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AXGN > SEC Filings for AXGN > Form 10-Q on 30-Apr-2014All Recent SEC Filings

Show all filings for AXOGEN, INC.

Form 10-Q for AXOGEN, INC.


30-Apr-2014

Quarterly Report


ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Unless the context otherwise requires, all references in this report to "AxoGen," "the Company," "we," "us" and "our" refer to AxoGen, Inc. and its wholly owned subsidiary AxoGen Corporation ("AC") after the Merger (as defined below), and AC before the Merger.

OVERVIEW

The Company is a leading medical technology company dedicated to peripheral nerve repair. AxoGen's portfolio of regenerative medicine products is available in the United States, Canada and several European countries and includes AvanceŽ Nerve Graft, the only off-the-shelf commercially available processed nerve allograft for bridging severed nerves without the comorbidities associated with a second surgical site, AxoGuardŽ Nerve Connector, a ECM coaptation aid for tensionless repair of severed nerves, and AxoGuardŽ Nerve Protector, a porcine submucosa ECM product used to wrap and protect injured peripheral nerves and reinforce the nerve reconstruction while preventing soft tissue attachments.

Revenue from the distribution of these products is the main contributor to AxoGen's total reported sales and has been the key component of its growth to date. AxoGen revenues increased in first quarter 2014 compared to 2013 primarily as a result of sales to new accounts and increased product usage by existing accounts. AxoGen has continued to broaden and strengthen its sales and marketing activity with a focus on the execution of its sales operations. This is expected to have a continued positive contribution to its revenue growth in the long term.

Results of Operations

Comparison of the Three Months Ended March 31, 2014 and 2013

Revenues

Revenues for the three months ended March 31, 2014 increased 46.4% to approximately $3,138,000 as compared to approximately $2,143,000 for the three months ended March 31, 2013. This increase was primarily a result of sales to new accounts and increased product usage by existing accounts. In addition, AxoGen recognized $62,000 of grant revenue in the first quarter of 2014 as compared to no such revenue in first quarter 2013.

Gross Profit

Gross profit for the three months ended March 31, 2014 increased 53.9% to approximately $2,437,000 as compared to approximately $1,583,000 for the three months ended March 31, 2013. Such increase in aggregate dollars was primarily attributable to the increased revenues in the first quarter of 2014, with additional contributions by the factors also affecting gross margin. Gross margin improved to 77.7% for the three months ended March 31, 2014 as compared to 73.9% for the same period in 2013 as a result of manufacturing efficiencies, a price increase in March 2014 and change in product mix.

Costs and Expenses

Total cost and expenses increased 38.9% to approximately $5,428,000 for the three months ended March 31, 2014 as compared to approximately $3,906,000 for the three months ended March 31, 2013. These increases were primarily due to increasing sales and marketing activities and increases in salaries as AxoGen hired additional personnel to meet its current and expected growth. To a lesser extent, these increases were also attributable to expenses associated with being a public company listed on NASDAQ, facility costs and research and development costs associated with the Company's preparation for its clinical trial. As a percentage of revenues, total operating expenses were 172.9% for the three months ended March 31, 2014 as compared to


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182.3% for the three months ended March 31, 2013. Such lower total costs and expenses as a percentage of revenue were primarily a result of the Company's revenue increase outpacing increases in costs and expenses.

Sales and marketing expenses increased 43.6% to approximately $2,721,000 for the three months ended March 31, 2014 as compared to approximately $1,894,000 for the three months ended March 31, 2013. This increase was primarily due to expansion of the direct sales force, increased support for both its direct sales force and independent distributors, sales training and surgeon education. As a percentage of revenues, sales and marketing expenses were 86.7% for the three months ended March 31, 2014 compared to 88.4% for the three months ended March 31, 2013. Such lower sales and marketing expenses as a percentage of revenue were a result of the revenue increase outpacing increases in costs and expenses.

