AxoGen, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2012. The unaudited statements consolidate AxoGen, Inc. and its wholly owned subsidiary. AxoGen sells products for peripheral nerve reconstruction and regeneration, including Avance Nerve Graft and AxoGuard products. The September 2011 merger means reported 2011 comparative results largely reflect the pre-merger business; the filing also provides unaudited pro forma 2011 results.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $2.013 million, up 64.3% year over year | $3.666 million, up 56.2% |
| Gross profit / margin | $1.511 million / 75.1% (65.4% in 2011) | $2.725 million / 74.3% (67.5% in 2011) |
| Operating loss | $1.587 million | $3.528 million |
| Net loss | $1.030 million, versus $1.678 million | $3.139 million, versus $3.969 million |
| Operating cash used | Not separately presented | $3.464 million, versus $2.463 million |
The 2012 net losses include a $736,000 income tax benefit related to net operating losses and franchise tax adjustments; approximately $563,000 had been received by June 30, with $173,000 recorded as receivable. Basic and diluted loss per share was $0.09 for the quarter and $0.28 for the six months.
At June 30, cash and equivalents were $4.639 million, working capital was approximately $4.930 million, and the current ratio was 2.59, down from $8.191 million, $8.863 million, and 5.39, respectively, at December 31, 2011. Total assets were $9.838 million. Debt had $5.0 million principal outstanding; balance-sheet debt, net of discount, totaled about $4.863 million, including $1.402 million current. Stockholders’ equity was $3.271 million.
Six-month investing cash use was $80,000. Financing activities used $8,000, compared with $2.919 million provided in 2011, when the company raised $3.0 million of debt. Cash declined $3.552 million during the first half.
Changes versus prior comparable periods
- Revenue growth reflected greater penetration of key accounts and new accounts through the direct sales force and independent distributors.
- Gross margin improved, which management attributed to higher revenue, lower manufacturing-related processing, travel and temporary labor costs, and nonrecurrence of 2011 manufacturing start-up expenses.
- Sales and marketing costs rose 66.9% for the quarter and 77.8% for the six months, driven by sales-force expansion and distributor support. Research and development spending also increased substantially, primarily for clinical activity.
- Quarterly and six-month net losses narrowed, helped in part by lower interest-related charges and the 2012 tax benefit. The tax benefit and merger-related differences affect comparisons with 2011.
Outlook, risks and unusual items
- Management said near-term revenue growth was lagging expense growth, while expanded sales and marketing efforts were expected to contribute positively over the long term. No specific revenue or earnings guidance was provided.
- The $5.0 million MidCap loan carries 9.9% interest, is secured by company assets, and includes covenants requiring minimum net invoiced revenue or cash of at least 80% of loan principal. AxoGen said it did not expect to meet the revenue test at the September 1, 2012 compliance date, though it remained in compliance through the cash test. The company estimated that available capital would support the cash covenant for approximately three months; future compliance was not assured.
- On August 14, 2012, after quarter-end, PDL BioPharma provided $1.75 million under a two-year revenue-interest agreement. In return, PDL receives 3% of net revenue monthly through 2012, then the greater of 5% of net revenue or $112,257 monthly through August 2014. Certain financings exceeding $5 million or a change of control trigger repurchase terms, including a $150,000 fee. PDL’s rights are subordinated to MidCap’s loan.
- AxoGen was considering additional financing; equity issuance could dilute shareholders. Management warned that if funding were unavailable, the company might slow sales and marketing expansion, delay regulatory activities, or reduce headcount.
- 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. It reported effective disclosure controls as of June 30 and described a new contract-review control implemented after previously identified internal-control weaknesses.
Important facts for investors to verify
- Whether AxoGen met or obtained relief from MidCap’s September 2012 revenue covenant, and how long cash levels supported the alternative covenant.
- Cash and liquidity after the August PDL funding, including the agreement’s ongoing revenue payments and potential repurchase obligations.
- Whether revenue growth and gross-margin improvement continued to outpace rising sales, marketing, research and development costs.
- Comparability of 2011 reported results with 2012, given the September 2011 merger; review the filing’s pro forma 2011 figures where relevant.
- Receipt of the remaining $173,000 tax refund and the effect of the $736,000 tax benefit on reported losses.