Axogen, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Financial figures are in millions of dollars unless otherwise noted. Axogen develops and sells peripheral nerve repair products, including Avance Nerve Graft, Axoguard products and Avive Soft Tissue Membrane.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $26.7 | $20.6 | $50.0 | $37.8 |
| Gross profit / margin | $22.5 / 84.1% | $17.5 / 84.9% | $42.0 / 84.1% | $32.0 / 84.6% |
| Operating loss | $(7.7) | $(4.8) | $(17.9) | $(9.8) |
| Net loss | $(7.0) | $(7.4) | $(16.5) | $(13.1) |
| Loss per share, basic and diluted | $(0.18) | $(0.20) | $(0.42) | $(0.37) |
- Q2 revenue grew 29.7%; six-month revenue grew 32.1%. Management attributed growth mainly to higher product volumes and purchasing by more and larger active accounts. Active accounts were approximately 762, up 20% from 634 a year earlier.
- Gross margin was broadly stable, declining 0.8 percentage points in Q2 and 0.5 points year to date. Operating expenses rose faster than revenue: total costs and expenses increased 35.1% in Q2 and 43.2% for the first half. Sales and marketing, R&D, and G&A all increased, reflecting commercial expansion, personnel, clinical and product-development work, and litigation-related professional fees.
- Q2 net loss narrowed despite a larger operating loss, partly because Q2 2018 included a $2.2 million debt-extinguishment loss and higher interest expense. For the first half, net loss increased to $16.5 million from $13.1 million.
- Operating cash use was $14.7 million for the first half, versus $9.9 million a year earlier. Investing activities provided $12.8 million, primarily reflecting net maturities of short-term investments. Financing activities provided $2.5 million, mainly from stock-option exercises.
- At June 30, cash and cash equivalents were $24.9 million, restricted cash $6.0 million, and investments $78.2 million; together these totaled $109.1 million. Working capital was $125.9 million and the current ratio 9.2, down from $137.9 million and 11.57 at year-end 2018.
- The company reported no term or revolving loan balance. Reported $4.2 million of long-term obligations consisted primarily of operating and finance lease liabilities, including $1.8 million current maturities. Total liabilities were $18.6 million.
Material changes, outlook and risks
- Management said existing cash, cash equivalents and investments should fund operations for at least the next 12 months, based on current operating estimates. The filing provides no clear numerical 2019 revenue or earnings guidance.
- Axogen is investing in its Vandalia, Ohio processing facility. A July 2019 design-build agreement estimated renovation costs at $29 million, with another estimated $13 million for equipment, furniture, validation and certification. The company anticipated spending up to approximately $33.5 million over the next 12 months and $37.6 million over 18 months for the facility project. Full processing transition was anticipated by early 2022.
- The company also anticipated up to $12 million in leasehold improvements, equipment and furniture for its planned Tampa office space over the next 12 months, with occupancy expected by Q2 2020. State and local grants could total up to $2.7 million, subject to job-creation milestones and other conditions.
- Material operating dependencies include Cook Biotech as the exclusive Axoguard distributor through June 2027 and Community Tissue Services (CTS) for Avance and Avive processing. Axogen noted that interruption at CTS could disrupt supply; a replacement facility would require regulatory approval.
- Three lawsuits were disclosed: a putative federal securities class action and two related Colorado cases alleging improper procurement of donated specimens. Axogen disputes the allegations and intends to defend itself. The filing reports legal-related costs of $0.6 million in Q2 and $1.8 million for the first half; outcomes and potential exposure are not quantified clearly.
- R&D spending supports clinical activities, product development and work related to a biologics license application for Avance. The filing describes a planned transition from a 361 HCT/P tissue product to a biologic product, which carries execution and regulatory uncertainty.
- Management concluded disclosure controls and procedures were effective as of June 30, 2019. The company adopted lease accounting guidance in 2019, recording right-of-use assets and lease liabilities; it reported no material impact on net earnings.
Investor verification priorities
- Check subsequent filings for revenue growth, active-account trends, pricing and product mix, and whether operating expenses begin to scale more slowly than sales.
- Monitor cash burn and the timing and total cost of Vandalia and Tampa projects, including whether grants are earned and received.
- Review developments, potential costs and any financial-statement effects of the securities and specimen-procurement litigation.
- Track Avance clinical and regulatory milestones, and assess the company’s dependence on CTS processing and Cook Biotech distribution.
- Confirm that liquidity remains adequate as capital projects and operating losses continue; the filing’s stated runway is based on management’s estimates.