AxoGen, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; filed May 4, 2017. AxoGen develops and commercializes surgical products and tools for peripheral nerve repair. Its portfolio includes Avance nerve graft, AxoGuard products, Avive soft tissue membrane, and neurosensory testing devices.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $12.24 million | $8.11 million |
| Gross profit / gross margin | $10.33 million / 84.3% | $6.71 million / 82.7% |
| Operating loss | $3.20 million | $2.62 million |
| Net loss | $3.76 million | $3.68 million |
| Loss per share, basic and diluted | $0.11 | $0.12 |
| Cash used in operating activities | $3.95 million | $4.61 million |
Revenue rose 50.9%, primarily from increased sales to active accounts and, to a lesser extent, new accounts; a product price increase took effect March 1. Active accounts were approximately 465, up 37% year over year. Gross margin improved mainly due to manufacturing efficiencies and the price increase. Total operating expenses rose 45.0% to $13.53 million, including higher sales activity, surgeon education, compensation, and growth-related costs. Stock-based compensation increased to $849,000 from $183,000.
Cash and cash equivalents were $25.91 million at March 31, down $4.10 million from year-end. Working capital was approximately $30.20 million, with a 3.82 current ratio. Investing activities used $183,000; financing activities provided $37,000. The company reported no income tax expense or benefit and maintains a full valuation allowance against deferred tax assets.
Debt, liquidity, and material changes
At quarter-end, debt included a $21.0 million MidCap term loan bearing 8.5% and $3.98 million drawn on a revolving facility bearing 5.0%. The revolving facility has a stated commitment of up to $10 million, subject to its borrowing base; the reported borrowing base was approximately $5.9 million. Both facilities mature May 1, 2021, and are secured by company assets and subject to operating and revenue covenants. The term loan requires interest-only payments through December 2018, followed by principal and interest payments. Interest expense declined 49.4% year over year, principally following the October 2016 refinancing.
Management said existing cash was sufficient for expected liquidity needs for at least the next 12 months. It cautioned that capital needs depend on revenue growth, product adoption, sales-force expansion, education programs, production and distribution costs, and market conditions; additional financing may be needed if revenue growth falls short. No material capital expenditure commitments or off-balance-sheet arrangements were reported.
Outlook, risks, and other notable disclosures
- Management discussed growth and 2017 guidance in its forward-looking statement language, but this filing text does not provide a clear numerical 2017 guidance value.
- Research and development focuses include the Avance nerve graft biologics license application, clinical studies, the RANGER Registry, and new products and applications. Management expects BLA-related costs to increase as trial enrollment progresses over approximately the next two years.
- Key risks include adoption pace, the need for capital, execution of sales and clinical programs, and compliance with debt covenants. The filing says there were no material changes to the risk factors in the 2016 Form 10-K.
- Disclosure controls and procedures remained ineffective at March 31, 2017 because of previously reported material weaknesses involving significant estimates and consigned-inventory counts. Remediation efforts began, but management said the weaknesses would not be considered resolved until controls operate effectively for a sufficient period and testing confirms effectiveness.
- The company reported no material litigation as of quarter-end; ordinary-course claims may arise, including matters related to patents. No material loss was expected from such matters.
- Potentially notable operating items include the March 2017 price increase, higher clinical spending, and increased stock-based compensation. The filing also notes that additional equity financing could dilute shareholders.
Important facts for investors to verify
- Whether revenue growth and active-account expansion continue, and how much growth reflects pricing versus volume and new accounts.
- Whether improved gross margin is sustainable as product mix, manufacturing costs, and clinical activity change.
- Cash burn and liquidity relative to the company’s 12-month assessment, debt covenants, and available revolving borrowing base.
- Progress, timing, enrollment, and costs of the Avance BLA and related clinical programs.
- Remediation and independent testing of the disclosed internal-control material weaknesses.
- Future financing needs, potential shareholder dilution, and any updates to guidance or risk factors.