Axogen, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited financial figures below are in millions of dollars unless otherwise stated. Axogen develops and sells products for peripheral nerve repair.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $22.1 | $26.7 | $46.4 | $50.0 |
| Gross profit | $16.5 | $22.5 | $36.0 | $42.0 |
| Gross margin | 74.7% | 84.1% | 77.5% | 84.1% |
| Operating loss | $(8.3) | $(7.7) | $(16.8) | $(17.9) |
| Net loss | $(8.1) | $(7.0) | $(16.3) | $(16.5) |
| Loss per share, basic and diluted | $(0.20) | $(0.18) | $(0.41) | $(0.42) |
- Q2 revenue fell 17% year over year; first-half revenue fell 7%. Product unit volume declined 19% in Q2 and 10% in the first half, partly offset by pricing and product mix. Active accounts rose 3% year over year to 786, but revenue per active account declined.
- Q2 gross margin fell to 74.7%, primarily from production suspension costs and inventory write-downs. The first-half inventory write-down provision was $1.6 million. Management expected margins to normalize as sales recovered.
- Operating expenses declined 18% in Q2 and 12% in the first half, reflecting lower travel, commissions, conferences, litigation costs and stock compensation, plus cost controls. R&D increased 3% in the first half, with continued investment in the Avance Nerve Graft biologics license application (BLA).
- Operating cash used in the first half was $15.1 million, compared with $14.7 million in 2019. Investing activities provided $23.5 million, including proceeds from investment maturities, while property and equipment purchases were $13.2 million. Financing activities provided $35.8 million, largely from new debt.
Liquidity, debt and capital commitments
- At June 30, cash and cash equivalents were $75.3 million, restricted cash $10.6 million and investments $24.0 million, totaling $109.9 million. Working capital was $126.2 million and the current ratio was 10.0. Management said available cash, cash equivalents and investments were expected to fund operations for at least 12 months.
- Axogen borrowed $35 million under a new seven-year Oberland Capital facility on June 30. Up to $40 million in additional tranches may be available through December 31, 2021, subject to terms and revenue milestones; total facility capacity is $75 million. The first tranche bears interest at 9.5% as of the reporting date, with interest-only payments during the term.
- The financing also includes revenue-based payments beginning September 30, 2021, estimated by the company to add about 1% annually to interest costs, and a make-whole provision targeting an 11.5% lender return at repayment. Oberland may purchase up to $3.5 million of common stock under an option. The debt is secured by substantially all company assets and includes revenue covenants; Axogen reported compliance at June 30.
- The company received and repaid a $7.8 million Paycheck Protection Program loan in May 2020 after subsequent government guidance concerning public-company eligibility.
- COVID-19 deferred about $25 million of expected 2020 capital spending for the Vandalia processing center to 2021. The project’s estimated renovation and additional equipment, validation and certification costs were approximately $42 million in total. The Tampa facility was expected to be occupied in Q4 2020; management estimated $7.4 million of remaining spending, including $4.6 million held in restricted escrow.
Outlook, risks and unusual items
- Axogen suspended its 2020 financial guidance because of COVID-19 uncertainty. Management reported improving access to healthcare facilities and Q2 regional rebounds as deferred procedures resumed, but noted that rebounds often returned to more normal levels. Further pandemic waves could reduce trauma incidence, procedure volumes, facility access and revenue.
- The company reduced compensation, laid off about 10% of its workforce, imposed a hiring freeze, cut discretionary spending and temporarily suspended some tissue processing. Tissue processing began a gradual restart in June, with a ramp to expected demand in Q3. Most employee pay reductions were expected to end in August; officers and directors remained subject to a 20% reduction at filing.
- Clinical studies were disrupted by site-access limits; the company expanded home-health follow-up visits. Some trials and projects were reduced or deferred, while RECON, RANGER and REPOSE were excluded from the stated trial reductions.
- Key operating dependencies include four principal products, the Cook Biotech supply arrangement for Axoguard products, and CTS processing capacity. The company warned that loss of supply or a prolonged processing-facility disruption could materially affect operations.
- Two shareholder matters remain: the Einhorn securities class action, whose amended complaint followed an earlier dismissal without prejudice, and the Bach derivative action. The company disputes the allegations; potential losses could not be reasonably estimated.
- State and local grants for the Vandalia project may total up to $2.7 million, but are tied to job-creation milestones by 2023 and include clawback provisions. About $0.2 million had been received.
- Management concluded disclosure controls were effective as of June 30, 2020, and reported no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether surgical volumes, revenue per active account and gross margins recover, and how renewed COVID-19 restrictions affect demand.
- Liquidity and cash burn against the 12-month funding estimate, including debt service, revenue-participation payments and capital spending.
- Compliance with Oberland revenue covenants and the facility’s default, collateral, make-whole and additional-tranche terms.
- Updated cost, timing and grant conditions for the Vandalia processing center and Tampa facility.
- Developments in the Einhorn and Bach litigation and any resulting financial or operational consequences.