Business Context and Reporting Period
MiMedx Group, Inc. filed this Form 8-K on December 23, 2010, to disclose the entry into a Material Definitive Agreement dated December 21, 2010. The Company agreed to acquire Surgical Biologics, LLC, a privately held developer of tissue processing techniques for surgical implants derived from amnion membranes. The transaction is expected to close in early January 2011, at which point Surgical Biologics will become a wholly owned subsidiary.
Key Financial Metrics and Transaction Structure
The filing details the consideration for the acquisition rather than the Company's historical financial performance. The total initial consideration includes:
- Equity: 5,250,000 shares of MiMedx common stock (valued at $1 per share, totaling $5,250,000).
- Cash: $500,000, subject to working capital and debt adjustments.
- Debt Instrument: Convertible Secured Promissory Notes with a principal sum of $1,250,000. These notes bear 4% annual interest, are payable in full 18 months after closing, and are secured by a first lien on the acquired intellectual property.
- Assumed Debt: Approximately $241,000 of Surgical Biologics' existing debt.
The Notes are convertible into MiMedx common stock at $1 per share at the holder's option, or at MiMedx's option if the stock price exceeds $1.75 for 20 consecutive trading days.
Material Changes and Contingent Consideration
Beyond the initial payment, the agreement includes significant contingent consideration payable in MiMedx common stock based on future revenue performance:
- 2011 Contingency: 60% of the excess of 2011 gross revenues from Surgical Biologics products over 2010 gross revenues.
- 2012 Contingency: 30% of the excess of 2012 gross revenues over 2011 gross revenues.
Calculations for contingent payments are subject to adjustments for cost of goods sold parameters, a 50% reduction for new hybrid products, and deductions for FDA clearance costs. Share valuation for these payments will be based on the average closing price of MiMedx stock for the 20 trading days preceding the filing of the applicable Form 10-K.
Indemnification and Security
The Company secured indemnification protections through the deposit of 525,000 shares of MiMedx common stock into escrow for two years. Additionally, the Company retains offset rights against 50% of the principal amount of the Convertible Secured Promissory Notes and all contingent payments.
Guidance, Risks, and Unusual Items
The filing does not provide specific financial guidance or outlook for MiMedx's existing operations. The primary risk disclosed is the conditional nature of the closing, which is subject to certain conditions. The Company noted that financial statements for Surgical Biologics and pro forma financial information will be filed by amendment within 71 calendar days. The issuance of securities was conducted under Section 4(2) of the Securities Act and Rule 506 of Regulation D.
Investor Verification Checklist
- Verify the closing date of the merger, expected in early January 2011.
- Review the upcoming amendment to this 8-K (due within 71 days) for Surgical Biologics' audited financial statements and pro forma information.
- Monitor the 2010 and 2011 gross revenue figures for Surgical Biologics to calculate potential contingent stock issuance.
- Track MiMedx's stock price to determine if the 175% threshold ($1.75) is met, triggering MiMedx's option to convert the $1.25M notes.
- Confirm the status of FDA clearances for Surgical Biologics' product line, as costs will reduce contingent payments.