remained consistent over the past two years.As such, revenue growth primarily occurs from increased purchasing from activeaccounts, followed by revenue growth from new accounts. During the COVID-19pandemic, we kept our sales team and broader commercial organization intact andtook the opportunity to provide extensive sales training. Our sales teamdeveloped skills and shared best practices around remote case support wherehospital access has been restricted. We believe this remote support has beenappreciated by customers and has expanded our sales team's ability to supportsurgeons and their patients during COVID-19 and beyond.There have been no significant changes to our critical accounting policies fromthose disclosed in our 2020 Annual Report on Form 10-K. 25-------------------------------------------------------------------------------- Table of ContentsResults of OperationsComparison of the Three Months Ended March 31, 2021 and 2020 Three Months Ended March 31, 2021 2020 % of % of Amount Revenue Amount Revenue (dollars in thousands)Revenues $ 31,037 100.0 % $ 24,261 100.0 %Cost of goods sold 5,172 16.7 4,816 19.9Gross Profit 25,865 83.3 19,445 80.1Cost and expensesSales and marketing 17,973 57.9 17,838 73.5Research and development 5,748 18.5 4,614 19.0General and administrative 8,364 26.9 5,502 22.7Total costs and expenses 32,085 103.4 27,954 115.2Loss from operations (6,220) (20.0) (8,509) (35.1)Other (expense) income:Investment income 34 0.1 311 1.3Interest expense (444) (1.4) (31) 0.0Change in fair value of derivatives - - 0.0Other expense (30) (0.1) 37 0.1Total other (expense) income, net (440) (1.4) 317 1.4Net Loss $ (6,660) (21.5) % $ (8,192) (33.8) %RevenuesRevenues for the three months ended March 31, 2021 increased 28% to $31,037 ascompared to $24,261 for the three months ended March 31, 2020. Revenue growthwas driven by an increase in unit volume of approximately 22%, as well as thenet impact of changes in prices and product mix of approximately 6%. The growthin unit volume increase was attributed to unit growth in our active accounts,and also reflects the initial negative impact of the COVID-19 pandemic, whichbegan to negatively impact procedure volumes and revenue in March of 2020.Gross ProfitGross profit for the three months ended March 31, 2021 increased 33% to $25,865as compared to $19,445 for the three months ended March 31, 2020. Gross marginincreased to 83% in the three months ended March 31, 2021 compared to 80% forthe three months ended March 31, 2020. Prior year gross margin was negativelyimpacted by excess inventory write-downs.Costs and ExpensesTotal costs and expenses increased 15% to $32,085 for the three months endedMarch 31, 2021, as compared to $27,954 for the three months ended March 31,2020. Prior year stock compensation included a credit of $1,697 on stockcompensation primarily reflecting lower estimates of performance stock awardsthat would be earned resulting from the impact of COVID-19 on performancemetrics for these awards. Additionally, the increase over prior year alsoincludes higher compensation, litigation expenses as well as increased expensesfor our new Tampa facility. These expenses were partially offset by decreases intravel, in-person conferences and surgeon education programs due to COVID-19related restrictions. As a percentage of total revenues, total costs andexpenses decreased to 103% for the three months ended March 31, 2021, ascompared to 115% for the three months ended March 31, 2020.Sales and marketing expenses increased less than 1% to $17,973 for the threemonths ended March 31, 2021, as compared to $17,838 for the three months endedMarch 31, 2020. This increase was primarily due to higher compensation related 26-------------------------------------------------------------------------------- Table of Contentsexpenses including sales commissions, offset by a decrease in travel andsymposium expense due to pandemic-related restrictions. As a percentage of totalrevenues, sales and marketing expenses decreased to 58% for the three monthsended March 31, 2021 as compared to 74% for the three months ended March 31,2020.Research and development expenses increased 25% to $5,748 for the three monthsended March 31, 2021, as compared to $4,614 for the three months ended March 31,2020. Research and development costs include our product development, reflectsspending in a number of specific programs including our efforts related to theBLA for Avance Nerve Graft and a next generation Avance product, and clinicaltrials. Product development expenses represented approximately 66% of totalresearch and development expense in the three months ended March 31, 2021 ascompared to 50% in the prior year period. Clinical trial