AxoGen, Inc. — 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017; includes fourth-quarter results. The filing was signed February 28, 2018.
Business context
AxoGen develops and sells surgical products and evaluation tools for peripheral nerve repair. Its principal products include Avance Nerve Graft, AxoGuard Nerve Connector and Protector, and Avive Soft Tissue Membrane. The company attributes growth mainly to greater use within existing customer accounts. Avance accounted for approximately half of revenue, and substantially all revenue came from four surgical products.
Financial results and liquidity
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Revenue | $60.4 million | $41.1 million | +47.0% |
| Gross profit / margin | $51.1 million / 84.6% | $34.6 million / 84.2% | Margin +0.4 percentage points |
| Operating loss | $8.0 million | $8.1 million | Improved $0.2 million |
| Net loss | $10.4 million | $14.4 million | Improved $4.0 million |
| Loss per share, basic and diluted | $0.31 | $0.47 | Improved $0.16 |
| Cash used in operations | $9.2 million | $11.2 million | Use decreased $2.0 million |
- Fourth-quarter 2017 revenue was $17.0 million, compared with $11.4 million in fourth-quarter 2016. Fourth-quarter net loss was $2.5 million versus $5.6 million.
- Sales and marketing expense rose 32.4% to $37.6 million; R&D rose 59.5% to $6.7 million; and G&A rose 45.5% to $14.7 million. Total operating expenses increased, but fell as a share of revenue to 97.8% from 104.1%.
- Cash and cash equivalents were $36.5 million at year-end, up from $30.0 million. Working capital was $42.0 million and the current ratio was 4.06.
- Debt included a $21 million MidCap term loan and $4.0 million drawn on the revolving facility. Year-end rates were 9.36% on the term loan and 5.86% on the revolver; both mature May 1, 2021. The company reported compliance with loan covenants.
- Management said cash resources were sufficient for at least the next 12 months. The company nevertheless continued to use operating cash and reported an accumulated deficit of $128.3 million.
Material changes and unusual items
- Revenue growth reflected increased penetration in active accounts and, to a lesser extent, new accounts. Active accounts reached 591 at year-end, up 31% from 452 a year earlier. A product price increase took effect in March 2017.
- Interest expense declined to $2.2 million from $5.4 million, largely reflecting the 2016 refinancing and absence of that year’s substantial debt-extinguishment charges.
- The November 2017 equity offering generated approximately $15.65 million in net proceeds for general working capital. Stock-based compensation expense increased to $3.6 million from $1.4 million.
- Management reported remediation of the prior-year internal-control material weaknesses; management and the auditor concluded internal control over financial reporting was effective at December 31, 2017. The auditor gave an unqualified opinion on the financial statements.
Outlook, risks and contingencies
- The filing provides no clear quantified 2018 revenue or earnings guidance. Management expected the U.S. direct sales team to exceed 75 professionals by year-end 2018, up from 60, and planned 18 national education programs versus 15 in 2017.
- Management expected costs related to the Avance BLA clinical program to increase as more patients enrolled. The RECON pivotal study was enrolling; BLA approval remains dependent on clinical results, manufacturing compliance and FDA review.
- Avance was being sold under FDA enforcement discretion while AxoGen pursued a biologics license application. A February 2018 FDA audit generated two Form 483 observations concerning medical-device quality procedures; no observations were reported for the human-tissue quality system. The company said it was addressing the observations.
- Key business risks include dependence on a small product portfolio; reliance on donor tissue, suppliers and the CTS processing facility; exclusive AxoGuard distribution rights through Cook Biotech; and the possibility of losing permission to distribute Avance if FDA transition conditions are not met.
- Other risks include continued operating cash use, potential need for further financing and shareholder dilution, debt and covenant obligations, reimbursement and pricing pressure, clinical-trial uncertainty, and evolving tissue-product regulation.
Important facts for investors to verify
- Whether sales growth and active-account expansion persist, and how much revenue remains concentrated in Avance and the other core products.
- Cash burn, working-capital needs, borrowing availability and compliance with MidCap covenants as the company scales.
- Progress, enrollment, outcomes and timing for RECON and the Avance BLA, including remediation of FDA audit observations.
- Continuity of donor-tissue supply, the CTS processing relationship, and Cook Biotech’s AxoGuard supply and distribution terms.
- Whether 2018 expenses, including sales-force expansion and clinical development, rise faster or slower than revenue; the filing does not provide quantified 2018 guidance.