Axogen, Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012, with 2011 comparisons. The filing notes that 2011 includes AxoGen Corporation only through September 30 and the combined company thereafter, so year-over-year comparisons are not fully like-for-like. The filing says fourth-quarter 2012 revenue increased year over year but does not provide a clear quarterly revenue value.
Business context
AxoGen develops and sells products for peripheral nerve repair: Avance Nerve Graft, an off-the-shelf processed human nerve allograft, and the porcine ECM AxoGuard Nerve Connector and Nerve Protector. Revenue is concentrated in these three products. The company attributed revenue growth to more customer accounts using its products and continued expansion of its sales and marketing effort.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Revenue | $7.692 million | $4.849 million |
| Gross profit | $5.730 million | $2.423 million |
| Gross margin | Approximately 74.5% | Approximately 50.0% |
| Operating loss | $7.802 million | $6.969 million |
| Net loss | $9.418 million | $9.219 million |
| Basic and diluted loss per share | $0.85 | $2.77 |
| Cash used in operating activities | $8.662 million | $7.079 million |
- Revenue rose 59%; gross profit increased 136%. Management cited higher sales and improved gross margin, including no repeat of 2011 inventory write-offs and certain elevated manufacturing costs.
- Total costs and expenses rose 44% to $13.532 million. Sales and marketing expense was $6.884 million, R&D $1.427 million, and G&A $5.221 million. R&D expense more than doubled, largely reflecting clinical activity and preparation for the FDA program.
- Cash and cash equivalents were $13.907 million at year-end, versus $8.191 million. Working capital was approximately $16.8 million, compared with $8.8 million; the current ratio was 12.4 versus 5.4.
- Net cash increased $5.717 million in 2012. Financing provided $14.506 million, while operating activities used $8.662 million and investing activities used $0.127 million.
- Shareholders’ equity moved from $6.071 million to a deficit of $2.829 million; accumulated deficit was $57.849 million. The company reported no positive operating cash flow historically.
Material changes, financing and unusual items
- In October 2012, AxoGen received total consideration of $20.8 million from PDL BioPharma in exchange for specified royalties on product net revenues over an eight-year term. Proceeds were used to repay the $5 million MidCap loan; no long-term debt remained at year-end apart from the PDL revenue-interest obligation, reported at $21.580 million.
- PDL receives a high-single-digit royalty on defined net revenues; minimum payments begin in Q4 2014. The agreement also provides PDL put and change-of-control repurchase rights, collateral rights, preemptive rights, a board designee, and restrictions on dividends. The filing describes potential substantial cash demands from these provisions.
- Interest expense included approximately $780,000 of non-cash interest related to the PDL transaction. The company recorded a $738,000 income tax benefit from net operating loss use and franchise tax adjustments.
- AxoGen recorded $169,887 of goodwill impairment, $129,667 of patent impairment, and a $147,826 loss on abandonment of a license in 2012.
Outlook, risks and contingencies
- Management said it believed available capital was sufficient for at least 12 months. It cautioned that future funding needs could require equity or debt financing, with potential shareholder dilution, or reductions or delays to sales expansion and regulatory work.
- Avance may continue to be sold under an FDA transition plan and enforcement discretion while AxoGen works toward a biologics license application. Continued distribution depends on compliance with the plan and completion of the required clinical and manufacturing work; FDA action could prevent sales. The Special Protocol Assessment for the planned Phase 3 trial was approved, but approval of the BLA was not assured.
- Clinical programs included the RANGER utilization registry, a completed-enrollment CHANGE pilot comparison, and a prostatectomy pilot study. The filing reports 80%–86% meaningful motor and sensory recovery in cited RANGER results for certain upper-extremity repairs, and no implant-related adverse events reported to date; these are company-reported study results.
- Key risks include dependence on three products, reliance on human donor nerve supply and third-party processors, suppliers and distributors, uncertain market adoption and reimbursement, competition, and regulatory and product-liability exposure. The AxoGuard line depends on Cook Biotech under an exclusive distribution agreement.
- The company reported no active or pending material legal proceedings. Management said disclosure controls and internal control over financial reporting were effective at December 31, 2012 after remediation of a material weakness identified for 2011. The auditor gave an unqualified opinion on the financial statements but did not attest to internal control effectiveness.
Important facts for investors to verify
- Quarterly revenue and profitability, which are not clearly stated in the supplied filing text, and the pace of customer and sales-force growth.
- Cash burn and runway against the PDL royalty schedule, minimum payments, put rights and change-of-control repurchase terms.
- FDA transition-plan compliance, Phase 3 trial timing and cost, and progress toward Avance BLA approval.
- Whether improving gross margins and revenue growth can outpace operating expenses while the company remains loss-making and has a shareholders’ deficit.