Axogen, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; filed November 6, 2019. Amounts below are in millions of dollars unless stated otherwise. Axogen develops and sells peripheral nerve repair products, principally Avance Nerve Graft, Axoguard products and Avive Soft Tissue Membrane.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $28.564 | $22.660 | $78.550 | $60.504 |
| Gross profit | $24.054 | $19.196 | $66.082 | $51.222 |
| Gross margin | 84.2% | 84.7% | 84.1% | 84.7% |
| Operating loss | $(6.112) | $(4.835) | $(23.987) | $(14.645) |
| Net loss | $(5.571) | $(4.102) | $(22.097) | $(17.168) |
| Loss per share, basic and diluted | $(0.14) | $(0.11) | $(0.56) | $(0.47) |
- Q3 revenue rose 26.1%; management attributed growth to higher unit volume and the net impact of pricing and product mix. Nine-month revenue rose 29.8%, primarily from core trauma applications and growth in active accounts.
- Active accounts reached approximately 791, up 17% from 679 a year earlier.
- Operating expenses grew faster than revenue for the first nine months: total costs and expenses rose 36.7% to $90.069 million. Increases reflected commercial expansion, personnel, R&D and clinical activity, stock compensation, and litigation-related costs. Nine-month litigation costs were $2.327 million.
- Gross margin declined 0.5 percentage point in both comparisons. Nine-month R&D expense rose 58.2% to $12.602 million, and G&A rose 45.2% to $24.321 million.
Cash, liquidity and obligations
- At September 30, cash and cash equivalents were $24.555 million, restricted cash $6.000 million, and investments $75.511 million. Together these totaled $106.066 million. Investments had maturities under one year.
- Working capital was $120.586 million, with a current ratio of 8.2, versus $137.909 million and 11.6 at year-end 2018. Management attributed the decline primarily to funding operations and payments of prior-year compensation and awards.
- Operating activities used $16.542 million in cash in the first nine months, versus $12.886 million in the comparable 2018 period. Investing activities provided $13.685 million, largely reflecting investment maturities; financing activities provided $3.118 million, mainly from stock-option exercises.
- The company reported $3.775 million of operating and finance lease obligations, including $1.773 million current. Its MidCap term and revolving loans had been repaid in 2018; no loan balance was reported at quarter-end.
- Management said existing cash, cash equivalents and investments were expected to fund operations for at least 12 months. This is management’s assessment, not a guarantee; the filing notes additional capital needs could arise and future financing might not be available on acceptable terms.
Outlook, investments and risks
- No quantified 2019 revenue or earnings guidance is provided in the supplied filing text. Management described continued investment in commercial capabilities, surgeon education, clinical studies, product development and infrastructure.
- The company planned up to approximately $33.5 million in APC renovation, equipment and furniture spending over the next 12 months and up to $37.6 million over 18 months. The facility’s substantial completion was targeted for Q3 2020, with processing transition anticipated by early 2022. It also anticipated up to $10 million for improvements and equipment at a leased Tampa office facility over the next 12 months.
- Axogen expected up to $2.685 million in state and local economic-development grants, subject to job-creation milestones and other conditions.
- Key operating dependencies include the CTS processing facility and an exclusive Cook Biotech distribution agreement for Axoguard products, which runs through June 2027. The filing warns that disruption at CTS or loss of Axoguard distribution could materially affect operations.
- Pending matters included a federal securities class action and two Colorado cases related to alleged procurement of specimens without consent. The company disputed the allegations and intended to defend the cases; potential losses in the Colorado matters could not be reasonably estimated. A shareholder derivative action was voluntarily dismissed without prejudice on November 5, 2019. The filing records litigation-related expense and reports a $98,000 insurance receivable; coverage for derivative-related costs remained under discussion with the insurer.
- Management stated that disclosure controls were effective as of September 30, 2019, and reported no material changes to internal control over financial reporting during the quarter. The filing said there had been no material changes to the risk factors in the 2018 Form 10-K.
Most important facts for investors to verify
- Whether revenue and active-account growth continue, and whether pricing and product mix support margins.
- Whether operating spending, litigation costs and cash use remain consistent with management’s liquidity assessment.
- Actual APC and Tampa facility costs, timing, grant receipts and milestones, and the resulting capital requirements.
- Developments in the securities and Colorado litigation, including insurance coverage and any eventual financial exposure.
- Continuity of CTS processing capacity and the Cook Biotech supply and distribution relationship.