Axogen, Inc. — 2015 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2015; comparisons are with fiscal 2014. This is an annual report, not standalone fourth-quarter results. Axogen develops and sells products and provides education for peripheral nerve repair, principally Avance Nerve Graft and AxoGuard Nerve Connector and Protector.
Financial performance and liquidity
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $27.331 million | $16.817 million |
| Gross profit / margin | $22.483 million / 82.3% | $13.375 million / 79.5% |
| Operating loss | $9.267 million | $9.801 million |
| Net loss | $13.356 million | $17.710 million |
| Loss per share, basic and diluted | $0.51 | $0.99 |
| Cash used in operating activities | $13.052 million | $10.451 million |
| Cash and cash equivalents at year-end | $25.910 million | $8.216 million |
- Revenue increased 62.5%; gross profit increased 68.1%. Management attributed growth mainly to greater use by existing accounts, with a lesser contribution from new accounts. A March 2015 price increase, product mix and manufacturing efficiencies also supported gross-margin improvement.
- Total operating costs and expenses were $31.749 million, up 37.0%. Sales and marketing expense rose 52.3% to $20.089 million; research and development rose 6.7% to $3.237 million; general and administrative expense rose 21.2% to $8.423 million.
- Interest expense was $3.989 million, down from $6.812 million; 2015 included $462,000 of noncash interest expense. No income tax expense or benefit was reported; the company maintained a full valuation allowance on deferred tax assets.
- Working capital was approximately $31.34 million and the current ratio was 9.45 at year-end, versus $11.97 million and 5.89 in 2014. Management said cash resources were sufficient for at least the next 12 months.
- Year-end debt carrying value was $25.547 million. The $25 million Three Peaks term loan has a six-year term, quarterly interest at 9% plus the greater of LIBOR or 1% (10% at year-end), and principal due at term-end. It is secured by substantially all tangible and intangible assets. A separate 10-year revenue-interest agreement requires payments at 3.75% of revenue, subject to stated terms and limits.
Material changes and notable items
- The company raised approximately $15.0 million gross in a February 2015 share offering and $17.5 million gross in an August 2015 offering. Common shares outstanding increased from 19.49 million at year-end 2014 to 29.98 million at year-end 2015.
- Cash increased by $17.694 million during 2015, principally reflecting $31.301 million of net financing cash flow, offset by operating and investing cash use. Operating cash use increased year over year despite a smaller net loss, including working-capital investment in receivables and inventory.
- Avance processing transitioned from LifeNet Health to Community Tissue Services (CTS); processing at CTS began in February 2016. The filing describes a five-year agreement, with termination without cause available after August 6, 2017 on 18 months’ notice.
- The company completed the prior PDL royalty-contract repayment in November 2014; no obligations under that contract remained at year-end 2015.
Outlook, risks and contingencies
- The filing refers to 2016 guidance in its forward-looking-statement discussion, but the provided filing text does not provide a clear numerical guidance value. Management expects continued investment in sales expansion and surgeon education; it also said BLA-related clinical costs would likely rise as enrollment progresses.
- AcroVal neurosensory and motor testing devices were expected to launch in March 2016. The phase 3 RECON study of Avance began enrollment in 2015; the filing reported no outcome data at that time.
- Avance is being distributed under FDA enforcement discretion while Axogen pursues a biologics license application and complies with an FDA transition plan. A negative FDA determination, failure to meet plan conditions, or unsuccessful clinical or manufacturing review could prevent continued distribution.
- Other key risks include ongoing operating cash burn and reliance on additional financing; dependence on three principal nerve-repair products; donor-tissue availability and quality; manufacturing and supplier concentration; the CTS transition; clinical and regulatory uncertainty; and debt covenants, repayment obligations and collateral rights. The AxoGuard line also depends on an exclusive Cook Biotech distribution agreement.
- The filing reported no active or pending material legal proceedings and no material capital-expenditure commitments at year-end. Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2015; the auditor did not attest to internal-control effectiveness.
Important facts for investors to verify
- Whether revenue growth, gross-margin gains and account penetration continued after 2015, and how much growth came from existing versus new customers.
- Current cash burn, liquidity runway, and the complete terms and covenant status of the secured Three Peaks loan and revenue-interest obligation.
- Progress, enrollment, results and timing for the RECON trial and Avance BLA, including continued compliance with the FDA transition plan.
- Whether the CTS manufacturing transition maintained supply, quality and regulatory compliance, and whether any single-source inputs create production constraints.
- Share dilution, including subsequent equity issuance, option awards and potential borrowing under the additional $7 million loan commitment.