Axogen, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; financial statements are unaudited. Dollar amounts below are in millions unless noted. Axogen develops and sells products and services for peripheral nerve repair. Its principal products include Avance Nerve Graft, AxoGuard products, and Avive Soft Tissue Membrane.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $23.285 | $17.260 | +34.9% |
| Gross profit / margin | $19.571 / 84.0% | $14.548 / 84.3% | Gross profit +34.5%; margin down 0.3 percentage points |
| Operating expenses | $29.774 | $19.539 | +52.4% |
| Operating loss | $(10.203) | $(4.991) | Loss increased |
| Net loss / loss per share | $(9.504) / $(0.24) | $(5.639) / $(0.16) | Loss increased |
| Cash used in operating activities | $(8.867) | $(5.844) | Cash use increased |
Revenue growth was attributed primarily to greater sales penetration within existing active accounts and an increase in active accounts. The company reported approximately 731 active accounts at quarter-end, up 21% from 604 a year earlier. Sales and marketing expense rose 31.8%, research and development rose 101.1%, and general and administrative expense rose 83.6%. Management cited commercial team expansion, clinical and product development, infrastructure investment, and legal costs. Gross margin remained high but edged down year over year.
Cash, liquidity, and obligations
- At March 31, 2019, cash, cash equivalents, and restricted cash totaled $29.522 million; short-term investments were $84.323 million. Cash and investments declined from year-end, in part because investments were redeemed and reinvested during the quarter.
- Working capital was $129.1 million and the current ratio was 8.83, compared with $137.9 million and 11.57 at December 31, 2018. Management said resources were sufficient for at least the next 12 months based on expected operations.
- Total liabilities were $19.749 million. Reported long-term obligations of $4.584 million were operating and finance lease obligations; the MidCap term and revolving loans had been repaid in May 2018. No material capital expenditure commitments were reported at quarter-end.
- Investing activities provided $7.770 million, including net proceeds from investment transactions; financing activities provided $0.325 million, principally from stock-option exercises.
Changes, outlook, and notable matters
- Operating costs grew faster than revenue, increasing the operating loss. General and administrative expense included $1.185 million related to the two lawsuits described in the filing. The filing does not provide a clear breakdown of the legal expense between the matters.
- Management continued investment in sales capacity, clinical studies, product development, and the Vandalia, Ohio processing facility. Renovations were expected to be completed in the third quarter of 2020, with the facility intended to support the Avance Nerve Graft biologics license application and future capacity.
- The company stated it believed it had adequate liquidity for at least 12 months, but warned that future capital needs could rise and that additional financing, if required, might not be available on acceptable terms. No specific numeric 2019 revenue or earnings guidance is provided in the supplied filing text.
- Axogen adopted the new lease accounting standard on January 1, 2019, recording right-of-use assets and lease liabilities; management said the adoption did not materially affect earnings or cash flows.
- Two lawsuits were pending: a putative federal securities class action alleging, among other things, misleading statements and sales practices, and a Colorado case alleging that specimens purchased from a vendor were procured without consent. Axogen disputed the allegations and said it intended to defend itself. The filing does not provide a clear estimate of potential financial exposure.
Risks and investor verification points
- Verify developments, potential exposure, and any subsequent disclosures concerning both lawsuits; the securities complaint includes allegations about pricing, sales practices, and internal controls, not findings established in this filing.
- Track whether revenue growth and active-account expansion can keep pace with operating expenses and cash use.
- Assess liquidity and runway, including the composition and accessibility of investments, lease commitments, and any future financing needs.
- Review progress, timing, regulatory requirements, and cost of the Vandalia facility and the Avance Nerve Graft biologics license application.
- Consider concentration risks: substantially all revenue comes from four products; AxoGuard depends on Cook Biotech, and processing of key products depends on Community Tissue Services. The filing notes potential disruption if these relationships or facilities are unavailable.
- Management concluded disclosure controls were effective as of March 31, 2019. The filing reports no material changes to risk factors since the 2018 Form 10-K.