expenses representedapproximately 34% of research and development expense in the three months endedMarch 31, 2021 as compared to 50% in the prior year period. The increase inproduct development expenses reflect increased spending in specific programs,including our efforts related to the BLA for Avance Nerve Graft and a nextgeneration Avance product. Additionally, pandemic related restrictions loweredspending on certain of our clinical study programs. In the first quarter of2021, we reinitiated activities in our Sensation-NOW and Rethink PainRegistries, and we expect that these and other clinical activities will continueto increase across the coming quarters. As a percentage of total revenues,research and development expenses remained flat at 19% for both three monthsended March 31, 2021 and 2021.General and administrative expenses increased 52% to $8,364 for the three monthsended March 31, 2021, as compared to $5,502 for the three months ended March 31,2020. The prior year quarter included $1,800 of lower non-cash stockcompensation primarily related to lower estimates of performance stock unitsthat would be earned resulting from the impact of COVID-19 on performancemetrics for these awards. Additionally, current year general and administrativeexpenses include litigation charges of $837. As a percentage of total revenues,general and administrative expenses increased to 27% for the three months endedMarch 31, 2021, as compared to 23% for the three months ended March 31, 2020.Other Income and ExpensesWe recognized total other expense of $440 for the three months ended March 31,2021, compared to other income of $317 for the three months ended March 31,2020. The change is primarily due to interest expense recognized in the currentperiod on our current financing agreement with Oberland Capital (the "OberlandFacility") that began June 30, 2020, and lower investment income from our assetmanagement program as we lowered our investment balances and increased cashreserves.Income TaxesWe had no income tax expense or benefit for each of the three months ended March31, 2021 and 2020, due to the incurrence of net operating losses in each ofthese periods, the benefits of which have been fully reserved. We do not believethat there are any additional tax expenses or benefits currently available.Liquidity and Capital ResourcesCash Flow InformationAs of March 31, 2021, we had cash, cash equivalents, and restricted cash of$46,176, a decrease of $9,433 from $55,609 at December 31, 2020, primarily as aresult of capital expenditures related to the biologics processing center inVandalia, Ohio, and other operating activities.We had working capital of $112,872 and a current ratio of 6.1x at March 31,2021, compared to working capital of $122,420 and a current ratio of 6.4x atDecember 31, 2020. The decrease in working capital and the current ratio atMarch 31, 2021, as compared to December 31, 2020, was primarily due to cashpayments in the quarter offset by higher receivables balance and inventorybalance at the end of the quarter due to increasing sales. We believe we havesufficient cash resources to meet our liquidity requirements for at least thenext 12 months based on our expected level of operations.Our future capital requirements depend on a number of factors including, withoutlimitation, revenue increases consistent with our business plan, cost ofproducts and acquisition and/or development of new products. We could faceincreasing capital needs. Such capital needs could be substantial depending onthe extent to which we are unable to increase revenue. 27-------------------------------------------------------------------------------- Table of ContentsIf we need additional capital in the future, we could draw additional debtproceeds of up to an additional $40,000 from the our current financing agreementwith Oberland Capital subject to certain restrictions as set forth in theagreement and described in Note 10 - Long Term Debt in the Notes to CondensedConsolidated Financial Statements. If necessary, we may raise additional fundsthrough public or private equity offerings, debt financings or from othersources. The sale of additional equity would result in dilution to ourshareholders. There is no assurance that we will be able to secure funding onterms acceptable to us, or at all. The increasing need for capital could alsomake it more difficult to obtain funding through either equity or debt. Shouldadditional capital not become available to us as needed, we may be required totake certain action, such as slowing sales and marketing expansion, delayingregulatory approvals or reducing headcount.

Three Months Ended March 31,

(9,433) $ 170

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