AxoGen, Inc. — Q3 2016 Form 10-Q
Business context and period: AxoGen develops and sells surgical products and assessment tools for peripheral nerve injuries, including Avance Nerve Graft and AxoGuard products. This unaudited report covers the quarter and nine months ended September 30, 2016; balance-sheet comparisons are with December 31, 2015.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $11.21 million | $8.15 million | $29.70 million | $19.52 million |
| Gross profit | $9.51 million | $6.74 million | $25.06 million | $16.09 million |
| Gross margin | 84.9% | 82.7% | 84.4% | 82.4% |
| Operating loss | $(1.18) million | $(1.92) million | $(5.41) million | $(6.61) million |
| Net loss | $(2.31) million | $(2.98) million | $(8.78) million | $(9.74) million |
| Basic and diluted loss per share | $(0.08) | $(0.11) | $(0.29) | $(0.39) |
- Revenue grew 37.4% in Q3 and 52.1% for the first nine months, mainly from increased use by active accounts, with a March 2016 price increase also contributing. Management said growth was driven primarily by existing active accounts, with new-account development a smaller contributor.
- Gross margin gains reflected processing efficiencies and product mix. Operating expenses rose 23.4% in Q3 and 34.2% year to date, led by sales-force expansion, surgeon education, compensation, clinical work and product development. Expense growth remained below revenue growth.
- Interest expense was $1.09 million for Q3 and $3.26 million year to date. Nine-month operating cash use was $9.78 million, investing cash use was $0.77 million, and financing provided $0.65 million. Cash declined by $9.91 million to $16.00 million.
- At September 30, cash was $16.00 million, current assets $28.66 million, current liabilities $4.60 million, and working capital approximately $24.07 million. The current ratio was 6.24, versus 9.45 at year-end 2015. Long-term debt was approximately $25.00 million; shareholders’ equity was $1.10 million.
Material changes, outlook and risks
- Compared with 2015, revenue and gross profit increased substantially, margins improved, and operating and net losses narrowed. Sales and marketing, research and development, and general and administrative expenses all increased in dollars.
- Management believed cash resources were sufficient for at least the next 12 months, while noting future capital needs depend on revenue growth, product adoption, sales expansion, margins, operating costs and market conditions. No clear numeric 2016 revenue or earnings guidance is provided in the filing text.
- Management expected RECON Phase 3 trial costs to rise as enrollment increased over approximately the next two years and as work progressed toward a Biologics License Application. Product-pipeline spending may also increase.
- On October 13, 2016, the company completed a common-stock offering of 2,683,334 shares, netting approximately $18.62 million for working capital and nerve-repair market development. On October 25, it refinanced the Three Peaks debt and revenue-interest arrangement: a $21 million MidCap term loan and a revolving facility with $10 million commitment, of which $4 million was drawn at closing. The facilities carry covenants and are secured by company assets. Approximately $2.3 million of prepayment fees and $0.7 million of refinancing costs were paid from company funds. Pro forma cash and debt, after the offering and refinancing, were approximately $31.7 million and $25 million, respectively, based on the September 30 balance sheet.
- Risks include continued operating cash burn and possible need for additional capital, which could dilute shareholders; debt covenants and collateral provisions; uncertainty in clinical trials and regulatory approval; and reliance on external processing and manufacturing arrangements. The FDA completed a routine audit of the processing facility on October 28; the final report was pending, and the company said no material issues had been expressed by the auditor. The company reported no material litigation and no material changes to its previously disclosed risk factors other than the audit update.
Important facts for investors to verify
- Whether product utilization, pricing and new-account activity sustain revenue growth, and whether gross-margin improvements continue.
- Cash burn and working-capital needs, including receivables and inventory growth, and the company’s use of offering proceeds.
- RECON enrollment, timing and costs, the BLA path, and the outcome of the FDA facility audit.
- MidCap loan and revolver balances, borrowing-base availability, interest and fees, covenant compliance, and refinancing obligations.
- Share dilution: 30.21 million shares were outstanding at September 30; the post-quarter offering added 2.68 million shares, and 32.90 million shares were reported outstanding on November 2.