MiMedx Group, Inc. — Form 10-Q Summary
Business context and reporting period
MiMedx is an integrated developer, manufacturer and marketer of regenerative biomaterials and bioimplants, including amniotic tissue products EpiFix and AmnioFix and device technologies HydroFix and CollaFix. The company operates in one Biomaterials segment. This report covers the three and six months ended June 30, 2013, compared with the corresponding 2012 periods.
Financial results and key metrics
| Metric | Three months ended June 30, 2013 | Three months ended June 30, 2012 | Six months ended June 30, 2013 | Six months ended June 30, 2012 |
|---|---|---|---|---|
| Net sales | $13.5 million | $4.9 million | $25.1 million | $8.6 million |
| Gross margin | $11.3 million; 83.7% | $3.8 million; 77.2% | $21.0 million; 83.6% | $6.5 million; 75.8% |
| Operating income (loss) | $(0.7) million; (5.5%) | $(0.1) million; (2.4%) | $(1.0) million; (3.9%) | $(0.7) million; (8.7%) |
| Net income (loss) | $(0.8) million; (5.6%) | $(0.7) million; (15.2%) | $(2.4) million; (9.5%) | $(1.8) million; (21.4%) |
| Adjusted EBITDA | $1.2 million | $0.9 million | $2.3 million | $1.2 million |
- Second-quarter revenue increased 177%, primarily from higher sales of EpiFix and AmnioFix. Six-month revenue increased 192%.
- Wound Care revenue increased to $7.3 million in the second quarter and $13.6 million for the six months, supported by Medicare reimbursement, government accounts and expansion of the direct sales force.
- Surgical and Sports Medicine revenue increased 51% in the quarter and 80% for the six months.
- Cost of sales declined to 16.3% of revenue in the quarter and 16.4% for the six months, compared with 22.8% and 24.1%, respectively, in the prior-year periods.
- Research and development expense increased 84% in the quarter and 139% for the six months as the company increased clinical, personnel, laboratory and testing investments.
- Selling, general and administrative expense increased to $10.9 million in the quarter and $19.2 million for the six months, reflecting sales-force expansion, reimbursement support, infrastructure, commissions, management incentives and share-based compensation.
- Share-based compensation expense was $1.5 million in the quarter and $2.5 million for the six months, compared with $0.6 million and $1.1 million, respectively, in 2012.
Cash flow, liquidity and capital structure
- Cash and cash equivalents were $4.2 million at June 30, 2013, compared with $6.8 million at December 31, 2012.
- Current assets were $21.5 million and current liabilities were $6.1 million, producing a reported current ratio of approximately 3.5.
- Operating activities used $2.9 million during the first six months, compared with $1.6 million in the prior-year period. The principal working-capital uses were increases in accounts receivable and inventory.
- Investing activities used $1.4 million, including $1.1 million for equipment and $0.3 million for patent application costs.
- Financing activities provided $1.7 million, principally from warrant and stock-option exercises.
- The $5.0 million convertible senior secured notes, including accrued interest of approximately $5.3 million, were converted into approximately 5.3 million common shares during January and February 2013. MiMedx had no outstanding long-term debt at June 30, 2013.
- On May 17, 2013, the company entered into a secured revolving credit facility of up to $3.0 million, including a $1.0 million letter-of-credit sub-limit. No amounts had been drawn as of the filing date. The facility matures May 1, 2014 and includes financial and operating covenants; the company reported compliance.
Material changes versus the prior comparable period
- Revenue growth accelerated substantially, driven by amniotic tissue products, Medicare reimbursement for EpiFix and expanded direct sales coverage.
- Gross margins improved materially because of greater direct-sales volume, product mix and higher production rates.
- Operating expenses increased faster than revenue in absolute dollars because of aggressive investments in selling, marketing, reimbursement infrastructure, clinical development and administration.
- Net losses remained, but the loss margin improved substantially year over year. The six-month net loss increased in dollars partly because of a $1.3 million non-cash acceleration of debt discount and financing-cost amortization related to the note conversion.
- The March 2013 settlement of the Surgical Biologics earn-out liability issued approximately 1.2 million common shares valued at $5.8 million and eliminated the corresponding liability.
- The company relocated to an approximately 80,000-square-foot headquarters, office, laboratory and warehouse facility in Marietta, Georgia. Related commitments include approximately $6.9 million of operating lease payments and approximately $0.5 million of standby letters of credit.
Outlook, commentary, risks and unusual items
Management stated that existing cash, anticipated operating and financing cash flows, and available credit were expected to fund operational liquidity needs and planned investing activities for the next twelve months. The filing does not provide formal revenue or earnings guidance.
- Management expects continued investment in direct sales, reimbursement support, research and development, clinical activities and infrastructure; these investments may delay profitability.
- Government accounts represented approximately 64% of first-half 2013 revenue, and two customers represented approximately 74% of accounts receivable at June 30, 2013. Distributor, Federal Supply Schedule and reimbursement changes therefore represent significant concentration risks.
- The company has a history of losses, including a $2.4 million first-half 2013 net loss and an accumulated deficit of approximately $72.1 million. Management warns that additional financing could be necessary to support growth, potentially causing dilution or restrictive debt covenants.
- Key operating risks include dependence on donated placental tissue, disease-transmission and product-liability exposure, regulatory classification and FDA compliance, reimbursement uncertainty, competition, manufacturing disruptions, intellectual-property challenges and difficulty managing rapid growth.
- The SEC has brought a civil action against the company’s Chairman and CEO relating to alleged insider information provided while he led another company. MiMedx is not a party to that action, but the filing notes that one potential remedy could restrict his service as a public-company officer or director.
- On July 3, 2013, MiMedx filed a shelf registration statement permitting potential future offerings of up to $100.5 million of securities and resale of up to 7.5 million common shares. The filing does not state that an offering had occurred.
- Legal proceedings reported in Part II, Item 1 were none; the filing states that there were no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether rapid EpiFix and AmnioFix revenue growth is sustained after accounting for government-account and distributor concentration.
- Collection of the sharply increased accounts receivable balance of $11.8 million and the adequacy of the $44,000 doubtful-account allowance.
- Inventory growth to $4.2 million and the adequacy of the $0.2 million obsolescence reserve.
- Progress toward operating profitability after significant sales, infrastructure, clinical and stock-compensation spending.
- Liquidity under continued negative operating cash flow, including the timing and terms of any future financing or shelf-registration offerings.
- Compliance with the secured revolving credit facility’s financial covenants and the May 1, 2014 maturity.
- Reimbursement coverage, Federal Supply Schedule status, distributor relationships and regulatory treatment of the company’s human tissue products.
- Potential dilution from 15.9 million outstanding options and 2.1 million outstanding warrants, in addition to any future equity issuance.