MDXG

Business Context and Reporting Period

MiMedx Group, Inc. is a developer, manufacturer, and marketer of patent-protected biomaterial-based products for surgical applications. This Form 10-Q covers the quarterly period ended March 31, 2011. The company operates in a single segment: Biomaterials. A significant event during the period was the acquisition of Surgical Biologics, LLC on January 5, 2011, to expand product lines in amnion tissue processing.

Key Financial Metrics

Debt and Liquidity: As of March 31, 2011, the company had a line of credit with a related party (CEO) of up to $3.6 million, with $800,000 drawn. The company also holds long-term convertible debt of approximately $897,000 and short-term notes payable of $205,140. Management believes existing cash, anticipated operating cash flow, and the line of credit will meet liquidity needs for the next 12 months.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased by approximately 809% to $1.04 million, driven primarily by the acquisition of Surgical Biologics and strong demand in Spine, Ophthalmology, and Orthopedics markets.
• Expense Increases:
  • Cost of Products Sold: Increased to $658,875 (from $379,588) due to higher sales volume and fixed costs associated with quality assurance and regulatory compliance.
  • SG&A Expenses: Increased to $2.79 million (from $1.71 million). Approximately $711,000 of this increase is attributable to the Surgical Biologics acquisition, including legal fees, amortization of intangibles, and new staff.
  • R&D Expenses: Increased to $847,903 (from $572,404) due to new patent applications and animal studies.
• Balance Sheet Expansion: Total assets more than tripled to $23.4 million, largely due to the recognition of $16.1 million in intangible assets and $4.0 million in goodwill from the Surgical Biologics acquisition.
• Liabilities: Total liabilities increased significantly to $11.0 million, primarily driven by a $7.4 million accrued contingent consideration liability related to the acquisition earn-out.

Guidance, Outlook, and Risks

• Outlook: Management expects to be positive in terms of cash flow from operations during the third quarter of 2011. The company is expanding its distribution network, including the appointment of a VP of Sales for EMEA and a VP of Wound Care.
• Subsequent Events: The company announced plans to close its Tampa, Florida facility to consolidate operations in Georgia, with an expected completion in the third quarter. The financial impact is yet to be determined.
• Risks:
  • Customer Concentration: Two customers accounted for 39% and 27% of total revenue in Q1 2011. These same two customers represented 54% of total accounts receivable.
  • Liquidity: While management projects sufficiency for 12 months, the company relies on a related-party line of credit and continued equity financing.
  • Foreign Currency: Future revenue is anticipated to be dependent on foreign distributors, introducing exchange rate risk (primarily EURO).
• Unusual Items: The quarter included significant non-cash charges related to the acquisition, including $167,000 in amortization of newly acquired intangible assets and the recognition of a $437,500 beneficial conversion feature on acquisition-related debt.

Investor Verification Checklist

• Verify the realization of the $7.4 million contingent consideration liability, which is based on future sales and expense targets for 2011 and 2012.
• Monitor the customer concentration risk, as nearly 66% of revenue and 54% of receivables depend on just two customers.
• Assess the timeline and cost impact of the consolidation of the Tampa facility into Georgia operations.
• Review the terms of the $3.6 million related-party line of credit and the associated contingent warrants issued to the CEO.
• Track the progress of clinical evaluations for new wound care and burn products, which are critical for future revenue diversification.