MiMedx Group, Inc. 10-Q Summary
Business context and reporting period
MiMedx develops, manufactures and markets regenerative biomaterials and bioimplants processed from human amniotic membrane, including EpiFix and AmnioFix. The company operates in one Biomaterials segment. This report covers the three and nine months ended September 30, 2013; financial statements are unaudited.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net sales | $16.1 million | $8.0 million | $41.2 million | $16.5 million |
| Gross margin | $14.0 million; 86.9% | $6.5 million; 82.1% | $35.0 million; 84.9% | $13.0 million; 78.8% |
| Operating income (loss) | $(0.3) million | $(3.6) million | $(1.2) million | $(4.4) million |
| Net income (loss) | $(0.3) million | $(4.2) million | $(2.7) million | $(6.1) million |
| Adjusted EBITDA | $1.9 million | $0.7 million | $4.1 million | $2.0 million |
| Net cash used in operating activities | Not separately provided for the quarter | $(1.1) million | $(2.5) million |
- Q3 revenue increased 103%; nine-month revenue increased 149%, primarily from higher sales of EpiFix and AmnioFix.
- Q3 cost of sales declined to 13.1% of revenue from 17.9%; nine-month cost of sales declined to 15.1% from 21.2%, reflecting product mix, direct sales growth and higher production volumes.
- Q3 selling, general and administrative expense rose to $12.7 million from $5.8 million. Nine-month SG&A rose to $31.9 million from $11.4 million, driven by expansion of the sales organization, commissions, marketing, reimbursement support, information technology and share-based compensation.
- Research and development expense increased to $1.3 million in Q3 and $3.5 million for the first nine months, reflecting higher clinical, personnel, laboratory and testing costs.
- At September 30, 2013, cash and cash equivalents were $6.1 million, current assets were $25.8 million and current liabilities were $8.3 million, producing a current ratio of approximately 3.1.
- Accounts receivable increased to $13.7 million from $7.7 million at year-end 2012, and inventory increased to $4.5 million from $3.0 million.
- Net cash used in investing activities was $2.5 million, primarily for facility-related equipment and capitalized patent costs. Financing activities generated $3.0 million, including proceeds from warrant and option exercises.
- The company had no outstanding convertible senior secured promissory notes at September 30, 2013. Approximately $5.3 million of notes and accrued interest were converted into approximately 5.3 million common shares during January and February 2013.
Material changes versus the prior comparable period
- Revenue growth was strongest in Wound Care, which increased 89% in Q3 and 259% for the nine-month period. Surgical and Sports Medicine revenue increased 129% in Q3 and 95% year to date.
- Gross margins improved materially, while operating losses narrowed because revenue growth and margin expansion partially offset substantially higher commercial and corporate spending.
- Net loss improvement included the absence of the $1.8 million intangible-asset impairment and $1.3 million earn-out fair-value adjustment recorded in the first nine months of 2012. However, 2013 included approximately $1.3 million of accelerated debt-discount and financing-cost amortization related to the note conversion.
- The company issued approximately 1.2 million shares to settle a $5.8 million Surgical Biologics earn-out liability and issued approximately 5.3 million shares in exchange for convertible debt, increasing common shares outstanding to approximately 97.7 million at September 30, 2013 from 88.4 million at December 31, 2012.
- The company moved into a new approximately 80,000-square-foot headquarters, laboratory and warehouse facility and incurred related capital expenditures and lease commitments.
- MiMedx entered into a three-year supply agreement with Medtronic entities for tissue-based products used in spine surgeries.
Guidance, outlook, risks and unusual items
- Management did not provide specific revenue or earnings guidance. It stated that existing cash and anticipated operating and financing cash flows should fund operational liquidity needs and planned investing activities for the next twelve months.
- MiMedx established a secured revolving credit facility of up to $3.0 million, including a $1.0 million letter-of-credit sub-limit. No draws had been made as of the filing date. The facility matures May 1, 2014, is subject to financial covenants and was reported to be in compliance.
- On August 28, 2013, the FDA issued an Untitled Letter asserting that the company’s micronized allografts may not qualify for regulation solely as Section 361 HCT/Ps because micronization may alter relevant structural characteristics. The FDA indicated that a biologics license could be required to market the products.
- Management met with the FDA on October 28, 2013 and presented arguments supporting its regulatory position. Possible outcomes include labeling or process changes, obtaining a biologics license, discontinuing products while pursuing approval, and potentially recalling products. The filing states that a recall is considered remote, but the ultimate regulatory outcome is uncertain.
- Four purported shareholder class actions were filed following publication of the FDA letter. The complaints allege federal securities-law violations relating to statements about FDA approval requirements. Damages are unspecified; management intends to defend the cases and currently does not expect a material adverse effect.
- The company recorded $4.2 million of share-based compensation for the first nine months, including $3.6 million in SG&A, and had approximately $13.3 million of unrecognized compensation expense at September 30, 2013.
- Operating lease obligations totaled approximately $6.6 million, and standby letters of credit associated with facility leases totaled approximately $525,000.
- Federal operating-loss carryforwards were approximately $43.4 million, with a full valuation allowance recorded against deferred tax assets.
Important facts for investors to verify
- Resolution and practical consequences of the FDA’s position on micronized injectable products, including any required licensing, labeling, process changes or marketing restrictions.
- Financial exposure, insurance coverage and potential impact of the four securities class actions.
- Whether rapid revenue growth and improved gross margins can offset the expanding direct-sales organization, clinical investment, compensation expense and facility costs.
- Collection of the sharply higher accounts receivable balance and the recoverability of increased work-in-process and finished-goods inventory.
- Cash burn, capital expenditures and the company’s ability to maintain liquidity without drawing on or renewing the revolving credit facility.
- Future dilution from approximately 15.1 million outstanding stock options, 1.9 million warrants and other equity compensation arrangements.