AxoGen, Inc. — Q2 2016 Form 10-Q
Business context and period: Unaudited results for the quarter and six months ended June 30, 2016. AxoGen develops and sells surgical products and testing tools for peripheral nerve injuries, including Avance nerve graft and AxoGuard products.
Financial performance and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $10.38 million | $6.42 million | $18.49 million | $11.37 million |
| Gross profit | $8.85 million | $5.38 million | $15.55 million | $9.35 million |
| Gross margin | 85.2% | 83.8% | 84.1% | 82.2% |
| Operating loss | $(1.61) million | $(2.15) million | $(4.23) million | $(4.70) million |
| Net loss | $(2.80) million | $(3.19) million | $(6.48) million | $(6.77) million |
| Loss per share, diluted | $(0.09) | $(0.13) | $(0.22) | $(0.29) |
Cash flow: Six-month operating cash use was $7.41 million, compared with $6.01 million in 2015; investing cash use was $0.55 million versus $0.19 million. Financing provided $0.32 million, versus $13.60 million in 2015, when the company completed an equity offering. Cash declined $7.64 million from year-end to $18.27 million.
Balance sheet at June 30: Current assets were $29.75 million and current liabilities $3.92 million; working capital was approximately $25.82 million and the current ratio 7.58. Long-term debt under the Three Peaks agreement was $24.95 million. Total liabilities were $28.96 million and shareholders’ equity $2.79 million.
Material changes and management commentary
- Revenue increased 61.8% for Q2 and 62.7% for the first half, primarily from higher product use in existing accounts, with a price increase effective March 1, 2016 also contributing. Gross margin improved, which management attributed to processing efficiencies and product mix.
- Sales and marketing expense rose 40.9% in Q2 and 48.5% in the first half, mainly from expanding the direct sales force and surgeon education. Research and development expense increased 27.3% in Q2 and 36.1% in the first half, including RECON clinical trial and product development spending. Management expects RECON costs to rise as enrollment progresses over approximately the next two years and preparation for a BLA submission advances.
- Management said revenue growth may lag increased market-development spending in the near term. It believes cash resources are sufficient for at least the next 12 months. The filing refers to 2016 guidance in its forward-looking-statement discussion but provides no clear numerical guidance value in the supplied text.
Risks, contingencies, and notable items
- The $25 million term loan carries a 10% interest rate at period-end, interest-only payments, and a final principal payment at the end of its six-year term. It is secured by company assets and includes covenants, including revenue requirements. An optional additional $7 million borrowing was available from July 1 through September 30, 2016; drawing it would increase the revenue royalty rate, potentially to 4.80%.
- The company used $1.96 million of cash for interest in the first half. Separately, the revenue-interest agreement and loan terms generated $0.20 million of non-cash interest expense for that period. Prepayment or certain change-of-control or other events may trigger substantial additional payments.
- Liquidity could require additional capital if revenue growth is insufficient; additional equity could dilute shareholders, and financing may not be available on acceptable terms. A full valuation allowance applies to deferred tax assets, and use of tax-loss carryforwards may be limited under Section 382.
- Grant revenue declined as grants matured; management cautioned that replacement grants are not assured. The filing reports no material litigation and no material changes to previously disclosed risk factors.
- A $272,240 non-cash stock-compensation charge was recognized after shareholder approval satisfied a contingency on certain options. Avance processing transitioned from LifeNet’s Virginia Beach facility to CTS in Dayton; the CTS agreement carries annual license fees of approximately $416,000. The company also expanded its Alachua headquarters under a lease amendment.
Important facts for investors to verify
- Whether product adoption and account growth continue to support high revenue growth and improved gross margins.
- RECON enrollment, trial costs, results, and timing and requirements for a BLA submission.
- Cash burn, working-capital needs, and the basis for management’s expectation of at least 12 months of liquidity.
- Debt covenants and the implications of any additional borrowing, revenue royalties, or prepayment/change-of-control terms.
- Whether grant revenue declines further and whether the CTS transition sustains processing capacity and product quality.