MIMEDX Group, Inc. 10-Q Summary
Reporting period: Three months ended March 31, 2017, compared with the three months ended March 31, 2016. MiMedx operates in one Regenerative Biomaterials segment, serving Wound Care, Surgical, Sports Medicine, Orthopedics, Ophthalmic and Dental markets.
Financial Performance and Position
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $72.6 million | $53.4 million | Up 36.0% |
| Gross margin | $63.9 million; 88.0% | $45.4 million; 85.1% | Margin up 290 basis points |
| Operating income | $6.2 million | $1.5 million | Up $4.7 million |
| Net income | $4.3 million | $1.2 million | Up $3.1 million |
| Diluted EPS | $0.04 | $0.01 | Improved |
| Adjusted EBITDA | $12.4 million | $9.1 million | Up $3.3 million |
| Net cash from operations | $10.6 million | $(1.0) million | Improved $11.6 million |
Revenue mix: Wound Care revenue was $54.9 million, up 39.7%; Surgical, Sports Medicine and Orthopedics revenue was $17.7 million, up 25.5%. Management attributed the overall increase primarily to approximately $21.7 million of volume from market-share gains and market expansion, partly offset by unfavorable product mix of $3.1 million. Pricing contributed approximately $0.6 million.
Expenses and margins: Research and development expense increased 68.0% to $4.2 million, reflecting higher clinical-trial, animal-study, laboratory, consulting and personnel costs. Selling, general and administrative expense increased 30.5% to $53.0 million, driven by expansion of the direct sales organization, higher commissions and additional support personnel. Share-based compensation was $4.7 million, compared with $4.6 million. The gross-margin improvement reflected lower Stability acquisition-related inventory costs, manufacturing efficiencies and yield improvements.
Liquidity: Cash and cash equivalents were $30.9 million at March 31, 2017, compared with $34.4 million at December 31, 2016. Current assets were $121.9 million and current liabilities were $49.6 million, producing a current ratio of approximately 2.5. Management expects operating cash flow, existing cash and available credit capacity to fund operating and planned investing needs for the next year.
Debt and commitments: No revolving loans were outstanding under the $50 million senior secured revolving credit facility, which also includes an uncommitted incremental facility of up to $35 million. The facility matures October 12, 2018 and bears interest at LIBOR plus 1.5% to 2.25%. The Company was in compliance with its leverage, fixed-charge coverage and minimum-liquidity covenants. The Stability acquisition earn-out liability was $17.5 million at March 31, 2017, including a $59,000 quarter-to-date increase recorded in interest expense.
Cash Flow and Capital Allocation
- Operating cash flow was $10.6 million, supported by higher net income and favorable working-capital changes.
- Investing cash outflow was $1.0 million, primarily for equipment purchases and patent costs. The prior-year investing outflow included $7.6 million for the Stability acquisition.
- Financing cash outflow was $13.1 million, including $12.7 million for share repurchases and $2.3 million for employee tax-withholding share repurchases, partly offset by $1.9 million from stock-option exercises.
- The Company repurchased 1.54 million shares under its authorized program for approximately $12.6 million, before brokerage commissions, leaving approximately $17.3 million available under the program. Total shares repurchased during the quarter, including employee tax-withholding shares, were approximately 1.83 million.
- Cash declined by $3.5 million during the quarter to $30.9 million.
Material Changes Versus the Prior Comparable Period
- Sales growth accelerated across both reported product categories, with Wound Care increasing by $15.6 million and SSO increasing by $3.6 million.
- Gross margin expanded from 85.1% to 88.0%, while operating income increased more than fourfold.
- Net income increased from $1.2 million to $4.3 million, although the effective tax rate rose to 28.4% from 15.2%.
- Operating cash flow changed from an outflow of $1.0 million to an inflow of $10.6 million.
- Research and development and sales infrastructure investments increased materially to support product development and market expansion.
- The prior-year quarter included $7.6 million of cash acquisition consideration and $713,000 of one-time Stability acquisition costs; those items were not present in Q1 2017.
- The Company adopted ASU 2016-09 for share-based payment accounting. It recorded an approximately $19,700 income-tax benefit related to excess tax benefits from exercised awards.
Outlook, Risks, Contingencies and Unusual Items
Management expects research and development spending to remain generally consistent with current spending as a percentage of sales and expects available cash flow and credit capacity to support operations and planned investments. The filing does not provide specific revenue, earnings or cash-flow guidance.
- FDA regulatory risk: The FDA continues to assert that certain micronized allografts may not qualify for regulation solely under Section 361 of the Public Health Service Act and may require a biologics license. Micronized products represented approximately 10% of 2016 revenue. Potential outcomes include additional compliance costs, labeling restrictions, a BLA requirement or product recall.
- Litigation: The Company is involved in former-employee litigation, patent infringement actions and related inter partes review proceedings. The filing states that several patent cases were expected to proceed toward trial in 2017; damages and outcomes remain uncertain.
- Internal controls: Management concluded that disclosure controls were not effective because a material weakness in income-tax accounting continued from the 2016 Form 10-K. Remediation efforts were underway, with a goal of remediation by year-end 2017, subject to successful testing.
- Contingent consideration: The Stability earn-out is based on specified sales and gross-profit measures, is not capped, and its undiscounted range of outcomes cannot be estimated.
- Accounting and estimates: The Company was evaluating the future effects of new revenue-recognition, lease, cash-flow and goodwill-impairment standards. No material impact was expected from the revenue-recognition standard based on work completed to date.
Important Facts for Investors to Verify
- Whether the FDA changes its position on micronized products and whether a BLA, additional controls or a recall becomes necessary.
- The status, potential cost and financial impact of the Stability earn-out liability and related payment obligations.
- Progress toward remediation and independent testing of the material weakness in income-tax accounting.
- Developments and potential liabilities in the patent, former-employee and related litigation matters.
- Whether revenue growth and the 88.0% gross margin are sustainable after adjusting for product mix, market expansion and acquisition-related effects.
- The effect of continued share repurchases and equity compensation on cash, diluted share count and per-share results.
- Availability under the credit facility and continued compliance with its financial covenants.