Business Context and Reporting Period
MiMedx Group, Inc. develops, processes and markets regenerative biomaterial products and tissue-processing services for wound care, surgical, sports medicine, orthopedic, spine, ophthalmic and dental markets. The company operates in one reportable segment, Regenerative Biomaterials.
This unaudited Form 10-Q covers the three and six months ended June 30, 2016, compared with the corresponding 2015 periods. On January 13, 2016, MiMedx acquired Stability Inc., a provider of tissue products for surgical, spine and orthopedic markets.
Financial Performance and Key Metrics
| Metric | Q2 2016 | Q2 2015 | Six Months 2016 | Six Months 2015 |
|---|---|---|---|---|
| Net sales | $57.3 million | $45.7 million | $110.7 million | $86.4 million |
| Gross margin | $49.9 million; 87.1% | $40.6 million; 88.9% | $95.4 million; 86.1% | $76.2 million; 88.2% |
| Operating income | $3.6 million; 6.2% margin | $5.7 million; 12.4% margin | $5.0 million; 4.5% margin | $9.9 million; 11.5% margin |
| Net income | $2.0 million | $5.4 million | $3.2 million | $9.5 million |
| Diluted earnings per share | $0.02 | $0.05 | $0.03 | $0.08 |
| Adjusted EBITDA | $10.1 million | $10.6 million | $19.1 million | $19.3 million |
Wound care revenue increased 18% to $42.0 million in the second quarter and 24.5% to $81.4 million for the first six months. Surgical, sports medicine and orthopedic revenue increased 54.3% to $14.5 million in the second quarter and 42.3% to $27.7 million for the first six months.
Cost of sales increased to 12.9% of revenue in the second quarter and 13.9% for the first six months, compared with 11.1% and 11.8%, respectively, in the prior-year periods. Excluding acquisition-related inventory step-up amortization, cost of goods sold was 11.9% in the second quarter and 12.7% for the first six months.
Research and development expense increased 54% to $3.2 million in the second quarter and 46% to $5.7 million for the first six months. Selling, general and administrative expense increased 31% to $42.8 million in the second quarter and 35% to $83.4 million for the first six months, reflecting sales-force expansion, commissions, share-based compensation, Stability operating costs, infrastructure, reimbursement support and legal expenses.
Cash Flow, Liquidity and Capital Structure
- Cash and cash equivalents were $23.8 million at June 30, 2016, compared with $28.5 million at December 31, 2015.
- Current assets were $101.8 million and current liabilities were $38.5 million, producing a reported current ratio of 2.6.
- Operating cash flow was $6.3 million for the first six months, down from $7.1 million in 2015.
- Investing cash outflow was $8.7 million, including $7.6 million for the Stability acquisition and $3.8 million for equipment purchases, partially offset by a $3.0 million certificate-of-deposit redemption.
- Financing cash outflow was $2.3 million, including approximately $4.2 million of stock repurchases and employee tax-withholding repurchases, partially offset by $2.0 million from stock-option exercises.
- The company had no outstanding borrowings under its $50 million senior secured revolving credit facility at June 30, 2016. The facility also permits up to $35 million of uncommitted incremental capacity and matures in October 2018.
- The company reported compliance with its credit-facility covenants, including leverage, fixed-charge coverage and minimum liquidity requirements.
- Material liabilities included a $25.6 million Stability acquisition earn-out liability, of which $9.6 million was classified as current, and approximately $10.6 million of disclosed contractual obligations.
Management believes existing cash, anticipated operating and financing cash flows, and available credit capacity will fund operating liquidity needs and planned investing activities for the next twelve months.
Material Changes Versus the Prior Comparable Period
- Revenue increased 26% in the second quarter and 28% for the first six months, driven by growth in both wound care and SSO markets and contributions from Stability.
- Despite revenue growth, operating income declined 37% in the second quarter and 49% for the first six months because operating expenses and acquisition-related costs grew faster than revenue.
- Net income declined 64% in the second quarter and 67% for the first six months. The 2015 comparison benefited from a $15.4 million deferred-tax valuation allowance release, contributing to a substantially lower prior-year effective tax rate.
- The Stability acquisition added goodwill of $22.9 million, net intangible assets, inventory step-up amortization and a $25.6 million estimated contingent consideration liability. Purchase accounting remained preliminary.
- Inventory increased to $17.2 million from $7.5 million at year-end 2015, while goodwill increased to $27.0 million from $4.0 million and net intangible assets increased to $27.7 million from $10.8 million.
- Adjusted EBITDA was modestly lower year over year, reflecting increased investments to support business growth.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal revenue, earnings or EBITDA guidance. Management indicated that it is investing in sales infrastructure, clinical studies, scientific programs and operational capacity to support continued growth.
- FDA regulatory risk: The FDA has maintained its position that certain micronized allografts may not qualify for regulation solely under Section 361 of the Public Health Service Act. The company is pursuing a biologics license application for certain products. Micronized products represented approximately 12% of fiscal 2015 revenue; potential outcomes include labeling or cGMP requirements, additional costs, the need for a biologics license or product recalls.
- Patent litigation: MiMedx had four pending patent actions and related inter partes review proceedings. The PTAB found challenged claims of the ’687 patent invalid for obviousness in July 2016, and a decision on the ’437 patent review was expected by August 2016. Several district-court cases were expected to proceed to trial in late 2016.
- Acquisition accounting: The Stability purchase-price allocation and goodwill were preliminary. The earn-out liability is a Level 3 fair-value estimate dependent on projected sales, expenses and discounting assumptions and will be remeasured quarterly.
- Expense and margin pressure: Higher sales-force costs, share-based compensation, acquisition integration, inventory step-up amortization, research spending and legal expenses reduced reported margins.
- Tax variability: The projected annual effective tax rate for 2016 was 42.2%, compared with 3.7% for the first six months of 2015, primarily because the prior year included the deferred-tax valuation allowance release.
Important Facts for Investors to Verify
- Whether the FDA changes its position on micronized products and the timing, scope and cost of any BLA or other regulatory requirements.
- The ultimate outcome of the pending patent litigation and PTAB proceedings, including potential effects on product commercialization and intellectual-property protection.
- The final purchase-price allocation for Stability and changes in the estimated $25.6 million earn-out liability.
- Whether revenue growth translates into improved operating margins as acquisition, sales-force, clinical, legal and infrastructure investments moderate.
- Cash conversion, inventory growth, accounts receivable collection and ongoing capital expenditures.
- The effect of the company’s stock-repurchase program, share-based compensation and related dilution on per-share results.