General and administrative expenses increased 17.9% to approximately $1,895,000 for the three months ended March 31, 2014 as compared to approximately $1,606,000 for the three months ended March 31, 2013. The increase was primarily a result of increased payroll and benefits, public company related expenditures and increased rent and utilities for the Company's new corporate headquarters and distribution facility, offset by a reduction in travel expenses. As a percentage of revenues, general and administrative expenses were 60.3% for the three months ended March 31, 2014 as compared to 74.9% for the three months ended March 31, 2013. Such lower general and administrative expenses as a percentage of revenue were a result of the revenue increase outpacing increases in costs and expenses.

Research and development expenses increased approximately 99.7% to approximately $813,000 in the three months ended March 31, 2014 as compared to approximately $407,000 for the three months ended March 31, 2013. Development includes AxoGen's product development, clinical efforts substantially focused on its biological license application ("BLA") for the AvanceŽ Nerve Graft and surgeon education. A substantial portion of the increase in research and development expenses from 2013 to 2014 related to expenditures for such clinical activity. AxoGen has also increased activity related to education of surgeons as to surgical techniques and AxoGen's products in support of its sales function, which activity contributed to a portion of the 2014 expense increase. Although AxoGen's products are developed for sale in their current use, it does conduct limited research and product development focused on new products and new applications to existing products. AxoGen has become more active in pursuing research grants to support this research. This AxoGen product pipeline development also contributed to a portion of the research and development expense increase in 2014, with grant revenue offseting a portion of this activity.

Other Income and Expenses

Interest expense increased 11.5% to approximately $1,191,000 for the three months ended March 31, 2014 as compared to approximately $1,068,000 for the three months ended March 31, 2013. This increase was due to the increase in the interest related to the Royalty Contract from higher revenues and the interest accrued related to PDL. As a result of the accounting treatment for the PDL transaction, interest expense included approximately $892,000 and $858,000 for the three months ended March 31, 2014 and 2013, respectively, of non-cash expense that is expected to be paid in the future based upon the terms of the PDL transaction and increases in AxoGen revenues. Other than the $892,000 and $858,000 non-cash expense, the remaining $299,000 and $210,000 in interest expense for the three months ended March 31, 2014 and 2013, respectively, is related to cash paid for interest on the note payable.

Interest expense-deferred financing costs increased 15.9% to approximately $51,000 for the three months ended March 31, 2014 as compared to approximately $44,000 for the three months ended March 31, 2013. This increase is primarily due to higher deferred financing cost amortization associated with the PDL agreement from applying the effective interest rate method.

Income Taxes

The Company had no income tax expenses or income tax benefit for each of the three months ended March 31, 2014 and 2013 due to incurrence of net operating loss in each of these periods.


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Effect of Inflation

Inflation has not had a significant impact on the Company's operations or cash flow.

Liquidity and Capital Resources

Note Payable

On October 5, 2012, AxoGen entered into the Royalty Contract with PDL. Proceeds from the PDL transaction were used to fully repay a prior credit facility and extinguish AxoGen's long-term debt obligations thereunder. Pursuant to the Royalty Contract the Company sold to PDL the right to receive specified royalties on the Company's Net Revenues (as defined in the Royalty Contract) generated by the sale, distribution or other use of the Company's products AvanceŽ Nerve Graft, AxoGuardŽ Nerve Protector and AxoGuardŽ Nerve Connector (the "Acquired Revenues"). The Royalty Contract has a term of eight years. Under the Royalty Contract, PDL is to receive royalty payments currently paid weekly based on a high single digit royalty rate of the Company's Net Revenues (the "Assigned Interests"), subject to certain agreed upon minimum payment requirements which begin in the fourth quarter of 2014 as provided in the Royalty Contract. The total consideration PDL paid to the Company was $20,800,000 (the "Funded Amount"), including $19,050,000 PDL paid to the Company on October 5, 2012, and $1,750,000 PDL paid to the Company on August 14, 2012 pursuant to the Interim Royalty Contract. Upon the closing of PDL's purchase of the specified royalties described above, which was concurrent with the execution of the Royalty Contract, the Interim Royalty Contract was terminated. There are no financial covenants or other restrictions on the use of capital by AxoGen as a result of the Royalty Contract, however, PDL has a first perfected security interest in the Assigned Interests.

