Business Context and Reporting Period
MiMedx Group, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2015. The company operates in one segment, Regenerative Biomaterials, developing, processing and marketing tissue-based products and services for wound care, surgical, orthopedic, sports medicine, ophthalmic and dental applications.
Key products include AmnioFix, EpiFix and OrthoFlo. CollaFix remained under development and had not been commercialized. The company reported 108,962,400 common shares outstanding as of October 15, 2015.
Financial Performance and Position
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Net sales | $49.0 million | $33.5 million | $135.5 million | $78.7 million |
| Gross profit | $44.0 million | $30.2 million | $120.2 million | $69.6 million |
| Gross margin | 89.8% | 90.0% | 88.8% | 88.5% |
| Operating income | $6.7 million | $3.7 million | $16.6 million | $2.4 million |
| Operating margin | 13.7% | 11.1% | 12.3% | 3.1% |
| Net income | $6.6 million | $3.7 million | $16.1 million | $2.4 million |
| Net margin | 13.4% | 11.0% | 11.9% | 3.0% |
| Diluted EPS | $0.06 | $0.03 | $0.14 | $0.02 |
| Adjusted EBITDA | $11.8 million | $7.3 million | $31.1 million | $12.2 million |
Management attributed sales growth primarily to increased wound care and surgical sales across commercial and government accounts. Q3 cost of products sold was 10.2% of revenue versus 10.0% in the prior-year quarter; the nine-month ratio improved to 11.2% from 11.5% because of product mix, direct sales growth and higher production rates.
Research and development expense increased to $2.2 million in Q3 and $6.1 million for the nine months, reflecting greater clinical-trial, scientific-study and personnel spending. Selling, general and administrative expense increased to $34.9 million in Q3 and $96.9 million for the nine months, driven by expansion of the direct sales force, commissions, reimbursement support, information technology, legal costs and share-based compensation.
At September 30, 2015, cash and cash equivalents were $41.1 million, short-term investments were $6.5 million and current assets were $102.7 million. Current liabilities were $24.4 million, producing a current ratio of approximately 4.2. Total assets were $125.9 million and total liabilities were $25.4 million. The filing text does not report outstanding conventional borrowings at the balance-sheet date; capital-lease obligations were approximately $163,000.
Cash Flow, Liquidity and Capital Allocation
- Net cash provided by operating activities was $14.5 million for the first nine months of 2015, compared with $8.5 million in the prior-year period.
- Operating cash flow benefited from higher net income and $12.6 million of share-based compensation, but was reduced by a $20.1 million increase in accounts receivable.
- Investing cash flow used $2.3 million, including $4.2 million for equipment and $594,000 for patent application costs, partially offset by $2.5 million of fixed-maturity security redemptions.
- Financing cash flow used $17.7 million, primarily because of $21.1 million in share repurchases, partially offset by $3.5 million from stock-option exercises.
- Cash decreased by $5.5 million from December 31, 2014, to $41.1 million at September 30, 2015.
- The company repurchased approximately 2.27 million shares for $21.1 million during the first nine months. Approximately $3.4 million remained under the then-current authorization at September 30, 2015; in October, the board increased the authorization from $30 million to $50 million.
- On October 12, 2015, the company entered into a three-year senior secured revolving credit facility with commitments of up to $50 million and an uncommitted incremental facility of up to $35 million. Borrowings would bear interest at LIBOR plus 1.50% to 2.25%. No borrowings were outstanding under the facility as of the filing date.
Management believed existing cash, anticipated operating and financing cash flows, and the new credit facility would fund operating liquidity needs and planned investing activities for at least the next twelve months.
Material Changes Versus the Prior Comparable Period
- Nine-month revenue increased 72% to $135.5 million; Q3 revenue increased 46% to $49.0 million.
- Nine-month operating income increased from $2.4 million to $16.6 million, and net income increased from $2.4 million to $16.1 million.
- Nine-month Adjusted EBITDA increased approximately $19.0 million to $31.1 million. Adjusted EBITDA is a non-GAAP measure and is not equivalent to operating cash flow.
- Gross-margin performance was broadly stable, while operating and net margins expanded because revenue growth exceeded the increase in cost of products sold and operating leverage improved.
- SG&A increased substantially as the company expanded its commercial infrastructure and incurred higher commissions, reimbursement-support costs, technology spending, legal expense and stock compensation.
- Accounts receivable increased to $46.8 million from $26.7 million at December 31, 2014, creating a significant working-capital use of cash.
- Share-based compensation increased to $12.6 million for the first nine months from $8.2 million in the comparable period.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal revenue or earnings guidance. Management cited continued quarter-over-quarter revenue growth, anticipated profitability and positive foreseeable trends. Management also stated that the full valuation allowance against U.S. deferred tax assets could be partially or fully released by year-end 2015 if profitability and future visibility supported a conclusion that the deferred tax assets were more likely than not to be realized. Any release could materially affect tax expense or benefit in the period recorded.
- FDA and product-regulatory risk: The FDA continued to assert that the company’s micronized products were more than minimally manipulated and might require a biologics license. The company initiated a Phase IIB clinical trial in March 2015 and pursued an IND/BLA pathway. The FDA could impose labeling or cGMP conditions, prohibit continued marketing or require a product recall. Micronized products represented approximately 14% of 2014 revenue.
- FDA guidance: The company was evaluating an October 28, 2015 draft guidance concerning homologous use and expected to submit comments. A public hearing was scheduled for April 13, 2016.
- Litigation: Consolidated securities class-action litigation related to the 2013 FDA Untitled Letter remained in discovery, with class-certification and expert-related motions pending. Management believed the outcome would not materially adversely affect financial position or results of operations.
- Patent disputes: Patent infringement actions involving Liventa/Medline/MTF, Bone Bank/Texas Human Biologics and NuTech/DCI remained active. Certain inter partes reviews were instituted on limited grounds, while other requested reviews were denied. The Bone Bank Markman hearing occurred October 2, 2015, and the NuTech motion to dismiss remained unresolved.
- OIG/qui tam matter: The related qui tam action was voluntarily dismissed in July 2015, with court approval on October 6, 2015. The Department of Justice had previously declined to intervene.
- Commitments: Contractual obligations totaled approximately $8.0 million, including capital leases, operating leases, charitable commitments and meeting-space commitments. The company also had approximately $235,000 of standby letters of credit related to its main facility lease.
- Controls: Management concluded that disclosure controls and procedures were effective as of September 30, 2015, and reported no material change in internal control over financial reporting during the quarter.
Investor Verification Checklist
- Verify whether the company’s rapid revenue growth translated into sustained operating cash flow after collection of the sharply higher accounts receivable balance.
- Track FDA decisions, guidance and clinical-trial progress affecting micronized products and the potential requirement for a biologics license.
- Assess the financial and operational effects of expanded SG&A, substantial stock-based compensation and ongoing legal costs.
- Monitor the deferred-tax-asset valuation allowance and any resulting tax expense or benefit recognized in later periods.
- Review utilization, covenants, interest costs and potential collateral requirements under the October 2015 credit facility.
- Follow the securities class action, patent litigation and inter partes reviews for potential damages, injunctions, product restrictions or legal expenses.
- Reconcile share repurchases, option exercises and equity awards when evaluating diluted share count and per-share results.