AxoGen, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; filed August 4, 2014. AxoGen develops and sells peripheral nerve repair products, including Avance Nerve Graft and AxoGuard products. Results are unaudited.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $4.214 million | $2.862 million | $7.352 million | $5.005 million |
| Gross profit / margin | $3.326 million / 78.9% | $2.229 million / 77.9% | $5.763 million / 78.4% | $3.812 million / 76.2% |
| Operating loss | $(2.298) million | $(2.194) million | $(5.289) million | $(4.518) million |
| Net loss | $(3.741) million | $(3.458) million | $(7.981) million | $(6.895) million |
| Basic and diluted loss per share | $(0.21) | $(0.31) | $(0.46) | $(0.62) |
- Revenue grew 47.2% in Q2 and 46.9% for the first half, principally from new accounts and increased use by existing accounts. Q2 and first-half 2014 included approximately $57,000 and $119,000 of grant revenue, respectively; the comparable 2013 periods had none.
- Gross margin improved, which management attributed to March 2014 price increases and product mix. Operating expenses rose as the company expanded sales and marketing, hired personnel, and funded clinical and product-development work.
- Six-month operating cash use was $5.720 million, versus $5.164 million in 2013. Investing cash use was $314,000, mainly for headquarters and distribution-facility expansion; financing provided $134,000, primarily from option exercises. Cash declined $5.899 million to $14.170 million.
- At June 30, 2014, current assets were $20.253 million and current liabilities $2.253 million, implying working capital of approximately $18.00 million and a 8.99 current ratio. Cash was down from $20.070 million at year-end 2013.
- Total liabilities were $29.575 million, including a $27.243 million PDL revenue-interest obligation; shareholders’ deficit was $7.176 million. The PDL carrying amount rose from $25.364 million at year-end, partly through accrued noncash interest.
Changes, outlook and risks
- Compared with 2013, revenue and gross profit increased substantially, and gross margins improved. However, operating and net losses widened in dollars; lower loss per share reflects a higher weighted-average share count.
- Management said cash resources should meet liquidity requirements for at least the next 12 months. It also cautioned that capital needs depend on revenue growth, product costs, and development or acquisition plans.
- Under the PDL agreement, payments equal 9.95% of defined net revenues, with minimum payments beginning in Q4 2014 and rising to approximately $1.3–$2.5 million per quarter through 2020. If revenue-based royalties do not exceed the minimums, cash needs could increase substantially. Management said additional financing might be needed; equity financing would dilute shareholders, and financing may not be available on acceptable terms.
- PDL’s agreement includes put and change-of-control repurchase provisions, with stated returns of 20% and 32.5%, respectively, as well as security interests and certain equity preemptive rights. The company reported no material capital-expenditure commitments, no material litigation, and no material changes to previously disclosed risk factors.
- Research and development included work toward a biologics license application for Avance Nerve Graft. The filing provides no specific revenue or earnings guidance. Management’s forward-looking statements are subject to risks and actual results may differ.
Investor facts to verify
- Whether sales growth and improved gross margin continue, and how much is attributable to pricing, product mix, and grant revenue.
- Cash burn and liquidity relative to the stepped-up PDL minimum payments beginning in Q4 2014.
- The PDL obligation’s future cash requirements and the assumptions behind its effective-interest accounting.
- Progress, costs, and timing of the Avance BLA-related clinical work, and whether additional financing becomes necessary.