AxoGen, Inc. — Q1 2012 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three months ended March 31, 2012, with balance-sheet comparisons to December 31, 2011. AxoGen develops and sells products for peripheral nerve repair, including Avance Nerve Graft and AxoGuard products. LecTec completed its merger with AxoGen Corporation on September 30, 2011; therefore, comparisons with Q1 2011 may not represent a like-for-like business. The filing also provides unaudited Q1 2011 pro forma results assuming the merger had occurred at the start of that period.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 reported |
|---|---|---|
| Revenue | $1.653 million | $1.122 million |
| Gross profit / margin | $1.214 million / 73.4% | $0.783 million / 69.8% |
| Operating expenses | $3.155 million | $1.685 million |
| Loss from operations | $1.941 million | $0.902 million |
| Net loss | $2.109 million | $2.291 million |
| Net loss per common share | $0.19 | $2.21 |
| Cash used in operating activities | $2.478 million | $1.157 million |
The Q1 2011 pro forma figures, which include the merger as if completed before the period, were revenue of $1.147 million and net loss of $1.523 million. The filing cautions that these pro forma results are not necessarily indicative of results that would actually have occurred.
Liquidity and debt. Cash and cash equivalents were $5.642 million at March 31, down from $8.191 million at year-end. Working capital was approximately $6.380 million, and the current ratio was 3.63, versus $8.863 million and 5.39 at December 31. The company reported a $2.549 million net decrease in cash during the quarter; investing activities used $71,000 and financing activities provided approximately zero. The $5.0 million secured loan bears 9.9% interest and matures April 1, 2015; its net carrying amount was approximately $4.851 million, including current and long-term portions. The loan is secured by company assets and includes revenue or minimum-cash covenants.
Material changes and management commentary
- Revenue rose 47.3%, which management attributed to greater penetration of key accounts and new accounts supported by an expanded direct sales force and independent distributors.
- Gross profit increased 55.0% and gross margin improved, reflecting higher revenue, lower processing and labor costs, and the absence of Avance manufacturing start-up costs incurred in Q1 2011.
- Total operating expenses increased 87.2%. Sales and marketing rose 90.1%, research and development rose approximately 179.2%, and general and administrative expense rose 70.5%. Management cited sales-force expansion, payroll, public-company costs, and clinical-trial preparation.
- Despite revenue growth, operating expenses substantially exceeded revenue and operating loss widened. Operating cash use also increased, in part because of the net loss and increases in receivables and inventory.
Outlook, risks, and unusual items
- Management said it believed cash resources were sufficient to meet liquidity requirements beyond the fiscal year, but was considering additional financing. It warned that financing might not be available on acceptable terms or at all; without additional capital, the company could slow sales and marketing expansion, delay regulatory approvals, or reduce headcount. No numerical revenue or earnings guidance was provided.
- Loan covenants require minimum net invoiced revenue or cash of at least 80% of loan principal. The filing says the revenue covenants were revised in May 2012, after quarter-end, but does not provide the revised thresholds in this text.
- License agreements require product royalties of 1%–3%, subject to a 3.75% royalty-stack cap. One agreement could trigger annual maintenance fees of $120,000 beginning August 2012, escalating to $240,000 in 2013 and 2014 if specified regulatory milestones are not met. The Emory agreement also entails future fees or potential loss of the license.
- The company reported no material litigation, no off-balance-sheet arrangements, and no material changes to the risk factors in its 2011 Form 10-K. Management reported disclosure controls were effective at March 31, 2012. It also disclosed that internal control over financial reporting had been ineffective at December 31, 2011 and described a new quarterly review procedure for significant contracts.
- The 2011 comparison includes unusually high deferred financing-cost expense and preferred-stock dividends; the merger and changes in the common-share count also affect period comparisons and per-share results.
Important facts for investors to verify
- How the May 2012 loan covenant revisions affect compliance, liquidity headroom, and the timing of principal payments.
- Whether sales growth and improved gross margin can continue to outpace expansion in operating expenses and cash use.
- Available financing options and the potential dilution or other terms if additional capital is raised.
- Applicable regulatory milestones and future maintenance fees under the UFRF, UTA, and Emory license agreements.
- The effect of the merger and pro forma adjustments when comparing Q1 2012 performance with Q1 2011.
- Progress in remediating the previously reported internal-control weakness and whether the new contract-review procedure is operating effectively.