AxoGen, Inc. — Q1 2015 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2015, compared with Q1 2014. AxoGen develops and sells products for peripheral nerve repair, including Avance nerve graft and AxoGuard products.
Financial performance
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Revenue | $4.95 million | $3.14 million; up 57.8% |
| Gross profit / margin | $3.97 million / 80.1% | $2.44 million / 77.7% |
| Operating loss | $2.54 million | $2.99 million |
| Net loss | $3.58 million; $0.16 per share | $4.24 million; $0.24 per share |
| Operating cash flow | -$2.51 million | -$3.15 million |
| Cash and cash equivalents | $19.26 million at March 31 | $8.22 million at December 31, 2014 |
| Debt | $25.27 million note payable | $25.09 million at December 31, 2014 |
Sales and marketing expense rose 44.5% to $3.93 million, mainly from expansion of the direct sales force and greater distributor support, training, and surgeon education. Research and development expense decreased 17.5% to $0.67 million; general and administrative expense was approximately flat at $1.91 million. Interest expense was $0.99 million, including $0.18 million of noncash expense. No income tax expense or benefit was recorded.
Liquidity, financing, and material changes
- Working capital was approximately $22.58 million and the current ratio was 7.57 at March 31, versus $11.97 million and 5.89 at December 31, 2014. Management attributed the improvement primarily to the February equity offering.
- The February offering sold 5,437,200 shares at $2.75 per share, generating approximately $15.0 million gross proceeds; estimated offering costs were approximately $1.4 million. Financing activities provided $13.59 million net cash during the quarter.
- Net cash increased by $11.04 million, notwithstanding operating cash use of $2.51 million and investing cash use of $0.04 million.
- The $25 million Three Peaks term loan bears interest at 9% plus the greater of LIBOR or 1% (10% at quarter-end), has a six-year term with interest-only payments and principal due at maturity, and is secured by company assets. A 10-year revenue interest agreement also requires payments at 3.75% of revenue, subject to stated caps. An additional $7 million borrowing may be available in 2016 subject to conditions.
- Shareholders’ deficit improved to $0.68 million from $11.25 million at year-end, largely reflecting the equity issuance. Shares outstanding were 24,926,014 at March 31.
Outlook, risks, and other notable items
- Management cited new accounts, higher usage by existing accounts, and a March 2015 price increase as drivers of revenue growth; it also attributed improved gross margin to manufacturing efficiencies, pricing, and product mix.
- No quantified earnings or revenue guidance was provided. Management stated that cash resources should meet liquidity requirements for at least the next 12 months. Future capital needs depend on revenue growth, sales-force expansion, education programs, margins, and production and distribution facilities; additional financing may be needed and could dilute shareholders.
- LifeNet Health notified AxoGen in April 2015 that its nerve-tissue processing agreement will end by February 27, 2016, requiring transition from the Virginia Beach facility. Management said it was planning controlled manufacturing space and had time to establish it.
- An April 2015 lease expanded warehouse space in Burleson, Texas; the three-year lease costs $60,000 annually and is intended to support storage, distribution, and operational expansion.
- Three Peaks debt includes restrictive covenants and potential costly prepayment or change-of-control provisions. The revenue-interest accounting estimate depends on projected revenues and payments and involves significant judgment.
- The company reported no material litigation and no material changes to the risk factors in its 2014 Form 10-K. Disclosure controls were assessed as effective; no material changes to internal control were reported.
Important facts for investors to verify
- Whether revenue growth and gross-margin improvement persist, and how much reflects pricing versus volume, mix, and grants.
- Cash burn, working-capital needs, and the assumptions behind management’s 12-month liquidity assessment.
- The effective economic cost and payment obligations of the Three Peaks loan and revenue-interest agreement, including covenant compliance and any future borrowing.
- Manufacturing transition plans, timing, costs, and ability to maintain supply before the LifeNet agreement ends.
- Potential dilution from future financing and the share-count effects of equity compensation or additional offerings.