Axogen, Inc. — Q3 2020 Form 10-Q
Quarter ended September 30, 2020; financial statements are unaudited. Dollar amounts below are in millions unless stated otherwise. Axogen develops and sells products for peripheral nerve repair.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $33.428 | $28.564 | $79.805 | $78.550 |
| Gross profit / margin | $27.731 / 83.0% | $24.054 / 84.2% | $63.687 / 79.8% | $66.082 / 84.1% |
| Operating loss | $(1.045) | $(6.112) | $(17.808) | $(23.987) |
| Net loss | $(1.479) | $(5.571) | $(17.776) | $(22.097) |
| Loss per share, basic and diluted | $(0.04) | $(0.14) | $(0.45) | $(0.56) |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $(12.463) | $(16.542) |
- Q3 revenue grew 17% year over year, attributed to approximately 12% unit-volume growth and 5% from price and product mix. Nine-month revenue increased 2%; unit volume fell 2%, partly offset by 4% from price and mix.
- Q3 operating costs and expenses declined 5% to $28.776, supporting a narrower operating loss. For the nine months, costs and expenses declined 10% to $81.495, but lower gross profit and margin persisted.
- Q3 gross margin was lower partly because processing had restarted but had not reached prior-year efficiency. Nine-month gross margin was affected by $2.114 of additional period costs associated with temporarily suspended tissue processing, including a $2.108 inventory write-down provision.
- At September 30, cash and cash equivalents were $60.002, restricted cash $7.607, and investments $39.126. Working capital was $121.181; the current ratio was 7.4. Total current liabilities were $18.792.
- Operating cash use improved to $12.463 for the first nine months. Investing activities provided $2.389, while financing activities provided $35.959, mainly reflecting new debt proceeds. Capital expenditures included $18.907 of property and equipment purchases.
- Oberland debt had $35.000 principal outstanding; its balance-sheet carrying amount, net of discount and fees, was $31.817. The company also reported $2.450 of debt derivative liability and $0.183 of common-stock option derivative liability. Lease obligations totaled approximately $21.475.
Material changes and significant items
- Axogen entered a seven-year Oberland facility in June 2020 and received $35.000. Interest is at least 9.5%, with quarterly payments. The agreement includes a revenue participation arrangement expected to add approximately 1% annually to outstanding principal; payments begin September 30, 2021.
- The facility permits up to $40.000 in additional tranches subject to specified revenue conditions, with a second $15.000 tranche also subject to an Oberland put right. Debt is secured by substantially all company assets. Axogen reported compliance with its minimum-revenue covenant at September 30.
- The company received and repaid a $7.820 Paycheck Protection Program loan in May 2020 after subsequent government guidance concerning public-company eligibility.
- Axogen began occupying its new Tampa office in September. The new lease contributed to a substantial increase in operating lease assets and liabilities.
- Construction of the Axogen Processing Center in Vandalia, Ohio was deferred during cost-cutting measures and was planned to resume in early 2021. The company estimated approximately $26.000 of 2021 project spending and about $0.498 for the remainder of 2020.
Outlook, management commentary, and risks
- Axogen suspended its 2020 financial guidance because COVID-19 made near-term performance uncertain. Management said hospital access improved and Q3 benefited from a catch-up in deferred procedures, but further outbreaks could reduce surgical volumes and affect sales, operations, and clinical programs.
- Management believed available cash, cash equivalents, and investments were sufficient to fund operations for at least 12 months, while noting that future capital needs depend on revenue recovery, expense management, and facilities and product investment. Additional financing may be needed; equity issuance could dilute shareholders.
- COVID-19 measures included salary reductions, a workforce reduction of approximately 10%, hiring and discretionary-spending limits, temporary tissue-processing suspension, and deferred facility construction. Most employee pay was restored in August; executive and board pay was restored in late October. Tissue processing was expected to return to full capacity in Q4.
- Clinical trials were disrupted by site-access limits; the company used home health visits to support follow-up. Management anticipated increased spending on Avance Nerve Graft BLA work.
- Key operating risks include COVID-19 effects, dependence on a small number of core products, reliance on Cook Biotech for Axoguard supply and Community Tissue Services for processing, and the time and expense needed to replace processing capacity.
- Two shareholder-related matters remain: the Einhorn securities class action, whose complaint was dismissed without prejudice and whose amended complaint was pending a court decision on dismissal, and a derivative action brought by Michael Bach. The company disputes the allegations; possible losses could not be reasonably estimated.
- State and local grants of up to $2.685 for the processing center are contingent on job-creation milestones by 2023; approximately $0.238 had been received, and grants include clawback provisions.
Important facts for investors to verify
- Whether revenue and procedure volumes sustain their Q3 recovery as COVID-19 restrictions or resurgences evolve.
- Progress toward normalized gross margins and full processing capacity, including the timing, total cost, and funding of the Vandalia facility.
- Compliance with Oberland revenue covenants, the terms and cost of revenue participation and make-whole provisions, and the company’s ability to service secured debt.
- Cash burn, capital spending, and whether management’s stated liquidity horizon remains adequate under weaker operating scenarios.
- Developments in the Einhorn and Bach litigation, and any resulting financial or operational consequences.
- Reliance on key products, suppliers, and processors, and the status of clinical studies and Avance BLA work.