The Company had no material commitments for capital expenditures at March 31, 2014.

Cash Flow Information

AxoGen had working capital of approximately $20.51 million and a current ratio of 11.67 at March 31, 2014, compared to working capital of $23.56 million and a current ratio of 12.23 at December 31, 2013. The decrease in working capital and the current ratio at March 31, 2014 as compared to December 31, 2013 was primarily due to the use of working capital for operations in excess of revenues.

AxoGen's future capital requirements depend on a number of factors, including, without limitation, revenue increases consistent with its business plan, and the corresponding royalty payments of approximately $1.3 to $2.5 million per quarter, starting in October 2014, due to PDL and pursuant to AxoGen's licensing agreements in connection with AvanceŽ Nerve Graft, cost of products and acquisition and/or development of new products. In particular, if revenue does not increase by fourth quarter 2014 to a level whereby the 9.95% royalty owed to PDL on AxoGen's gross revenues exceeds the PDL minimum royalty payments at such time of approximately $1.3 million, and such differential continues, or grows larger as the PDL minimum royalty payments increase, AxoGen would face increasing capital needs. Such capital needs could be substantial depending on the extent to which AxoGen is unable to increase revenue. The Company believes it has sufficient cash resources to meet its liquidity requirements for at least the next 12 months. AxoGen's future capital requirements depend on a number of factors, including, without limitation, revenue increases consistent with its business plan, cost of products and acquisition and/or development of new products pursuant to the PDL transaction.

AxoGen continually evaluates its capital needs and takes action as it deems appropriate to maximize its flexibility to address these needs. As a result, although it has no current operating capital requirements, if such need arose it would raise additional funds through public or private equity offerings, debt financings or from other sources. The sale of additional equity would result in dilution to AxoGen's shareholders. There is no assurance that AxoGen will be able to secure funding on terms acceptable to it, or at all. The increasing need for capital as the PDL transaction matures could also make it more difficult to obtain funding through either equity or debt. Should additional capital not become available to AxoGen as needed, AxoGen may be required to take certain action, such as, slowing sales and marketing expansion, delaying regulatory approvals or reducing headcount. During the three months ended March 31, 2014, the Company had a net decrease in cash and cash equivalents of approximately $3,262,000 as compared to a net decrease of cash and cash equivalents of approximately $2,707,000 in the three months ended March 31, 2013. The Company's principal sources and uses of funds are explained below:

Cash used in operating activities

The Company used approximately $3,151,000 of cash for operating activities in the three months ended March 31, 2014, as compared to using approximately $2,651,000 of cash for operating activities in the three months ended March 31, 2013. This increase in cash used in operating activities is primarily attributed to the net loss generated in the three months ended March 31, 2014, along with an increase in our accounts receivable and inventory and a decrease in accounts payable and accrued expenses.

Cash used for investing activities

Investing activities for the three months ended March 31, 2014 used approximately $204,000 of cash as compared to using approximately $57,000 of cash in the three months ended March 31, 2013. This increase in use is principally attributable to the purchase of certain fixed assets for the expansion of the headquarters office and the opening of the worldwide distribution facility.


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Cash provided by financing activities

Financing activities in the three months ended March 31, 2014 provided approximately $92,000 of cash as compared to providing approximately $1,700 of cash in the three months ended March 31, 2013. The increase was due to proceeds received from the exercise of stock options.

Off-Balance Sheet Arrangements

AxoGen does not have any off-balance sheet arrangements.

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