AxoGen, Inc. — Q2 2018 Form 10-Q
Business context and reporting period. The unaudited filing covers the three and six months ended June 30, 2018. AxoGen sells products and services for peripheral nerve repair, including Avance Nerve Graft, AxoGuard products and Avive Soft Tissue Membrane. Management attributed growth primarily to increased purchases from active accounts; approximately 634 accounts were active at quarter-end, up 24% year over year.
Key financial metrics
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $20.6 million | $15.2 million | $37.8 million | $27.4 million |
| Gross profit | $17.5 million | $12.9 million | $32.0 million | $23.2 million |
| Gross margin | 84.9% | 85.0% | 84.6% | 84.7% |
| Operating loss | $(4.8) million | $(1.4) million | $(9.8) million | $(4.6) million |
| Net loss | $(7.4) million | $(2.1) million | $(13.1) million | $(5.8) million |
| Basic and diluted loss per share | $(0.20) | $(0.06) | $(0.37) | $(0.18) |
- Revenue grew 35.7% in Q2 and 38.1% in the first half. Management cited active-account growth, new accounts and a March 2018 price increase.
- First-half operating cash use was $9.9 million, versus $6.0 million a year earlier. Investing cash use was $0.9 million; financing provided $107.9 million, principally from the stock offering.
- Cash and cash equivalents were $133.6 million at June 30, versus $36.5 million at year-end 2017. Working capital was $147.1 million and the current ratio was 15.92.
- The MidCap term and revolving loans were repaid in full in May. Remaining obligations were $84,000, primarily equipment leases. The debt repayment resulted in a $2.2 million extinguishment loss in Q2.
- Total costs and expenses rose 55.5% in Q2 and 50.2% in the first half, outpacing revenue growth. Sales and marketing, R&D and G&A all increased. First-half stock-based compensation was $3.8 million.
Material changes, outlook and risks
- In May, AxoGen sold 3.45 million shares in a public offering, receiving approximately $132.7 million in net proceeds. It cited facility and capacity expansion and general corporate purposes; management retains discretion over their use.
- Management said cash resources should meet liquidity needs for at least the next 12 months. The filing provides no clear numerical 2018 revenue or earnings guidance.
- In July 2018, a subsidiary completed the purchase of a 70,000-square-foot property in Vandalia, Ohio. Renovations are expected to support a new processing facility and the Avance BLA; the filing gives no purchase price.
- Key operating dependencies include the CTS processing facility and the exclusive Cook Biotech supply arrangement for AxoGuard products, which runs through June 2027. A prolonged processing disruption or loss of AxoGuard supply could adversely affect the business.
- Substantially all revenue comes from four products. Expenses are rising as the company expands its sales organization, clinical work and product development; continued growth may require additional capital if revenue does not develop as planned.
- The company reported no material litigation, no material changes to previously disclosed risk factors, and no off-balance-sheet arrangements. Management concluded disclosure controls were effective.
Investor verification priorities
- Verify whether account and revenue growth can continue while sales, marketing, R&D and administrative costs grow faster than revenue.
- Track use of offering proceeds, cash burn and liquidity, including the costs and timing of the new processing facility.
- Monitor progress and regulatory requirements for the Avance BLA and the facility’s readiness to support production capacity.
- Assess continuity and alternatives for CTS processing and Cook Biotech-supplied AxoGuard products.
- Separate recurring operating performance from the one-time debt extinguishment loss and consider share dilution from the offering and equity compensation.