AxoGen, Inc. — Q1 2016 Form 10-Q
Business context and period. The unaudited filing covers the three months ended March 31, 2016, with balance-sheet comparisons to December 31, 2015. AxoGen develops and sells peripheral nerve repair products, led by Avance Nerve Graft and AxoGuard products. Management attributed growth primarily to increased use by existing accounts.
Financial highlights
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $8.112 million | $4.951 million |
| Gross profit / margin | $6.706 million / 82.7% | $3.968 million / 80.1% |
| Operating loss | $2.623 million | $2.544 million |
| Net loss | $3.676 million | $3.575 million |
| Basic and diluted loss per share | $0.12 | $0.16 |
| Net cash used in operating activities | $4.609 million | $2.514 million |
| Net cash used in investing activities | $0.488 million | $0.038 million |
Revenue increased 63.8% year over year. Gross margin improvement reflected processing efficiencies and favorable product mix. Total operating costs and expenses rose 43.3% to $9.329 million; sales and marketing expense rose 57.8% to $6.206 million, while R&D increased to $0.978 million, including RECON clinical-trial costs. Grant revenue declined to approximately $46,000 from $142,000. Interest expense was $1.003 million, including approximately $0.900 million of cash interest. No income tax expense or benefit was recorded.
Liquidity and debt
Cash and cash equivalents were $20.949 million at March 31, 2016, down from $25.910 million at year-end. Working capital was approximately $27.69 million and the current ratio was 8.36, versus $31.34 million and 9.45 at December 31, 2015. Operating cash use increased, principally reflecting the net loss and investment in receivables, inventory and prepaid expenses. Management stated that available cash was expected to meet liquidity requirements for at least the next 12 months.
The balance sheet reported $24.804 million of long-term note payable, net of deferred debt issuance costs. The Three Peaks loan has a six-year term, quarterly interest at 9% plus the greater of LIBOR or 1% (10% at quarter-end), and a final principal payment at term end. A 10-year revenue interest agreement requires payments based on 3.75% of revenue, subject to stated limits. The lender holds a security interest in company assets; covenants include revenue requirements and restrictions on additional debt and dividends.
Material changes, outlook and risks
- Sales and marketing expansion and surgeon education supported growth but increased near-term costs; management noted that revenue growth can lag market-development spending.
- RECON is a Phase 3 study intended to support a Biologics License Application. Management expected trial costs to rise as enrollment grows over approximately the next two years and as BLA preparation proceeds.
- The company could draw an additional $7 million under the loan, subject to conditions, during April 1–June 29, 2016. Drawing it would increase the revenue royalty rate proportionally, up to 4.80%.
- The company transitioned Avance processing from LifeNet’s Virginia Beach facility to Community Tissue Services after the LifeNet agreement ended in February 2016. The CTS agreement has a five-year term and annual license fees of approximately $416,000.
- A March 2016 lease amendment expanded the Alachua headquarters by 7,050 square feet, with annual incremental rent of approximately $123,000 in year one, increasing over the five-year term.
- No specific numerical 2016 revenue or earnings guidance is provided in the filing text. The filing identifies risks including the need for additional capital if revenue growth falls short, potential dilution or difficulty raising funds, clinical-trial and regulatory uncertainty, and lender remedies in a default. Management reported no material changes to previously disclosed risk factors, no material litigation, and effective disclosure controls.
Investor verification checklist
- Track revenue growth, account adoption, gross margins, and whether sales and marketing spending converts into sustained growth.
- Monitor operating cash burn, cash runway, working-capital trends, and the availability and conditions of additional financing.
- Verify RECON enrollment, trial execution, rising clinical costs, and the timing and requirements for a BLA.
- Review loan covenants, the potential additional borrowing, revenue-based payments, and consequences of default or a change of control.
- Assess the CTS processing transition, capacity, product quality, and expanded facility and lease costs.