AxoGen, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2017. The unaudited statements consolidate AxoGen and its wholly owned subsidiaries. AxoGen develops and sells surgical products for peripheral nerve repair, including Avance nerve grafts and AxoGuard products.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $15.17 million | $10.38 million | $27.41 million | $18.49 million |
| Gross profit | $12.89 million | $8.85 million | $23.22 million | $15.55 million |
| Gross margin | 85.0% | 85.2% | 84.7% | 84.1% |
| Operating loss | $(1.45) million | $(1.61) million | $(4.65) million | $(4.23) million |
| Net loss | $(2.06) million | $(2.80) million | $(5.82) million | $(6.48) million |
| Loss per share, basic and diluted | $(0.06) | $(0.09) | $(0.18) | $(0.22) |
- Revenue rose 46.1% in Q2 and 48.2% for the six-month period, primarily from increased purchases by active accounts, with additional contribution from new accounts and a March 2017 price increase.
- Q2 gross margin edged down year over year due mainly to manufacturing yield variances and product mix; the six-month margin improved, reflecting the price increase and product mix.
- Operating expenses increased with sales activity, surgeon education, staffing, clinical and product-development work, and general growth-related costs. Sales and marketing remained the largest expense category.
Cash, liquidity and debt
- Cash and cash equivalents were $23.87 million at June 30, 2017, down from $30.01 million at December 31, 2016. Working capital was approximately $29.2 million and the current ratio was 3.67, versus $33.0 million and 3.97 at year-end.
- For the six months, operating activities used $6.03 million; investing activities used $0.52 million; financing activities provided $0.40 million. Net cash decreased $6.14 million.
- Total debt obligations were approximately $24.17 million, including a $21 million MidCap term loan and $3.83 million drawn on a revolving facility. The term loan bore an 8.5% rate and the revolver a 5.0% rate at quarter-end. Both facilities mature May 1, 2021; term-loan principal payments begin after December 1, 2018. The company reported covenant compliance at June 30.
- Management stated it believed available cash resources were sufficient for at least the next 12 months, based on expected operations. It noted that additional capital could be needed depending on revenue growth and other business requirements; future financing might dilute shareholders or be unavailable on acceptable terms.
Outlook, risks and notable items
- Approximately 510 active accounts were reported at the end of Q2, up 36% from Q2 2016. Management described active-account growth and expanded sales and marketing efforts as key drivers of revenue growth. The filing text does not provide a clear numerical 2017 guidance value.
- Research and development includes work supporting the Avance nerve-graft biologics license application, the RANGER Registry, investigator-initiated studies, and new products and applications.
- Disclosure controls and procedures were deemed ineffective at June 30 because of material weaknesses previously reported in the 2016 Form 10-K. The company described improvements to estimates testing and consigned-inventory cycle counts, but said remediation depended on controls operating effectively for a sufficient period and being tested.
- The company reported no material litigation, no material changes to the risk factors in its 2016 Form 10-K, and no off-balance-sheet arrangements. It stated there were no material capital-expenditure commitments at quarter-end.
- The company was evaluating the new revenue-recognition standard; its preliminary assessment was that timing of revenue recognition would not materially change, but the evaluation remained ongoing.
Important facts for investors to verify
- Whether rapid revenue growth continues and how much comes from active accounts, new accounts, and pricing.
- Whether gross margins and operating leverage hold up as sales, clinical, and marketing costs increase.
- Cash burn, available liquidity, and capacity under the borrowing-base-dependent revolver.
- Progress on Avance clinical and regulatory work, and the status of the material weaknesses and remediation testing.
- Any subsequent numerical 2017 guidance or updates to the company’s 12-month liquidity assessment.