AxoGen, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2015. AxoGen develops and sells products for peripheral nerve repair, including Avance Nerve Graft and AxoGuard products. Interim financial statements are unaudited.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $8.15 million | $4.67 million | $19.52 million | $12.02 million |
| Gross profit / margin | $6.74 million / 82.7% | $3.78 million / 80.8% | $16.09 million / 82.4% | $9.54 million / 79.3% |
| Operating expenses | $8.66 million | $5.58 million | $22.70 million | $16.63 million |
| Operating loss | $(1.92) million | $(1.80) million | $(6.61) million | $(7.09) million |
| Net loss | $(2.98) million | $(3.24) million | $(9.74) million | $(11.22) million |
| Loss per share, basic and diluted | $(0.11) | $(0.19) | $(0.39) | $(0.64) |
- Revenue rose 74.6% in Q3 and 62.4% for the nine-month period, primarily from increased use by existing accounts and sales to new accounts; a March 2015 price increase also contributed to year-to-date growth. Grant revenue was $118,000 in Q3 and $387,000 for the nine months.
- Sales and marketing expense increased 69.6% in Q3 and 52.8% year to date, principally reflecting expansion of the direct sales force and surgeon education. Research and development expense rose 37.4% in Q3 and 14.3% year to date, including costs for the Avance clinical trial.
- At September 30, cash and cash equivalents were $29.94 million, versus $8.22 million at December 31, 2014. Working capital was approximately $34.47 million and the current ratio 9.41, compared with $11.97 million and 5.89, respectively.
- For the nine months, operating cash outflow was $8.79 million, investing cash outflow was $445,000, and financing provided $30.96 million. Cash increased $21.72 million. Operating cash use increased from $8.02 million in the prior-year period, reflecting higher receivables and inventory, among other factors.
- Total liabilities were $29.74 million, including a $25.54 million long-term note payable. The Three Peaks term loan has a six-year term, quarterly interest at 10% as of September 30, 2015, and principal due at maturity; the related 10-year revenue interest agreement generally charges 3.75% of revenue, subject to stated terms and caps. Interest expense includes material non-cash amounts tied to the revenue interest agreement.
- Total assets were $40.91 million and shareholders’ equity was $11.18 million, compared with a deficit of $11.25 million at December 31, 2014. Common shares issued and outstanding increased to 29.84 million from 19.49 million.
Material changes, outlook, and risks
- Two 2015 equity offerings raised approximately $32.5 million gross: the February offering generated approximately $15.0 million before about $1.4 million of estimated costs; the August offering generated approximately $17.5 million before about $300,000 of costs. Proceeds supported sales and marketing and working capital.
- Management said cash resources were sufficient for at least the next 12 months. Capital needs depend in part on revenue growth, sales-force expansion, margins, and operating costs; if more capital is needed, additional financing may dilute shareholders, and funding may not be available on acceptable terms.
- Management expected Avance BLA clinical-trial costs to increase as patient enrollment proceeds over approximately the next two years. The filing describes the pivotal trial as underway.
- LifeNet notified AxoGen that processing at its Virginia Beach facility would end by February 27, 2016. AxoGen entered an agreement with Community Tissue Services to transition processing by the end of Q1 2016 and anticipated approximately $400,000 in related capital expenditures over the next two quarters.
- After quarter-end, AxoGen exercised an option to acquire technology and assets for the AcroVal neurosensory testing system and intended to launch it in Q1 2016. Terms include a $15,000 option fee, up to $39,500 of prior development fees, and a 15% royalty on sales for ten years, plus certain milestone payments.
- Debt covenants include restrictions on additional indebtedness and dividends and revenue requirements. The lender has a security interest in company assets; the filing warns that foreclosure following default could prevent continuation of the business. Change-of-control, asset-sale, or material-adverse-change provisions may trigger specified repayment rights.
- The company reported no material litigation, no material changes to previously disclosed risk factors, and no off-balance-sheet arrangements. Management concluded disclosure controls were effective as of September 30, 2015.
Important facts for investors to verify
- Whether revenue growth and improved gross margins persist as sales-force and marketing costs rise.
- Cash burn, collection of receivables, inventory levels, and the effect of ongoing equity dilution on per-share performance.
- Compliance with Three Peaks’ debt covenants, the effective cost of the loan and revenue interest, and the cash required at maturity or under early-repayment provisions.
- Progress, enrollment, cost, and regulatory timing for the Avance clinical trial and BLA, alongside the LifeNet-to-CTS processing transition.
- AcroVal launch timing, commercial adoption, and the financial impact of its royalty and milestone terms.