Axogen, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise. Axogen develops and sells products for peripheral nerve repair. The filing is unaudited, and interim results may not indicate full-year performance.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Revenue | $31.0 million | $24.3 million; up 28% |
| Gross profit / margin | $25.9 million / 83.3% | $19.4 million / 80.1% |
| Operating loss | $6.2 million | $8.5 million |
| Net loss | $6.7 million; $0.16 per share | $8.2 million; $0.21 per share |
| Operating cash flow | $(10.8) million | $(8.1) million |
| Cash, cash equivalents and restricted cash | $46.2 million at quarter-end | Down $9.4 million from year-end 2020 |
| Debt | $35.0 million principal; $32.1 million net carrying value | Oberland Facility, interest rate 9.5% at quarter-end |
Revenue growth reflected approximately 22% higher unit volume and a 6% net contribution from price and product mix. Gross margin improved partly because the prior-year period included higher inventory write-downs. Total operating expenses rose 15% to $32.1 million; the prior-year comparison benefited from a $1.7 million stock-compensation credit. Q1 2021 general and administrative expense included $0.8 million in litigation charges. No income tax expense or benefit was recorded.
Working capital was $112.9 million and the current ratio was 6.1x, compared with $122.4 million and 6.4x at December 31, 2020. Cash used in operations increased year over year, with working-capital movements among the stated factors. Investing cash flow was $0.9 million, including $3.1 million of property and equipment purchases, partly offset by net investment sales. Management said it expected available cash resources to meet liquidity needs for at least the next 12 months.
Business developments and material changes
- Axogen reported 919 active accounts, up 26% year over year, and 274 Core Accounts, up 13%. Active accounts generated about 85% of revenue; Core Accounts generated about 60%.
- Research and development expense increased 25% to $5.7 million, including work on the Avance Nerve Graft biologics license application (BLA), a next-generation Avance product and clinical programs. Registry activities were reinitiated during the quarter.
- Property and equipment increased to $44.4 million, including construction in progress for the Axogen Processing Center (APC) in Ohio. The company resumed APC construction in January 2021 after a temporary deferral.
- Cash, cash equivalents and restricted cash decreased from $55.6 million at December 31, 2020 to $46.2 million at March 31, 2021. Accounts receivable and inventory increased alongside sales.
Outlook, risks and contingencies
- Capital spending: Axogen anticipated spending up to approximately $20.4 million on APC renovations, equipment and furniture over the next 12 months, and up to $21.8 million over 18 months. Total additional APC renovation, equipment, validation and certification costs were estimated at $13.6 million. The filing gives differing project timing descriptions: substantial completion is described as both the third quarter of 2021 and late 2022; full processing transition was expected by late 2022.
- Debt terms: The $35 million Oberland borrowing carries quarterly interest-only payments for seven years and a revenue-participation payment expected to begin September 30, 2021. Axogen was in compliance with covenants at March 31, 2021. Up to $40 million of additional borrowing was potentially available, subject to agreement conditions. The facility includes revenue covenants, secured substantially all company assets, and can require make-whole payments in specified circumstances.
- Concentration and operations: Avance accounted for approximately half of revenue, and five products generated substantially all revenue. Axogen depends on Cook Biotech for Axoguard products and on Community Tissue Services (CTS) for processing Avance and Avive. A prolonged disruption at CTS could affect sales; the APC is intended to provide future processing capacity.
- COVID-19 and demand: Management cited continuing uncertainty about COVID-19 and possible effects on procedure volumes and results. Restrictions reduced travel, conferences and some clinical-program spending; the company expected clinical activities to increase in coming quarters.
- Legal matters: The company disclosed a federal securities class action and derivative shareholder matters. It disputes the allegations and intends to defend itself; the potential loss in the class action could not be reasonably estimated. Management said ordinary-course claims were not expected to have a material adverse effect, but noted contingencies could affect results in a particular period.
- Other exposure: Grants of up to $2.7 million for APC development are subject to job-creation milestones and clawbacks; approximately $0.2 million had been received. The company also reported $39.3 million of cash and cash equivalents above FDIC insurance limits.
Important facts for investors to verify
- Whether sales growth and active/Core Account expansion continue, and how much reflects unit volumes versus price and product mix.
- Cash burn, working-capital needs, APC spending and the timing and cost of completing and transitioning production to the APC.
- The effect of Oberland interest and revenue-participation charges on future cash flows, and continued compliance with debt covenants.
- Progress on the Avance BLA and clinical programs, including any changes in timelines or spending.
- Developments in the securities and derivative litigation, and any eventual financial or operational consequences.
- Reliance on Avance, Cook Biotech and CTS, and preparedness for supply or processing disruptions.