MiMedx Group, Inc. 2017 Q3 Form 10-Q Summary
Business Context and Reporting Period
MiMedx operates in one segment, Regenerative Biomaterials, serving Wound Care, Surgical, Sports Medicine, Ophthalmic and Dental markets. The filing covers the unaudited three and nine months ended September 30, 2017, compared with the corresponding 2016 periods.
Key Financial Metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Net sales | $84.6 million | $64.4 million | $233.6 million | $175.1 million |
| Gross margin | 88.7% | 87.6% | 88.5% | 86.7% |
| Operating income | $8.8 million | $4.7 million | $22.2 million | $9.7 million |
| Net income | $17.5 million | $3.3 million | $29.9 million | $6.5 million |
| Diluted EPS | $0.15 | $0.03 | $0.26 | $0.06 |
| Adjusted EBITDA | $15.6 million | $11.4 million | $42.2 million | $30.5 million |
Q3 revenue increased 31.3%, while nine-month revenue increased 33.4%. Wound Care revenue was $61.9 million in Q3 and $171.4 million for nine months; SSO revenue was $22.7 million in Q3 and $62.2 million for nine months.
Net cash from operating activities was $42.1 million for the nine months ended September 30, 2017, compared with $9.1 million in the prior-year period. Investing cash outflow was $4.1 million, principally for equipment purchases, and financing cash outflow was $35.8 million, including $44.0 million of share repurchases and $11.6 million of proceeds from stock-option exercises.
Cash and cash equivalents were $36.5 million at September 30, 2017, compared with $34.4 million at December 31, 2016. Current assets were $114.1 million and current liabilities were $35.2 million, producing a reported current ratio of 3.2.
The company had no outstanding revolving loans under its $50 million senior secured revolving credit facility and remained in compliance with its covenants. The facility maturity was extended to October 12, 2019 and includes an uncommitted incremental facility of up to $35 million. The filing reports no material market-risk exposure and no off-balance-sheet arrangements.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected market-share gains and market expansion, increased staffing, new product introductions and additional product reimbursements. For Q3, volume contributed approximately $26.0 million of the increase, with $1.4 million of favorable pricing offset by $7.3 million of unfavorable product mix.
- Gross margin improved due to lower one-time acquisition-related inventory costs, manufacturing efficiencies and yield improvements.
- Research and development expense increased 87.8% in Q3 and 68.1% for the nine-month period, primarily from increased clinical-trial and other development investments.
- SG&A increased 24.9% in Q3 and 28.0% for the nine-month period. The increases reflected expansion of the direct sales organization, higher commissions, support personnel, litigation costs and share-based compensation.
- The company repurchased 3.64 million shares for approximately $44.0 million during the first nine months. Approximately $13,000 remained under the repurchase authorization at September 30; the board subsequently increased total authorization to $120 million in October 2017.
- Assets declined to $178.7 million from $193.3 million at December 31, 2016, primarily reflecting the divestiture of Stability Biologics and reductions in accounts receivable, inventory and intangible assets. Stockholders’ equity increased to $142.5 million from $133.0 million.
Outlook, Commentary, Risks and Unusual Items
Management stated that existing cash, anticipated operating cash flow and credit availability should fund operational liquidity needs and planned investing activities for the next year. The projected 2017 annual effective tax rate, excluding discrete items, was 35.1%.
On September 30, 2017, MiMedx completed the divestiture of Stability Biologics. The transaction generated a pretax gain of $4.3 million and an associated tax benefit of $5.7 million. These items materially increased reported Q3 and nine-month net income. The company also recorded significant tax benefits related to equity compensation, including $1.5 million in Q3 and $4.2 million for the nine-month period.
The FDA continues to take the position that the company’s micronized products may require a biologics license. MiMedx is pursuing the BLA process for certain products but continues to market micronized products. Potential outcomes include additional labeling or manufacturing requirements, substantial compliance costs, or restrictions or recalls.
Material litigation includes patent infringement actions, former-employee claims and lawsuits involving parties accused of publishing allegedly misleading information about the company. In September 2017, the company received an adverse partial summary judgment ruling in the Bone Bank action and filed a motion for reconsideration. The Federal Circuit affirmed an adverse PTAB decision concerning the ’437 patent in September 2017.
Management reported that disclosure controls were not effective because a material weakness in internal control over financial reporting related to income-tax accounting remained outstanding. Remediation efforts included enhanced review procedures, hiring an internal tax specialist and improved documentation and training. Management targeted remediation by the end of fiscal 2017, subject to successful testing.
Most Important Facts for Investors to Verify
- Whether revenue growth and high gross margins continue after the Stability divestiture and changes in product mix.
- The recurring operating earnings and cash-flow profile excluding the $4.3 million divestiture gain and related $5.7 million tax benefit.
- The status and potential financial impact of FDA regulation, BLA requirements and any possible product restrictions or recalls.
- The outcomes and costs of pending patent, former-employee and defamation-related litigation.
- Whether the income-tax control remediation was completed and the material weakness was formally remediated.
- The effect of continued share repurchases, equity compensation and option exercises on liquidity and diluted share count.
- Compliance with the credit facility’s leverage, fixed-charge coverage and minimum-liquidity covenants.