AxoGen, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. AxoGen develops and sells products for peripheral nerve repair, including Avance Nerve Graft and AxoGuard products.
Financial performance
- Q2 revenue: $6.42 million, up 52.3% year over year; six-month revenue was $11.37 million, up 54.6%. Management attributed growth primarily to new accounts, higher use by existing customers, and a March 2015 price increase. Grant revenue was $128,000 for Q2 and $270,000 for the first half of 2015.
- Gross profit and margin: Q2 gross profit was $5.38 million, with an 83.8% margin versus 78.9% a year earlier. First-half gross profit was $9.35 million, with an 82.2% margin versus 78.4%. Management cited processing efficiencies and product mix.
- Operating costs and losses: Q2 operating expenses were $7.53 million and operating loss was $2.15 million; net loss was $3.19 million, or $0.13 per share, versus a $3.74 million net loss, or $0.21 per share, in Q2 2014. First-half operating loss was $4.70 million and net loss was $6.77 million, or $0.29 per share, compared with a $7.98 million net loss, or $0.46 per share, in the prior-year period.
- Cash flow: First-half operating cash use was $6.01 million, investing cash use was $187,000, and financing provided $13.60 million. Cash increased $7.41 million to $15.62 million, primarily reflecting the February equity offering.
- Liquidity: Working capital was approximately $19.82 million and the current ratio was 6.79 at June 30, compared with $11.97 million and 5.89 at year-end 2014. Management said available cash should meet liquidity needs for at least the next 12 months.
- Debt and equity: The Three Peaks note payable was $25.43 million, all classified as long-term; it carries a 10% rate at the reported LIBOR floor and is interest-only, with principal due at the end of its six-year term. A 10-year revenue-interest agreement also requires royalties based on revenue. February’s offering sold 5,437,200 shares for approximately $15.0 million gross proceeds; shares outstanding rose to 24,932,392 from 19,488,814 at year-end.
Material changes, outlook, and risks
- Sales and marketing expense rose 43.4% in Q2, reflecting sales-force expansion and surgeon education; research and development expense increased as the Avance clinical trial began. Management expected BLA-related clinical costs to rise as enrollment continued over approximately the next two years.
- No formal revenue or earnings guidance was provided. Management identified future capital needs as dependent on revenue growth, sales-force expansion, education programs, margins, facilities, and market conditions; additional financing could dilute shareholders, and funding may not be available on acceptable terms.
- LifeNet notified AxoGen that processing must leave its Virginia Beach facility by February 27, 2016. AxoGen subsequently signed an agreement with Community Tissue Services (CTS) on August 6, 2015, with processing transfer expected to be complete by the end of Q1 2016. The company anticipated approximately $400,000 in facility equipment and build-out spending.
- The Three Peaks loan is secured by company assets; default could permit foreclosure. Prepayment or certain change-of-control, asset-sale, or material-adverse-change events may trigger substantial contractual payments. Effective-interest accounting depends on subjective estimates of future revenue and royalty payments.
- The company reported no material litigation, no material changes to previously disclosed risk factors, and effective disclosure controls as of June 30, 2015.
Important facts for investors to verify
- Whether revenue growth and gross-margin improvement persist, and how much is attributable to grant revenue, pricing, and product mix.
- Cash runway against ongoing operating cash use and rising clinical-trial, sales, and facility costs.
- Debt economics, revenue-based royalties, covenants, collateral exposure, and the assumptions underlying effective-interest expense.
- Successful transition of Avance processing from LifeNet to CTS by the expected timetable and within the anticipated cost.
- Clinical-trial progress, BLA requirements, and the potential for future financing or share dilution.