AxoGen, Inc. — Q3 2013 Form 10-Q
Business and period: AxoGen develops and commercializes peripheral nerve repair products, including Avance nerve graft and AxoGuard products. This unaudited filing covers the quarter and nine months ended September 30, 2013; comparisons are to the corresponding 2012 periods.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $2.96 million | $1.98 million | $7.96 million | $5.65 million |
| Gross profit | $2.31 million | $1.44 million | $6.12 million | $4.16 million |
| Gross margin | 78.0% | 72.6% | 76.9% | 73.7% |
| Operating loss | ($2.28 million) | ($2.04 million) | ($6.79 million) | ($5.57 million) |
| Net loss | ($3.55 million) | ($2.24 million) | ($10.45 million) | ($5.38 million) |
| Loss per share, basic and diluted | ($0.25) | ($0.20) | ($0.86) | ($0.49) |
- Revenue grew 49.3% in Q3 and 41.0% for the nine months, primarily from new accounts and increased use by existing customers. Management also cited manufacturing efficiencies and a March 2013 price increase as drivers of improved gross margin.
- Operating expenses rose 31.6% in Q3 and 32.7% for the nine months. Sales and marketing expense increased 62.5% and 46.2%, respectively, as the company expanded its sales force, marketing and surgeon education. Research and development expense also increased, principally due to clinical activity.
- Interest expense increased substantially, mainly because of non-cash imputed interest on the PDL agreement: approximately $0.92 million in Q3 and $2.76 million for the nine months. Nine-month 2012 net loss included a $0.74 million income tax benefit; there was no tax benefit in 2013.
Cash, liquidity and financing
- At September 30, 2013, cash and equivalents were $22.59 million, working capital was approximately $26.66 million, and the current ratio was 21.24. The company reported a $24.33 million PDL revenue-interest liability and total liabilities of $25.65 million.
- For the first nine months, operating cash use was $8.06 million, investing cash use was $0.12 million, and financing provided $16.86 million. Cash increased by $8.68 million from year-end 2012.
- An August 2013 underwritten equity offering, including the exercised over-allotment, raised approximately $16.7 million net. The company issued 6,184,332 shares in the offering; shares outstanding were 17,339,271 at October 30, 2013.
- Management said cash resources were sufficient for at least the next 12 months. The filing reports no material capital expenditure commitments as of September 30.
Material changes, outlook and risks
- The PDL agreement entitles PDL to 9.95% of specified product net revenues for eight years, subject to quarterly minimum payments beginning in Q4 2014. Minimum annual payments rise from approximately $1.25 million in 2014 to $9.23 million in 2016, then remain substantial through 2020. Principal repayments were expected to begin in February 2015; payments before then were described as interest-only.
- PDL may require repurchase of the assigned interests under specified circumstances, including a put option that can produce a 20% internal rate of return. A change of control triggers a repurchase price designed to produce a 32.5% return. The agreement also provides PDL with a board designee right, preemptive rights and security interests in specified collateral.
- Management warned that if revenue does not grow enough to exceed PDL’s minimum payments, funding needs could increase. Additional financing may not be available on acceptable terms; potential responses could include slowing sales and marketing expansion, delaying regulatory approvals or reducing headcount.
- The company expected to move into expanded Alachua, Florida space in December 2013, with estimated moving costs of about $225,000, and into Burleson, Texas space in November or December, with estimated costs of about $500,000 before anticipated city incentives. The moves are intended to support growth and same-day shipping to western U.S. regions.
- No specific revenue or earnings guidance was provided. Management expected broader sales and marketing efforts to support long-term revenue growth, while acknowledging that near-term growth could lag the related hiring and market-development expenses.
- The company reported no material litigation and no material changes to previously disclosed risk factors. Management concluded disclosure controls were effective as of September 30, 2013.
Investor verification points
- Assess whether revenue growth and product adoption can outpace sales-force and clinical-development spending and narrow operating losses.
- Review the PDL agreement’s payment schedule, effective-interest assumptions, put and change-of-control provisions, and the company’s capacity to meet minimum payments as they increase.
- Track operating cash burn, receivables and inventory, and whether management’s stated 12-month liquidity outlook remains supported by cash and revenue performance.
- Confirm actual facility transition costs and any Burleson incentives, and evaluate the impact of the equity offering on per-share results and dilution.