AxoGen, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparative period is Q1 2013. AxoGen develops and sells peripheral nerve repair products, including Avance Nerve Graft and AxoGuard products. The interim financial statements are unaudited.
Financial performance and position
| Metric | Q1 2014 / March 31, 2014 | Comparable period / prior year-end |
|---|---|---|
| Revenue | $3.14 million | $2.14 million in Q1 2013 |
| Gross profit / margin | $2.44 million / 77.7% | $1.58 million / 73.9% in Q1 2013 |
| Operating loss | $2.99 million | $2.32 million in Q1 2013 |
| Net loss | $4.24 million; $0.24 per share | $3.44 million; $0.31 per share in Q1 2013 |
| Operating cash used | $3.15 million | $2.65 million in Q1 2013 |
| Cash and cash equivalents | $16.81 million | $20.07 million at December 31, 2013 |
| Current assets / current liabilities | $22.43 million / $1.92 million | $25.66 million / $2.10 million at December 31, 2013 |
| Working capital / current ratio | Approximately $20.51 million / 11.67 | Approximately $23.56 million / 12.23 at December 31, 2013 |
| Note payable under PDL revenue-interest agreement | $26.26 million | $25.36 million at December 31, 2013 |
| Total liabilities / shareholders’ equity (deficit) | $28.26 million / $(3.69) million | $27.55 million / $0.14 million at December 31, 2013 |
Investing activities used $0.20 million, primarily for fixed assets, and financing activities provided $0.09 million from stock-option exercises. Cash declined by $3.26 million during the quarter, versus a $2.71 million decline in Q1 2013. Gross margin improved; the company remained loss-making and reported a larger net loss, although loss per share was lower as weighted-average shares increased to 17.38 million from 11.12 million.
Changes and management commentary
- Revenue rose 46.4%, primarily from new customer accounts and higher product usage at existing accounts; Q1 2014 also included $62,000 of grant revenue.
- Gross margin increased from 73.9% to 77.7%, which management attributed to manufacturing efficiencies, a March 2014 price increase, and product mix.
- Total operating expenses increased 38.9% to $5.43 million. Sales and marketing rose 43.6% as the company expanded its sales force and surgeon training; research and development nearly doubled, substantially reflecting clinical activity related to the Avance BLA and product pipeline work.
- Interest expense was $1.19 million. It included approximately $0.89 million of noncash interest added to the PDL note, compared with $0.86 million in Q1 2013.
Liquidity, outlook, and risks
- Management said cash resources were sufficient for at least the next 12 months. It also noted that continued operating cash use and future product-development needs affect capital requirements.
- The PDL agreement assigns royalties equal to 9.95% of defined product revenues. Minimum payments begin in Q4 2014 and are described as approximately $1.3 million to $2.5 million per quarter through 2020. Management warned that if revenue does not grow enough to exceed minimum payments, capital needs could increase substantially; additional financing may not be available on acceptable terms or at all.
- The agreement includes potential repurchase provisions: a PDL put option in specified circumstances and a 32.5% internal-rate-of-return price upon a change of control. PDL also has a security interest in specified collateral, board-designation rights, and certain preemptive rights.
- The company reported no material litigation, no material changes to the risk factors in its 2013 Form 10-K, and no off-balance-sheet arrangements. Management stated disclosure controls were effective as of March 31, 2014; no material changes in internal control were reported.
- No specific numerical revenue or earnings guidance was provided. Management expected expanded sales and marketing activity to support long-term revenue growth. Forward-looking results remain subject to risks and uncertainties.
Important facts for investors to verify
- Whether revenue growth and gross-margin improvement continue, and whether the March price increase and product mix are sustainable.
- Whether product revenue can cover the PDL minimum payments beginning in Q4 2014, alongside ongoing operating cash burn and product-development costs.
- The projected timing and cash impact of PDL payments, including the note’s noncash interest accretion and contractual put and change-of-control terms.
- Progress, costs, and regulatory status of the Avance BLA-related clinical work.
- Cash runway and potential need for additional financing, including possible shareholder dilution.