AxoGen, Inc. — Q3 2018 Form 10-Q
Business and reporting period. AxoGen develops and sells products and services for peripheral nerve repair. This unaudited filing covers the quarter and nine months ended September 30, 2018; comparisons are to the corresponding 2017 periods unless noted.
Financial performance
| Metric | Q3 2018 | Nine months 2018 |
|---|---|---|
| Revenue | $22.7 million, up 41% | $60.5 million, up 39% |
| Gross profit / margin | $19.2 million / 84.7% | $51.2 million / 84.7% |
| Operating expenses | $24.0 million | $65.9 million |
| Operating loss | $4.8 million | $14.6 million |
| Net loss | $4.1 million | $17.2 million |
| Loss per share, basic and diluted | $0.11 | $0.47 |
Revenue growth was attributed mainly to higher purchases by established active accounts, with new accounts also contributing, and to a price increase implemented earlier in 2018. Active accounts rose 21% year over year to approximately 679 at quarter-end. Gross margin was broadly stable, while operating costs grew faster than revenue as the company expanded sales, research and development, clinical activities, and infrastructure. Nine-month stock-based compensation was $6.0 million.
Cash flow and liquidity. Operating activities used $12.9 million of cash in the first nine months, versus $8.2 million used in 2017. Investing activities used $106.7 million, principally for short-term investments, facility acquisition, and capital spending; financing activities provided $108.7 million, principally from the stock offering. At September 30, cash and cash equivalents were $25.6 million and investments were $100.7 million. Working capital was $140.8 million and the current ratio was 12.7. Management said available resources were sufficient for at least the next 12 months based on expected operations.
Debt and financing. AxoGen repaid its MidCap term and revolving loans in May 2018. At September 30, it reported no revolving borrowings and only $74,276 of equipment-lease obligations, of which $38,314 was long-term. The nine-month results included a $2.2 million debt-extinguishment loss, including fees and remaining deferred financing costs. A May public offering of 3.45 million shares generated approximately $132.7 million net proceeds.
Material changes and notable items
- Quarterly revenue rose 41%, while quarterly operating expenses increased 60%; the quarterly net loss widened from $2.1 million to $4.1 million. For the nine months, revenue rose 39%, but the net loss widened from $7.9 million to $17.2 million.
- Sales and marketing, research and development, and general and administrative expenses all increased substantially, reflecting hiring, commercial expansion, clinical work, and organizational growth.
- The company began investing in securities in 2018. It disclosed that approximately $81.8 million of securities held at June 30 had been presented as cash equivalents in its June 2018 balance sheet; the current filing presents them as investments and includes the related purchases in the nine-month cash-flow statement.
- Property and equipment rose to $7.7 million from $2.2 million at year-end, including the purchase of a 70,000-square-foot Ohio facility for approximately $5.0 million. Renovations were expected to be completed by Q3 2020, subject to the facility’s intended role in the Avance BLA process.
- The company entered into a lease for 75,000 square feet of planned Tampa office and laboratory space. Disclosed future operating-lease payments totaled $40.8 million, including this lease. A separate short-term Tampa office lease was signed after quarter-end.
Outlook, risks, and contingencies
Management described continued growth from product penetration in active accounts and expansion of the commercial team, while noting ongoing investment in clinical and product-development programs, including the Avance Nerve Graft biologics license application. The filing refers to 2018 and 2019 guidance in its forward-looking statement discussion, but the provided filing text does not provide clear guidance values. Management warned that future capital needs depend on growth, product costs, and product development; additional financing may be needed, and may not be available on acceptable terms.
- Revenue depends substantially on four products. AxoGuard distribution is tied to Cook Biotech under an agreement expiring in 2027; loss of access could materially affect the business until replacements are available.
- Processing of Avance and Avive depends significantly on Community Tissue Services (CTS). Disruption or termination could affect production and revenue; the company said its new facility might not cover a near-term CTS outage.
- Other disclosed risks include clinical, regulatory and product-development uncertainty; expansion-related costs; possible dilution if further equity is raised; and compliance with data-protection laws, including GDPR.
- The company reported no material litigation as of September 30, 2018, and no material change to previously disclosed risk factors other than the added data-protection risk. No material capital-expenditure commitments or off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether revenue growth and active-account expansion continue, and how much growth reflects account penetration, new accounts, and pricing.
- Whether operating expenses can grow more slowly than revenue and reduce operating losses.
- The liquidity and risk profile of the investment portfolio, and the effects of the disclosed June-quarter balance-sheet classification error.
- Progress, cost, and timing of the Avance BLA and Ohio facility renovations, including the company’s dependence on CTS during the transition.
- The terms and expected cost of the Tampa leases and other lease commitments, and whether future capital requirements require additional financing.