AxoGen, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Unaudited consolidated results; comparisons are with Q1 2017 unless otherwise noted.
Business context
AxoGen develops and sells surgical products and related tools for peripheral nerve repair. Its principal products include Avance Nerve Graft, AxoGuard products and Avive Soft Tissue Membrane. Management attributed growth primarily to increased purchases and product adoption in existing accounts. Active accounts reached approximately 604, up 30% year over year.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 or prior-period balance |
|---|---|---|
| Revenue | $17.3 million | $12.2 million; up 41% |
| Gross profit and margin | $14.5 million; 84.3% | $10.3 million; 84.4% |
| Operating expenses | $19.5 million | $13.5 million; up 44% |
| Operating loss | $5.0 million | $3.2 million |
| Net loss and diluted loss per share | $5.64 million; $0.16 | $3.76 million; $0.11 |
| Cash used in operations | $5.84 million | $3.95 million |
| Cash and cash equivalents | $30.6 million | $36.5 million at December 31, 2017 |
| Total assets | $55.2 million | $58.9 million at December 31, 2017 |
Investing activities used $0.50 million; financing activities provided $0.40 million. Working capital was $36.2 million and the current ratio was 3.32 at quarter-end, versus $42.0 million and 4.06 at year-end. Management said cash resources were sufficient for at least the next 12 months based on expected operations.
Debt included a $21.0 million MidCap term loan and $4.0 million drawn on a revolving facility, alongside smaller equipment leases. The term loan rate was 9.66% and the revolver rate was 6.16% at March 31. Approximately $7.9 million of revolver borrowing-base availability remained. The term loan requires interest-only payments through December 2018, followed by principal and interest payments; both facilities mature May 1, 2021. The company reported covenant compliance.
Material changes and management commentary
- Revenue increased 41%, attributed to unit growth, net pricing changes and product mix, with increased penetration in active accounts and some contribution from new accounts.
- Gross margin edged down to 84.3% from 84.4%, primarily due to processing yield variances and product mix.
- Sales and marketing expense rose 45% to $12.5 million, reflecting sales-force hiring, higher commissions and surgeon education. Research and development expense rose 46% to $2.1 million, including clinical, product-development and staffing costs. General and administrative expense rose 43% to $5.0 million.
- Operating cash use increased by approximately $1.9 million year over year, with higher losses and increases in receivables, inventory and prepaid expenses contributing. Cash also funded a $2.5 million payment for the 2017 employee performance bonus and related costs.
- Stock-based compensation was $1.7 million, versus $0.85 million in Q1 2017. Interest expense increased, which management attributed to higher variable rates.
Outlook, risks and contingencies
The filing discusses 2018 guidance as a forward-looking topic but provides no specific guidance figures in the supplied text. Management cited possible future capital needs if revenue does not grow as planned; additional financing could dilute shareholders or may not be available on acceptable terms. Management said it could slow commercial expansion, delay regulatory approvals or reduce headcount if needed capital were unavailable.
Key business exposures include dependence on four products for substantially all revenue, an exclusive AxoGuard supply/distribution arrangement with Cook Biotech, and reliance on Community Tissue Services for Avance processing. A disruption to the processor or loss of AxoGuard availability could materially affect operations. Debt agreements impose operational and financial covenants and include lender remedies for specified defaults. The company reported no material litigation and no material changes to the risk factors in its 2017 Form 10-K. It adopted ASC 606 on January 1, 2018; management said adoption had no material financial impact.
Important facts for investors to verify
- Whether revenue and active-account growth continue, and how much growth comes from existing-account adoption versus new accounts.
- Progress toward operating leverage, given expense growth exceeded revenue growth and net losses increased.
- Cash burn, working-capital trends and the sufficiency of cash under management’s stated 12-month outlook.
- Debt terms, variable-rate exposure, upcoming amortization and continued compliance with MidCap covenants.
- Continuity of CTS processing capacity and the Cook Biotech arrangement, including any supply or minimum-purchase developments.
- Any specific 2018 guidance or material developments not quantified in the supplied filing text.