AxoGen, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. The company develops and commercializes peripheral nerve repair products, principally Avance Nerve Graft and AxoGuard products. Financial statements are unaudited.
Financial performance and liquidity
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $2.862 million | $2.013 million | $5.005 million | $3.666 million |
| Gross profit | $2.229 million | $1.511 million | $3.812 million | $2.725 million |
| Gross margin | 77.9% | 75.1% | 76.2% | 74.3% |
| Operating loss | $(2.194) million | $(1.587) million | $(4.518) million | $(3.528) million |
| Net loss | $(3.458) million | $(1.030) million | $(6.895) million | $(3.139) million |
| Loss per share, basic and diluted | $(0.31) | $(0.09) | $(0.62) | $(0.28) |
- Q2 revenue grew 42.2%; first-half revenue grew 36.5%, mainly from new accounts and greater use by existing customers. New accounts contributed about $293,000 in Q2 and $441,000 in the first half.
- Gross margin improved with higher volume, manufacturing efficiencies, and the March 2013 price increase; the company estimated the increase contributed about $238,000 to Q2 revenue and $207,000 to first-half revenue. Higher inventory reserves partly offset gains.
- Operating expenses rose 42.8% in Q2 and 33.2% in the first half, driven primarily by sales-force and marketing expansion, hiring, public-company costs, and clinical-related R&D. Sales and marketing expense increased 59.7% in Q2.
- Interest expense increased substantially following the PDL transaction. First-half interest expense was $2.291 million, including approximately $1.833 million of non-cash interest accrued on the PDL arrangement; cash interest paid in the first half was $458,394.
- At June 30, cash and equivalents were $8.693 million, down from $13.907 million at December 31, 2012. Working capital was about $12.22 million and the current ratio was 8.70, versus $16.82 million and 12.36 at year-end.
- First-half cash used in operating activities was $5.164 million, versus $3.464 million in the prior-year period. Investing activities used $84,375; financing activities provided $33,393.
- The PDL note payable was $23.384 million, up from $21.580 million at year-end; total liabilities were $24.972 million. Shareholders’ deficit was $9.299 million.
Material changes and subsequent events
- On August 14, 2013, after quarter-end, AxoGen completed an offering of 6.0 million shares at $3.00 per share, receiving approximately $16.2 million net proceeds, excluding any over-allotment. Underwriters received a 30-day option for up to 900,000 additional shares. Proceeds were intended for commercialization and marketing, product pipeline development, and working capital.
- The filing reports 11,139,939 shares outstanding at June 30 and 17,139,939 as of August 14, 2013, reflecting the 6.0 million-share offering.
- The company began trading on the Nasdaq Capital Market on August 9, 2013, according to the risk disclosures.
- Management stated that it believed cash resources were sufficient for at least the next 12 months. This assessment preceded the August offering and depends on revenue growth, spending, and PDL payment obligations.
Outlook, risks, and unusual items
- No specific revenue, earnings, or margin guidance is provided. Management expects broader sales and marketing efforts to support longer-term revenue growth, while noting that near-term revenue growth may lag increased spending. Sales hires made in the first half were not expected to contribute significantly in Q3.
- Under the eight-year PDL revenue interest agreement, PDL receives 9.95% of specified product net revenues. Minimum quarterly payments of approximately $1.3 million to $2.5 million begin in Q4 2014, with stated minimum annual payments rising to $9.232 million in 2016. PDL may require repurchase under specified conditions at a price designed to provide a 20% return; a change of control triggers a repurchase price designed to provide a 32.5% return. The agreement is secured by specified collateral and includes board-designation and preemptive rights.
- Management warned that if product revenue does not exceed the PDL minimum-payment thresholds, or if PDL exercises its put when the company lacks funds, additional capital may be needed. Failure to raise capital could require slowing sales expansion, delaying regulatory work, or reducing headcount.
- Avance Nerve Graft was being sold under an FDA transition plan, not a BLA approval. Continued commercial sales depend on compliance with the plan and progress toward the required clinical and regulatory submissions. Delays, adverse trial outcomes, or an FDA change in position could materially affect the business.
- Key risks include reliance on three products, donor-tissue availability and public acceptance, supplier and manufacturing continuity, distributor relationships, reimbursement and pricing pressure, clinical and regulatory execution, and competition. AxoGuard distribution depends on Cook Biotech; related patents were expected to expire in 2016.
- The company reported no material litigation, no off-balance-sheet arrangements, and no material capital-expenditure commitments. Management concluded disclosure controls were effective at June 30; no material changes in internal control over financial reporting were reported for the quarter.
Important facts for investors to verify
- Whether revenue growth and gross-margin improvement continue to offset expanding sales, marketing, and clinical costs.
- Cash burn after the August equity offering, including the offering’s dilution and any exercised over-allotment option.
- Actual PDL payments and the assumptions underlying the recorded effective interest rate, future minimums, put provisions, and change-of-control obligations.
- Progress, timing, and costs for the Avance clinical trial and BLA process, and any changes to FDA transition-plan status.
- Product concentration, donor-tissue supply, Cook Biotech distribution terms, and the effect of AxoGuard patent expirations.