AxoGen, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. The interim financial statements are unaudited. AxoGen develops and sells peripheral nerve repair products, including Avance Nerve Graft and AxoGuard products.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $4.67 million | $2.96 million | $12.02 million | $7.96 million |
| Gross profit | $3.78 million | $2.31 million | $9.54 million | $6.12 million |
| Gross margin | 80.8% | 78.0% | 79.3% | 76.9% |
| Operating loss | $(1.80) million | $(2.28) million | $(7.09) million | $(6.79) million |
| Net loss | $(3.24) million | $(3.55) million | $(11.22) million | $(10.45) million |
| Loss per share, basic and diluted | $(0.19) | $(0.25) | $(0.64) | $(0.86) |
- Q3 revenue increased 58.0%; nine-month revenue increased 51.0%. Management attributed growth mainly to increased sales and product use within existing accounts. Grant revenue was $57,000 for Q3 and $175,000 for the nine-month period, versus none in the comparable 2013 periods.
- Gross margin improvement was attributed to March 2014 price increases, manufacturing efficiencies, and product mix. Sales and marketing, R&D, and general and administrative costs all rose in dollars; revenue growth caused several expense categories to decline as a percentage of revenue.
- Interest expense rose year over year, partly because of revenue-linked PDL financing. Approximately $2.81 million of nine-month interest expense was noncash and expected to be paid in the future under the agreement.
Cash, liquidity, and obligations
- Cash and cash equivalents were $11.80 million at September 30, 2014, down from $20.07 million at December 31, 2013. Nine-month operating cash use was $8.02 million; investing cash use was $0.38 million; financing provided $0.13 million. Cash declined by $8.27 million.
- Working capital was approximately $15.96 million and the current ratio was 8.85, versus $23.56 million and 12.23 at year-end 2013. Management said existing cash was sufficient for at least the next 12 months, while cautioning that future capital needs could increase and additional financing might not be available on acceptable terms.
- The PDL revenue-interest obligation was recorded at $28.17 million at quarter-end, versus $25.36 million at year-end 2013. Its terms included 9.95% of defined product net revenues and minimum payments beginning in Q4 2014. The agreement included security interests and put and change-of-control provisions; the put option specified a 20% return and the change-of-control provision a 32.5% return.
Outlook, risks, and subsequent financing
- No specific revenue or earnings guidance was provided. Management expected continued long-term revenue contribution from sales and marketing execution. R&D spending included clinical activity related to the Avance Nerve Graft biologics license application (BLA).
- Management identified potential future capital needs, including if revenue does not increase as planned. It said insufficient funding could require slower sales and marketing expansion, delayed regulatory approvals, or headcount reductions. The filing reported no material change to the risk factors in the 2013 Form 10-K.
- Subsequent event: On November 12, 2014, AxoGen entered into financing arrangements with Three Peaks/Oberland, with the initial $25 million, six-year term loan closing November 13. The loan carries quarterly interest at 9% plus the greater of LIBOR or 1%; at closing the rate was 10%, with interest-only payments and principal due at maturity. An additional $7 million borrowing could be available in 2016 subject to conditions. The loan is secured and subject to covenants, including revenue requirements and restrictions on debt and dividends.
- The subsequent financing also included a 10-year revenue-interest agreement with a 3.75% rate on revenues up to $30 million in any 12-month period, rising proportionally up to 4.80% if the additional borrowing is drawn. Proceeds from the initial loan, a $3.55 million Three Peaks share sale, and $1.75 million of company cash were used to repay PDL in full. AxoGen also sold $1.75 million of shares to PDL for general corporate purposes. The filing describes substantial premiums or return-based payments in specified prepayment and change-of-control circumstances.
- No material litigation, off-balance-sheet arrangements, or material changes in internal control were reported. Management concluded disclosure controls and procedures were effective.
Important facts for investors to verify
- Whether revenue growth and gross-margin gains continue, and how sales-force expansion affects operating losses and cash use.
- Clinical and regulatory progress on the Avance BLA, including timing, costs, and any resulting obligations.
- Actual cash runway and compliance with the new lender’s financial and operating covenants.
- The full economic burden of the new term loan and revenue-interest agreement, including prepayment, change-of-control, and additional-borrowing terms.
- Share dilution and updated shares outstanding following the November equity sales; the filing reported 19,487,530 common shares outstanding as of November 13, 2014.