MiMedx Group, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2016. The unaudited filing covers MiMedx Group and subsidiaries, which operate in one Regenerative Biomaterials segment serving wound care, surgical, sports medicine, orthopedic, ophthalmic and dental markets.
Financial performance and position
- Revenue: $53.4 million, up 31% from $40.8 million in the prior-year quarter. Wound Care revenue increased 32% to $39.3 million; Surgical, Sports Medicine and Orthopedics revenue increased 28% to $14.1 million.
- Gross profit: $45.4 million versus $35.6 million. Gross margin was approximately 85.1%, down from 87.4%, reflecting Stability integration costs, a $734,000 purchase-accounting inventory step-up and product mix.
- Operating income: $1.5 million versus $4.2 million. Operating margin declined to approximately 2.7% from 10.4%.
- Net income: $1.2 million, or $0.01 per diluted share, versus $4.1 million, or $0.04 per diluted share.
- Adjusted EBITDA: $9.1 million versus $8.8 million. This non-GAAP measure excludes depreciation and amortization, interest, taxes, share-based compensation, acquisition costs and purchase-accounting effects.
- Cash flow: Operating activities used $1.0 million, compared with $4.2 million generated in the prior-year quarter. Investing activities used $9.3 million, including $7.6 million for the Stability acquisition and $2.0 million for equipment. Financing activities used $3.1 million, including $3.5 million of share repurchases.
- Cash and liquidity: Cash and cash equivalents were $15.1 million, down from $28.5 million at December 31, 2015. Short-term investments were $2.5 million. Current assets were $95.2 million and current liabilities were $28.8 million, producing a reported current ratio of approximately 3.3.
- Credit facility: The company had no revolving borrowings under its $50 million senior secured facility, which matures in October 2018. An additional uncommitted facility of up to $35 million is available subject to conditions. The company reported compliance with its leverage, fixed-charge coverage and minimum-liquidity covenants.
- Balance sheet: Total assets increased to $177.2 million from $135.9 million, primarily due to the Stability acquisition. The balance sheet included $33.2 million of contingent earn-out liability, $30.7 million of goodwill and $33.7 million of net intangible assets.
Material changes versus the prior comparable period
- MiMedx completed the Stability Inc. acquisition on January 13, 2016, paying $6.0 million in cash, issuing $3.3 million of common stock and assuming $1.8 million of debt. The preliminary purchase price included $33.2 million of contingent consideration and $26.7 million of goodwill.
- Selling, general and administrative expense increased to $40.6 million from $29.3 million, driven by expansion of the direct sales force, higher commissions, increased share-based compensation, Stability operating costs, acquisition costs, reimbursement support, infrastructure investment and patent litigation.
- Research and development expense increased 36% to $2.5 million due primarily to higher scientific-study, clinical-trial and personnel costs.
- Inventory increased to $18.0 million from $7.5 million, including approximately $1.6 million of remaining Stability purchase-accounting fair-value step-up.
- Share repurchases totaled 415,252 shares and approximately $3.5 million during the quarter. Approximately $10.8 million remained available under the repurchase authorization at March 31, 2016.
- Share-based compensation expense increased to $4.6 million from $3.9 million and represented a significant component of operating expenses.
Guidance, outlook, risks and unusual items
- Management stated that existing cash, short-term investments, anticipated operating and financing cash flows, and credit-facility availability should fund operational needs and planned investing activities for the next twelve months. The filing does not provide formal revenue or earnings guidance.
- The FDA has asserted 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. MiMedx continues to market the products while pursuing the BLA process. Micronized products represented approximately 12% of fiscal 2015 revenue. Potential outcomes include labeling or cGMP requirements, significant compliance costs, or product recall.
- The company faces multiple patent infringement actions and related inter partes reviews involving competitors. A new action against Vivex was filed on April 1, 2016. The filing does not quantify potential damages or probable recoveries.
- A shareholder class-action settlement related to the FDA matter received final court approval on April 5, 2016. Management does not expect the settlement to materially affect results or financial condition.
- The contingent Stability earn-out is a Level 3 liability that will be remeasured quarterly. Changes in projected sales, expenses, discount rates or payment timing may cause material earnings volatility.
- The projected annual effective tax rate for 2016 was approximately 40.4%, compared with a 15.2% reported effective rate for the quarter. The prior-year tax rate benefited from a $15.4 million valuation allowance release.
- Future contractual obligations totaled approximately $10.1 million, including capital leases, operating leases, charitable commitments, software licenses and meeting-space commitments. The filing reports no off-balance-sheet arrangements and no material market-risk exposure.
Important facts for investors to verify
- Whether Stability produces the expected revenue and earnings contribution and whether the $33.2 million earn-out liability changes materially in subsequent quarters.
- Whether revenue growth continues while gross margin and operating margin recover from the purchase-accounting and integration effects.
- Operating cash-flow conversion, inventory growth, accounts receivable collections and remaining cash after acquisition spending and share repurchases.
- FDA developments concerning micronized products, including any final guidance, BLA requirements, labeling restrictions, compliance costs or recall risk.
- Progress and outcomes in the Liventa, Bone Bank, NuTech and Vivex patent matters and related IPR proceedings.
- Compliance with the credit facility’s maximum leverage, minimum fixed-charge coverage and $10 million minimum-liquidity covenants.