Axogen, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; filed May 6, 2020. Axogen develops and commercializes products for peripheral nerve repair. Financial amounts below are in U.S. dollars; millions unless otherwise stated.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Revenue | $24.3 million | $23.3 million; up 4.2% |
| Gross profit / margin | $19.4 million / 80.1% | $19.6 million / 84.0% |
| Operating loss | $8.5 million | $10.2 million |
| Net loss | $8.2 million; $0.21 per share | $9.5 million; $0.24 per share |
| Cash used in operations | $8.1 million | $8.9 million |
| Cash, cash equivalents and restricted cash | $41.9 million at March 31 | Up $0.2 million from year-end |
| Cash, cash equivalents and investments | $89.0 million at March 31 | — |
| Working capital / current ratio | $100.9 million / 6.18 | $114.1 million / 6.5 at December 31, 2019 |
Revenue increased on higher unit volume and the net effect of pricing and product mix. Active accounts rose 13% year over year to 825. March sales fell sharply as hospitals shifted resources to COVID-19 care, limited elective procedures and restricted access, while shelter-in-place measures likely reduced traumatic injuries.
Gross margin declined amid manufacturing period and variance costs from temporarily suspending tissue processing, and higher reserves for excess and obsolete inventory. Operating expenses were $28.0 million, down 6.1%, principally reflecting lower litigation costs and stock-based compensation, partly offset by higher sales and marketing and R&D spending. Stock compensation included forfeitures and reversals of performance awards associated with revenue results and expected COVID-19 effects.
Investing activities provided $8.6 million, largely reflecting net investment maturities, while property and equipment purchases used $5.0 million. Total liabilities were $20.7 million, including $3.0 million of lease liabilities; the filing does not report material conventional borrowings. Management said existing cash, cash equivalents and investments were expected to fund operations for at least 12 months, subject to pandemic developments.
Material changes, outlook and risks
- COVID-19 and guidance: The company suspended its 2020 financial guidance, stating the pandemic would materially affect near-term performance. It could not predict the duration or full impact, but expected revenue to decline in Q2 and potentially longer.
- Cost and capacity actions announced after quarter-end: Axogen reduced executive and board cash compensation by 20%, reduced other exempt salaries by 10%–15%, laid off approximately 10% of its workforce, froze hiring, suspended tissue recovery and processing temporarily, and cut discretionary spending. Severance was expected to be recorded in Q2.
- Capital investment: Completion of the Vandalia biologics processing center was deferred by up to a year, shifting approximately $25 million of expected 2020 capital expenditures to 2021. The company extended its CTS production-facility agreement through December 31, 2022. The filing also describes continuing APC construction commitments and possible stop-start costs.
- PPP loan: Axogen received a $7.8 million Paycheck Protection Program loan on April 23, 2020, then repaid it on May 5 after subsequent Treasury guidance raised questions about public-company eligibility. The company said it would pursue further cost reductions as needed and explore non-dilutive financing.
- Contingencies: The Einhorn securities class action was dismissed without prejudice on April 21, 2020; the plaintiff had 60 days to amend. A shareholder derivative complaint by Michael Bach was filed April 21, 2020. The company disputes the allegations and said potential losses could not be reasonably estimated. Other referenced derivative complaints had been dismissed or withdrawn without prejudice.
- Business concentration and execution risks: Most revenue comes from four products. Axogen depends on Cook Biotech for Axoguard products and on Community Tissue Services for nerve-graft processing; prolonged disruption at the processing site could harm supply and results. The APC transition, regulatory requirements and clinical trials add execution and funding risk.
Management reported disclosure controls and procedures were effective as of March 31, 2020 and no material change in internal control over financial reporting. Interim results are not necessarily indicative of full-year results.
Most important facts for investors to verify
- How COVID-19 affected Q2 revenue, procedure volumes, customer access and recovery in subsequent periods, and whether guidance was reinstated.
- Cash burn, liquidity and financing needs against the stated 12-month funding expectation, including the effect of cost reductions and the repaid PPP loan.
- Timing, remaining cost and funding of the Vandalia processing center, and the implications of extending the CTS agreement.
- Trends in gross margin, inventory write-downs, active accounts and product demand after the sharp March slowdown.
- Developments in the Einhorn and Bach matters, and any resulting financial exposure or costs.