Axogen, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; comparisons are with FY 2015. This is an annual filing, not a standalone fourth-quarter report, and the supplied text does not provide clear Q4-only results.
Business context
Axogen develops and sells surgical products and evaluation tools for peripheral nerve injuries. Its principal products include Avance Nerve Graft and AxoGuard Nerve Connector and Protector. The company says substantially all revenue is derived from Avance and the two AxoGuard products. Avive Soft Tissue Membrane launched in November 2016.
Financial results and liquidity
| Metric | FY 2016 | FY 2015 | Change / context |
|---|---|---|---|
| Revenue | $41.11 million | $27.33 million | Up 50.4%; growth primarily came from increased purchases by active accounts. |
| Gross profit / margin | $34.64 million / 84.3% | $22.48 million / 82.3% | Margin improved, attributed to manufacturing efficiencies, product mix and a March 2016 price increase. |
| Operating expenses | $42.77 million | $31.75 million | Up 34.7%; 104% of revenue versus 116% in 2015. |
| Operating loss | $8.13 million | $9.27 million | Loss narrowed. |
| Interest expense and deferred financing costs | $6.26 million | $4.12 million | Higher in 2016, including debt prepayment and write-off charges. |
| Net loss / loss per share | $14.41 million / $0.47 | $13.36 million / $0.51 | Net loss increased; loss per share improved. |
| Cash used in operating activities | $11.20 million | $13.05 million | Cash outflow narrowed. |
| Cash and cash equivalents at year-end | $30.01 million | $25.91 million | Up $4.10 million during 2016. |
Sales and marketing expense was $28.43 million, R&D $4.21 million, and G&A $10.13 million. Cash used in investing was $1.19 million; financing provided $16.50 million, including $18.67 million net proceeds from a 2016 stock offering. Working capital was $32.96 million and the current ratio was 3.97 at year-end (versus 9.45 in 2015); the lower ratio mainly reflected current classification of revolver borrowings.
At December 31, 2016, debt included a $21 million MidCap term loan and $4.03 million drawn on a revolving facility, plus a small equipment lease. The balance sheet reported $24.31 million of total obligations before deductions for deferred financing costs. The term loan bears interest at 8.5% at year-end, with interest-only payments through December 2018; the revolver rate was 5.0%. The company stated it believed available cash was sufficient for at least 12 months.
Material changes versus FY 2015
- Revenue grew 50.4%, while total costs and expenses grew more slowly, improving expense-to-revenue leverage and narrowing operating loss.
- Net loss nevertheless increased, reflecting higher interest costs and 2016 refinancing-related charges. Axogen repaid the Three Peaks term loan and revenue-interest agreement in October 2016, replacing them with MidCap term and revolving facilities.
- The company raised approximately $18.67 million net through a common-stock offering, issuing 2,683,334 shares; outstanding shares increased during the year.
- Avance processing moved to Community Tissue Services (CTS) in February 2016. The company expanded its distribution, manufacturing and headquarters capacity.
- R&D spending rose 30.1%, mainly for clinical work and the pivotal Avance trial; management expected BLA-related costs to increase as enrollment continued.
Outlook, risks and unusual items
- Outlook: Management described continued sales-force, account-penetration and product/market expansion efforts. The filing refers to 2017 guidance in its forward-looking-statement discussion, but the supplied filing text does not provide a clear numerical guidance value.
- Avance regulatory status: Avance had not received BLA approval and was being distributed under FDA enforcement discretion subject to a transition plan, clinical-trial progress and regulatory compliance. An unfavorable FDA decision or inability to complete the BLA process could prevent continued sales.
- Clinical and commercial execution: The RECON pivotal study was in early enrollment, with no outcome data available. Growth depends on physician adoption, clinical evidence, reimbursement and continued expansion of sales channels.
- Funding and debt: The company continued to incur operating cash outflows and reported an accumulated deficit of approximately $117.9 million. Debt is secured by substantially all tangible and intangible assets and includes covenants; future financing may cause dilution or increase debt.
- Supply and concentration: Revenue depends heavily on three products. AxoGuard relies on an exclusive Cook Biotech distribution arrangement; human-tissue products depend on donor supply and processing capacity. Certain production materials have single-source supply risks, including a chemical for which the company reported more than one year of inventory while seeking alternatives.
- Controls and audit: Management and the independent auditor identified material weaknesses in controls over significant estimates and quarterly cycle counts of consigned inventory. Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end. The auditor issued an adverse opinion on internal control, while issuing an unqualified opinion on the financial statements.
- Other disclosures: The filing reports no active or pending material legal proceedings and no material capital-expenditure commitments at year-end. It reports four AxoGuard adverse events through 2016 and none for Avance or Avive; no AxoGen MDR submissions were reported.
Most important facts for investors to verify
- Progress, enrollment and results of the RECON pivotal trial, and the expected timing and requirements for the Avance BLA.
- Whether the material control weaknesses are remediated and whether inventory and estimate controls operate effectively.
- Quarterly operating cash burn, revenue growth by product and account, and the pace at which revenue growth converts to improved operating performance.
- Debt balances, borrowing-base availability, covenant compliance, interest and exit-fee obligations, and liquidity beyond management’s stated 12-month assessment.
- CTS processing continuity, human-tissue supply, and resolution of single-source material risks.
- The extent to which the newly launched Avive product and other growth initiatives contribute revenue, and any 2017 guidance disclosed outside the supplied text.