Business Context and Reporting Period
MiMedx Group, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2014. The company operates in one Regenerative Biomaterials segment, developing, manufacturing and marketing human amniotic tissue products and related services for wound care, surgical, sports medicine, ophthalmic and dental markets. Key products include AmnioFix, EpiFix and CollaFix.
Financial Performance and Position
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $19.6 million | $11.6 million |
| Gross margin | $16.6 million; 84.8% | $9.7 million; 83.6% |
| Operating income (loss) | $(0.9) million | $(0.2) million |
| Net income (loss) | $(0.9) million | $(1.6) million |
| Net loss per share | $(0.01) | $(0.02) |
| Net cash used in operating activities | $(1.6) million | $(2.1) million |
| Adjusted EBITDA | $2.0 million | $1.1 million |
- Revenue increased 69%, primarily from higher EpiFix wound-care sales in commercial and government accounts.
- Cost of sales declined to 15.2% of revenue from 16.5%, reflecting greater direct-sales volume, improved product mix and higher production rates.
- R&D expense rose 11.5% to $1.4 million, driven primarily by clinical-trial and personnel costs.
- SG&A increased to $15.9 million from $8.4 million, mainly due to expansion of the direct sales organization, higher commissions, reimbursement support, information technology and share-based compensation.
- The company reported $43.0 million of cash and cash equivalents at March 31, 2014, compared with $44.1 million at December 31, 2013. Current assets were $67.9 million and current liabilities were $9.6 million, representing a 7.1 current ratio.
- Total liabilities were $11.1 million and stockholders’ equity was $76.2 million at March 31, 2014. The filing does not report funded borrowings at quarter-end; the secured $3.0 million revolving credit facility had not been drawn. Capital lease obligations and other liabilities remained outstanding.
- Investing cash outflows were $0.6 million, including equipment purchases and capitalized patent costs. Financing cash inflows were $1.2 million, including $0.8 million from warrant exercises and $0.4 million from stock-option exercises.
Material Changes Versus the Prior Comparable Period
- Sales increased approximately $8.0 million, while gross margin percentage improved by approximately 1.2 percentage points.
- Despite stronger gross profit, operating loss widened because SG&A investment substantially exceeded the increase in gross profit.
- Net loss improved by approximately $0.7 million. Interest and financing expense fell to $21,000 from $1.3 million, primarily because prior convertible debt had been converted or paid off.
- Operating cash use improved by approximately $0.5 million, although accounts receivable increased by $2.9 million during the quarter.
- Cash declined only $1.1 million because operating and investing outflows were partly offset by proceeds from warrant and option exercises.
- Common shares outstanding increased, with 105.8 million shares issued and 105.8 million outstanding at March 31, 2014, versus 104.4 million issued and 104.4 million outstanding at December 31, 2013.
Guidance, Outlook, Risks and Unusual Items
- Management stated that existing cash, anticipated operating and financing cash flows, and the $3.0 million credit facility were expected to fund operating liquidity and planned investing activities for the next twelve months.
- The company did not provide formal revenue or earnings guidance. It stated that micronized products represented approximately 15% of projected 2014 revenue.
- The FDA has challenged whether the company’s micronized allografts qualify for regulation solely under Section 361 of the Public Health Service Act. MiMedx proposed pursuing an IND and biologics license application process and held its first pre-IND meeting with the FDA on March 13, 2014.
- The FDA could require additional conditions, including labeling restrictions and current good manufacturing practices, prevent continued marketing during the transition, or require product recalls. The regulatory outcome could materially affect revenue and operations.
- Shareholder class-action lawsuits related to the FDA disclosures were consolidated in federal court. The company filed a motion to dismiss and stated that it currently believes the litigation will not materially affect its financial position or results of operations.
- The secured revolving credit facility expired on May 1, 2014, and the company elected not to renew it.
- On May 12, 2014, the board authorized repurchases of up to $10 million of common stock through December 31, 2014; the filing does not state that any repurchases had occurred.
- The company recorded $2.4 million of share-based compensation in the quarter, and outstanding options, restricted stock and warrants represented potential future dilution.
- The company reported no material changes to previously disclosed risk factors, no off-balance-sheet arrangements and effective disclosure controls as of March 31, 2014.
Investor Verification Points
- Verify the FDA’s subsequent position, any transition conditions, BLA progress and the potential impact on micronized-product sales.
- Monitor whether continued SG&A and direct-sales investment converts revenue growth into sustainable GAAP profitability and positive operating cash flow.
- Reconcile accounts-receivable growth, collections and allowance levels with reported revenue growth.
- Confirm the company’s liquidity after expiration of the $3.0 million credit facility and assess cash needs for operating leases, capital leases, facility expansion and clinical development.
- Track the consolidated shareholder litigation and any related settlement, defense costs or regulatory consequences.
- Assess dilution from approximately 17.1 million outstanding stock options, 0.3 million warrants and 0.9 million unvested restricted shares at March 31, 2014.
- Distinguish the reported $2.0 million Adjusted EBITDA from GAAP operating results and operating cash flow, because the metric includes substantial add-backs, particularly share-based compensation.