MiMedx Group, Inc. 2015 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2015. The filing is an annual report, not a quarterly filing; fourth-quarter data is provided in the audited financial statement notes. MiMedx develops, processes and markets regenerative biomaterial products derived primarily from human amniotic membrane and other human tissue. Its principal platforms include EpiFix, AmnioFix and OrthoFlo, with products serving wound care, surgical, sports medicine, orthopedic, spine, ophthalmic and dental markets.
Financial Results and Position
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net sales | $187.3 million | $118.2 million | +58% |
| Gross margin | $167.1 million | $105.6 million | +58% |
| Operating income | $24.4 million | $7.1 million | +243% |
| Net income | $29.4 million | $6.2 million | +373% |
| Diluted earnings per share | $0.26 | $0.05 | Higher |
| Net cash from operations | $18.8 million | $16.8 million | +$2.0 million |
- Gross margin was approximately 89.2%, compared with 89.3% in 2014. Operating margin was approximately 13.0%, and net margin was approximately 15.7%.
- Wound Care revenue increased approximately $47.5 million, or 51%; Surgical, Sports Medicine and Orthopedics revenue increased approximately $21.5 million, or 87%.
- Adjusted EBITDA, a non-GAAP measure, was $44.0 million, compared with $20.7 million in 2014. It should not be treated as a substitute for GAAP cash flow or earnings.
- Cash and cash equivalents were $28.5 million, supplemented by $3.0 million of short-term FDIC-insured certificates of deposit. Working capital was $69.5 million and the current ratio was 3.6.
- Accounts receivable increased to $53.8 million from $26.7 million, reflecting significant revenue growth and consuming $27.1 million of operating cash.
- Cash used in investing activities was $0.7 million. Cash used in financing activities was $36.2 million, principally due to $40.3 million of share repurchases.
- Total assets were $135.9 million and stockholders’ equity was $108.0 million at year-end. Long-term liabilities were $1.1 million; the filing reports no outstanding borrowings under the new revolving facility.
Material Changes Versus 2014
- Revenue growth was driven by expansion of the direct sales force, increased wound-care market share, broader clinical use of EpiFix and new surgical applications for AmnioFix.
- Cost of sales as a percentage of revenue increased slightly to 10.8% from 10.7%, partly because EpiFix’s Medicare pass-through status expired and because SSO products carry lower gross margins than Wound Care products.
- Research and development expense increased 19% to $8.4 million, primarily for clinical trials, personnel, laboratory supplies and consulting.
- Selling, general and administrative expense increased 47% to $133.4 million. The increase reflected sales-force expansion, higher commissions, additional support personnel and patent litigation costs.
- Share-based compensation rose to $16.9 million from $11.5 million and represented a significant non-cash component of expenses.
- The Company repurchased approximately 4.6 million shares for approximately $40.1 million, excluding commissions. Approximately $14.3 million remained authorized at year-end.
- The Company adopted deferred-tax presentation changes prospectively and released approximately $15.4 million of valuation allowance, contributing materially to the reported 2015 tax benefit and net income.
Liquidity, Debt and Capital Resources
- On October 12, 2015, MiMedx entered into a senior secured revolving credit facility with commitments of up to $50 million and an uncommitted incremental facility of up to $35 million. The facility matures October 12, 2018, subject to possible extensions.
- No revolving loans were outstanding at December 31, 2015. The facility includes a maximum consolidated leverage ratio of 2.50:1.00, a minimum fixed-charge coverage ratio of 2.00:1.00 and minimum liquidity of $10 million.
- Contractual obligations totaled approximately $9.2 million, including operating leases, capital lease obligations, charitable commitments and meeting-space commitments.
- Management stated that operating cash flow, existing cash, investments and available credit were expected to fund operating and planned investing needs for the following year.
Outlook, Commentary and Unusual Items
- Management expected research and development spending to remain generally consistent with current spending as a percentage of sales and anticipated continued growth in SSO sales, although that mix may reduce consolidated gross margins.
- The FDA continued to question whether MiMedx’s micronized amniotic products qualify for regulation solely as Section 361 HCT/Ps. The Company continued marketing the products, pursued a BLA for certain products and initiated a Phase IIB clinical trial in 2015.
- Micronized products represented approximately 12% of 2015 revenue. Possible FDA outcomes include additional labeling or manufacturing requirements, delayed or denied approval, removal from the market or product recall.
- Approximately 24% of 2015 revenue came through AvKARE, which distributes products to Government accounts. The related receivable concentration was approximately 26% of total accounts receivable.
- The Company completed the acquisition of Stability Biologics on January 13, 2016, after the reporting period. Consideration included $10 million at closing, approximately $0.8 million of assumed debt, elimination of a $2.4 million receivable and a two-year performance-based earn-out expected to represent the larger portion of total consideration.
- Shareholder class-action litigation related to the FDA’s 2013 Untitled Letter was preliminarily settled, with a final settlement hearing scheduled for April 5, 2016. The Company stated that the settlement was not expected to materially affect results or financial condition.
- The Department of Justice declined to intervene in a related qui tam matter, and the private plaintiff voluntarily dismissed the case in 2015. Three patent infringement actions and related inter partes review proceedings remained pending.
- The Company had no off-balance-sheet arrangements, paid no dividends and stated that it did not expect to pay dividends in the foreseeable future.
Key Risks
- FDA reclassification or additional regulation of micronized products, including potential BLA requirements.
- Dependence on third-party reimbursement, Medicare payment methodologies and Government purchasing programs.
- Revenue and receivable concentration involving AvKARE and Government accounts.
- Competition, pricing pressure, product adoption risk and dependence on clinical evidence.
- Availability and safety of donated human tissue, processing disruptions, product liability and recall exposure.
- Patent validity, infringement litigation and inter partes review outcomes.
- Execution and integration risks associated with the Stability acquisition and continued expansion of the sales organization.
Investor Verification Items
- Verify the sustainability of 2015 revenue growth, particularly EpiFix wound-care growth and the rapid expansion of SSO revenue.
- Reconcile reported net income with operating cash flow and assess the effect of the $15.4 million deferred-tax valuation allowance release.
- Review accounts-receivable growth, collection experience and the concentration of Government-related receivables.
- Monitor FDA guidance, the micronized-product BLA pathway, clinical-trial results and any changes to product marketing status.
- Assess the impact of the Stability acquisition, including earn-out payments, assumed debt, integration costs and expected margins.
- Track patent litigation and IPR decisions, as adverse outcomes could affect product commercialization and competitive protection.
- Review the credit facility’s covenants, liquidity requirements and the Company’s use of cash for share repurchases.