AxoGen, Inc. — Q3 2017 Form 10-Q
Business and period: AxoGen develops and sells surgical products and tools for peripheral nerve repair. This unaudited report covers the quarter and nine months ended September 30, 2017; comparisons are with the same 2016 periods unless noted.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $16.0 million | $11.2 million | $43.5 million | $29.7 million |
| Gross profit | $13.5 million | $9.5 million | $36.8 million | $25.1 million |
| Gross margin | 84.4% | 84.9% | 84.6% | 84.5% |
| Operating expenses | $15.0 million | $10.7 million | $42.9 million | $30.5 million |
| Operating loss | $1.5 million | $1.2 million | $6.1 million | $5.4 million |
| Net loss | $2.1 million | $2.3 million | $7.9 million | $8.8 million |
| Loss per diluted share | $0.06 | $0.08 | $0.24 | $0.29 |
- Revenue increased 42.9% in Q3 and 46.5% year to date. Management attributed growth to greater purchases and product adoption in active accounts, new accounts, and, for the nine-month period, a March 2017 price increase. Active accounts were approximately 563, up 36% year over year.
- Q3 gross margin declined slightly, which management attributed to manufacturing yield variances and product mix; nine-month margin edged higher.
- Operating expenses rose with sales activity, staffing and compensation, clinical and product-development work, and general growth costs. Stock-based compensation was $2.5 million for the first nine months, versus $1.0 million in 2016.
- Interest expense fell year over year following the October 2016 debt refinancing. No income tax expense or benefit was recorded because the company generated net operating losses.
Cash, liquidity and debt
- Cash and equivalents were $22.0 million at September 30, 2017, down $8.0 million from year-end 2016. Current assets were $39.5 million and current liabilities $11.1 million; reported working capital was $28.4 million and the current ratio was 3.55.
- For the first nine months, operating activities used $8.2 million of cash, investing activities used $0.8 million, and financing activities provided $1.0 million. Operating cash use was $1.6 million lower than in the comparable 2016 period.
- Debt included a $21.0 million MidCap term loan bearing 8.5% and a $4.0 million revolving balance bearing 5.0%. The facilities mature May 2021; term-loan payments are interest-only through December 2018, followed by scheduled principal and interest payments. Borrowings are secured, subject to covenants, and expose the company to variable interest rates. The company reported covenant compliance at quarter-end.
- Management stated that available cash was sufficient for expected liquidity needs for at least the next 12 months, while warning that further capital could be needed if revenue growth is inadequate. Additional equity financing would dilute shareholders; access to debt or equity funding is not assured.
Outlook, risks and notable items
- The filing’s forward-looking-statement discussion references 2017 and 2018 guidance, but the provided filing text does not provide clear numeric guidance. Management expects continued sales growth from account expansion and broader sales and marketing efforts.
- Research and development includes work on the Avance Nerve Graft biologics license application, the RECON clinical trial, the RANGER Registry, investigator-initiated studies, and new products and applications.
- Management reported no material change to the risk factors in the 2016 Form 10-K. Risks highlighted in this report include dependence on product adoption and revenue growth, funding needs, debt covenants and interest-rate exposure, and the possibility of dilution or spending reductions if financing is unavailable.
- Disclosure controls and procedures were still not effective at September 30 because of previously reported material weaknesses in controls over significant estimates and consignment-inventory cycle counts. The company reported improved procedures, but said the weaknesses would not be considered remediated until controls operate effectively for a sufficient period and are tested.
- No material litigation was reported. The company disclosed a $285,000 headquarters expansion project expected to be completed by December 31, 2017, and estimated future minimum lease payments of $970,739.
- The company’s revenue-recognition standard evaluation indicated no expected material change to revenue timing, though additional disclosures may be required; evaluation and implementation preparations were ongoing.
Important facts for investors to verify
- Whether active-account growth, product adoption, and pricing continue to drive revenue while preserving gross margins.
- Cash consumption, working-capital needs, and the assumptions supporting management’s stated 12-month liquidity outlook.
- Debt balances, variable-rate exposure, covenant compliance, and scheduled principal payments after the interest-only period.
- Progress and costs for the Avance BLA and RECON clinical trial, and whether these efforts produce expected regulatory and commercial outcomes.
- Whether remediation of the disclosed internal-control weaknesses is completed and validated.
- Any numeric 2017 or 2018 guidance in related company disclosures; this filing text does not state clear numerical guidance.