Business Context and Reporting Period
MiMedx Group, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2014. The company operates in one segment, Regenerative Biomaterials, developing, manufacturing and marketing human amniotic membrane products and related tissue-processing services for wound care, surgical, sports medicine, ophthalmic and dental markets. Key products include AmnioFix, EpiFix and CollaFix.
As of October 15, 2014, MiMedx had 106.9 million common shares outstanding. On September 5, 2014, it entered a three-year distribution agreement with Zimmer, Inc. for musculoskeletal applications.
Financial Highlights
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Net sales | $33.5 million, up 108% | $78.7 million, up 91.0% |
| Gross margin | $30.2 million; approximately 90.0% | $69.6 million; approximately 88.5% |
| Operating income | $3.7 million | $2.4 million |
| Operating margin | Approximately 11.1% | Approximately 3.1% |
| Net income | $3.7 million, or $0.03 diluted per share | $2.4 million, or $0.02 diluted per share |
| Net margin | Approximately 11.0% | Approximately 3.0% |
| Adjusted EBITDA | $7.3 million | $12.2 million |
| Cash flow from operations | Approximately $8.9 million | $8.5 million |
Revenue growth was driven primarily by increased EpiFix wound-care sales to commercial and government accounts. Cost of sales declined to 10.0% of revenue in the quarter and 11.5% for the nine-month period, compared with 13.1% and 15.1%, respectively, in the prior-year periods.
Research and development expense increased 56.5% to $2.0 million in the quarter and 50.5% to $5.2 million for the nine months, principally because of clinical-trial and personnel investments. Selling, general and administrative expense increased to $24.2 million in the quarter and $61.2 million for the nine months, reflecting expansion of the direct sales force, higher commissions, reimbursement support, information-technology infrastructure and share-based compensation.
Liquidity, Cash Flow and Capitalization
- Cash and cash equivalents were $47.3 million at September 30, 2014, compared with $44.1 million at December 31, 2013.
- Current assets were $77.3 million and current liabilities were $14.4 million, producing a reported current ratio of approximately 5.4.
- Nine-month operating cash flow was $8.5 million, versus negative $1.1 million in the prior-year period.
- Nine-month investing cash outflow was $2.3 million, primarily for equipment and patent-application costs.
- Nine-month financing cash outflow was $3.0 million, including $5.3 million of common-stock repurchases, partially offset by $1.5 million from stock-option exercises and $0.9 million from warrant exercises.
- The filing does not report material conventional borrowings or senior debt outstanding. Other liabilities include capital-lease obligations and landlord-funded leasehold improvements; capital-lease obligations totaled approximately $278,000 under the contractual-obligation table.
- Management stated that existing cash and anticipated operating and financing cash flows should fund operating liquidity needs and planned investing activities for the next twelve months.
Material Changes Versus Prior Comparable Period
- The company moved from a $0.3 million net loss in the third quarter of 2013 to $3.7 million of net income in the third quarter of 2014, and from a $2.7 million nine-month net loss to $2.4 million of net income.
- Operating income improved from a $0.3 million quarterly loss and $1.2 million nine-month loss to operating income of $3.7 million and $2.4 million, respectively.
- Interest and financing expense declined substantially, from approximately $1.4 million in the first nine months of 2013 to $39,000 in the 2014 period, primarily because convertible senior secured notes were converted or repaid in early 2013.
- Accounts receivable increased to $23.3 million from $16.1 million, and inventory increased to $4.7 million from $3.9 million, consistent with business growth but increasing working-capital exposure.
- Share-based compensation increased to $8.2 million from $4.2 million for the nine months and represented a significant component of operating expenses and the improvement in Adjusted EBITDA.
- The company repurchased approximately 894,000 shares for approximately $5.3 million through September 30, 2014, under a $10 million authorization. It repurchased 110,266 shares for approximately $745,000 during the third quarter.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal revenue or earnings guidance. Management expected liquidity to be sufficient for at least the next twelve months and anticipated initiating a Phase IIb clinical trial for a micronized product in the first half of 2015. The planned trial was expected to enroll approximately 150 patients at 10 to 20 U.S. sites.
The FDA continues to assert that MiMedx's micronized products are more than minimally manipulated and may require biologics licensing rather than regulation solely under Section 361 of the Public Health Service Act. MiMedx filed an IND application on July 22, 2014, which was allowed, and was seeking a transition agreement and potentially alternative formulations. The FDA could impose labeling or manufacturing conditions, deny continued marketing, require a biologics license, or require a product recall. Management stated that micronized products represented approximately 15% of projected 2014 revenue.
Several securities class-action lawsuits related to the FDA matter were consolidated. The court denied the company's motion to dismiss, and MiMedx filed a motion for reconsideration on September 8, 2014. The company also filed patent-infringement lawsuits against Liventa Bioscience, Medline Industries and Musculoskeletal Transplant Foundation, and against Transplant Technology and Texas Human Biologics. The matters were in discovery and claim-construction phases. Management believed the securities litigation would not materially adversely affect financial position or results of operations.
Other notable items include approximately $7.5 million of contractual obligations, including leases, meeting-space commitments and charitable contributions, and a full valuation allowance against U.S. deferred tax assets. The effective tax rate for the nine months was approximately 0.92%.
Investor Verification Checklist
- Verify the sustainability of EpiFix-driven revenue growth and the extent of customer, government-account and reimbursement concentration.
- Assess whether gross-margin improvement can continue as production capacity, product mix and the direct-sales organization expand.
- Track FDA decisions concerning micronized products, the clinical-trial timetable, any transition agreement, potential BLA requirements and recall or labeling risks.
- Review accounts-receivable growth, collections, product-return allowances and inventory-obsolescence reserves.
- Separate cash generation from non-GAAP Adjusted EBITDA, particularly the significant share-based compensation add-back.
- Monitor securities litigation and patent litigation outcomes, including potential damages, injunctions, legal costs or business restrictions.
- Evaluate dilution from outstanding options, restricted stock and warrants, as well as the effect of the stock-repurchase program.