AxoGen, Inc. — Form 10-Q Summary
Business and period: AxoGen develops and commercializes peripheral nerve repair products, including Avance Nerve Graft and AxoGuard products. This unaudited report covers the quarter and nine months ended September 30, 2012. Comparisons with 2011 are affected by the September 30, 2011 merger that combined LecTec and AxoGen.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $1.981 million | $1.141 million | $5.647 million | $3.488 million |
| Gross profit | $1.439 million | $10,000 | $4.163 million | $1.594 million |
| Gross margin | 72.6% | 0.9% | 73.7% | 45.7% |
| Operating loss | $2.043 million | $2.626 million | $5.571 million | $4.980 million |
| Net loss | $2.237 million | $3.113 million | $5.376 million | $7.082 million |
- Q3 revenue rose 73.6%; nine-month revenue rose 61.9%. Management attributed growth to greater penetration of key accounts, new accounts, and expanded direct sales and distributor efforts.
- Gross-margin improvement reflected higher sales, lower manufacturing processing and labor costs, and the absence of approximately $828,000 in Q3 2011 inventory write-offs. Nine-month results also benefited from nonrecurring 2011 manufacturing start-up costs.
- Operating expenses rose 32.0% in Q3 and 48.1% for the nine-month period, led by sales-force expansion, personnel, clinical-trial preparation, and product-pipeline activities. Operating loss worsened for the nine months despite revenue growth.
- Nine-month net loss included a $736,000 income-tax benefit from net operating loss utilization and franchise-tax adjustments; the refund had been received. Lower interest and deferred-financing-cost expense also affected year-over-year comparisons.
Cash, liquidity, and debt
- At September 30, cash and cash equivalents were $4.445 million, down from $8.191 million at December 31, 2011. Working capital was approximately $4.435 million and the current ratio was 2.18, versus $8.863 million and 5.39, respectively.
- For the first nine months, operating cash use was $5.288 million, investing cash use was $120,000, and financing provided $1.662 million. Net cash declined by $3.746 million.
- September 30 debt was $6.750 million before unamortized discount, including $5.0 million under the MidCap loan and $1.750 million under an interim PDL revenue-interest agreement. The MidCap loan was secured by company assets and carried a 9.9% interest rate and financial covenants.
- Management stated that available capital was sufficient to maintain operations for more than 12 months. It cautioned that additional financing might be needed and might not be available on acceptable terms; potential responses could include slowing sales and marketing expansion, delaying regulatory activities, or reducing headcount.
Outlook, significant transactions, and risks
- No quantified revenue or earnings guidance is provided. Management expects sales and marketing expansion to support longer-term growth, while noting that in the near term revenue growth may lag expense growth. It also expects increased spending on new products and applications.
- Subsequent event: On October 5, 2012, PDL BioPharma paid total consideration of $20.8 million for specified product revenue interests over eight years, including $1.75 million received under the interim agreement. PDL is entitled to a high-single-digit royalty rate, with minimum payment provisions beginning in Q4 2014. AxoGen used proceeds to repay the MidCap loan and paid an approximately $370,000 prepayment penalty.
- The PDL contract includes potential repurchase obligations upon specified events, including a change of control, and an optional company call after September 30, 2016. It also provides PDL board-designation and equity preemptive rights, and restricts certain dividends and share repurchases. The filing reports no financial covenants or general use-of-capital restrictions under the royalty contract.
- Management reported no material litigation, no material changes to previously disclosed risk factors, and no off-balance-sheet arrangements. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Review the PDL royalty agreement’s effective royalty rate, minimum payments, repurchase formulas, and possible effect on future cash flows and shareholder flexibility.
- Confirm the October 2012 MidCap payoff, including the final balance and prepayment penalty, and assess liquidity after the transaction.
- Assess operating cash burn, working-capital use, and whether revenue growth can outpace sales, clinical, and other operating expenses.
- Consider the impact of merger-related comparability and the 2011 inventory write-offs when interpreting reported growth and margins.
- Monitor sales-force productivity, account growth, clinical and regulatory progress, and the need for any further financing.