MiMedx Group, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2014; filed August 11, 2014. MiMedx operates in one segment, Regenerative Biomaterials, serving wound care, surgical, sports medicine, ophthalmic and dental markets with products including AmnioFix, EpiFix and CollaFix.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $25.6 million | $13.5 million | $45.1 million | $25.1 million |
| Gross margin | $22.8 million; 89.3% | $11.3 million; 83.7% | $39.4 million; 87.3% | $21.0 million; 83.6% |
| Operating income (loss) | $(0.4) million | $(0.7) million | $(1.3) million | $(1.0) million |
| Net income (loss) | $(0.4) million | $(0.8) million | $(1.3) million | $(2.4) million |
| Adjusted EBITDA | $2.9 million | $1.2 million | $4.9 million | $2.3 million |
| Net cash from operating activities | Approximately $1.2 million | Approximately $(0.7) million | $(0.4) million | $(2.9) million |
Q2 revenue increased 89% year over year, primarily from higher EpiFix wound-care sales in commercial and government accounts. Six-month revenue increased 80%. Cost of sales declined to 10.7% of revenue in Q2 and 12.7% for the first six months, versus 16.3% and 16.4%, respectively, in the comparable periods.
Operating losses persisted because selling, general and administrative expense increased to $21.2 million in Q2 and $37.0 million for the first six months. Research and development expense increased to $1.8 million and $3.2 million, respectively, reflecting higher clinical-trial and personnel costs. Share-based compensation was $2.8 million in Q2 and $5.1 million year to date.
At June 30, 2014, cash and cash equivalents were $39.2 million, versus $44.1 million at December 31, 2013. Current assets were $66.3 million and current liabilities were $9.9 million, representing a reported current ratio of 6.7. Total liabilities were $11.5 million and stockholders’ equity was $74.5 million. The company had no borrowings under its $3.0 million revolving credit facility, which expired May 1, 2014 and was not renewed.
Cash used in investing activities was $1.4 million for the first six months, primarily for equipment and patent costs. Financing cash use was $3.0 million, including $4.6 million for stock repurchases, partially offset by $1.7 million from warrant and stock-option exercises. Capital and operating lease obligations, charitable commitments and standby letters of credit remain additional liquidity considerations.
Material changes versus the prior comparable periods
- Revenue increased $12.1 million, or 89%, in Q2 and $20.1 million, or 80%, for the first six months, driven primarily by EpiFix wound-care sales.
- Gross margin percentage improved substantially because of increased direct sales, product mix and higher production rates absorbing fixed manufacturing costs.
- The six-month net loss improved by approximately $1.1 million, despite higher operating expenses. Prior-year results included approximately $1.3 million of amortization of debt discount related to convertible senior secured notes; those notes had been converted or paid off in early 2013.
- Operating cash flow improved year to date but remained negative at $0.4 million, while cash declined by $4.8 million due largely to stock repurchases and investing activities.
- The company authorized up to $10 million for stock repurchases through December 31, 2014 and repurchased approximately 784,000 shares for approximately $4.6 million through June 30.
- Common shares outstanding increased to approximately 105.3 million at June 30, 2014 from approximately 104.4 million at year-end 2013, before considering the effect of the repurchases.
Outlook, risks, contingencies and unusual items
Management stated that existing cash and anticipated operating and financing activities should fund operational liquidity needs and planned investing activities for the next twelve months. The filing provides no formal revenue or earnings guidance.
The principal risk is regulatory uncertainty concerning micronized allografts. The FDA has asserted that these products may be more than minimally manipulated and may require biologics licensing rather than regulation solely under Section 361 of the Public Health Service Act. MiMedx submitted an initial Investigational New Drug application on July 22, 2014 and sought a transition agreement. The FDA could impose labeling or cGMP conditions, deny continued marketing, or require a product recall. Management estimated that micronized products represented approximately 15% of projected 2014 revenue.
Several securities-related class action lawsuits have been consolidated in federal court; the company moved to dismiss and stated that it does not expect a material adverse financial impact. MiMedx also filed patent infringement lawsuits against competing parties; defendants denied the allegations and asserted defenses and counterclaims. Outcomes are uncertain.
The company carries a full valuation allowance against U.S. deferred tax assets. It also has a contingent $200,000 payment and royalty obligations under a license arrangement, including a $50,000 minimum annual royalty. The filing states that there were no material changes to previously disclosed risk factors and no off-balance-sheet arrangements.
Investor verification points
- Verify whether EpiFix and other wound-care products continued to support the reported revenue growth and margin improvement.
- Monitor FDA actions concerning micronized products, including IND/BLA progress, any transition agreement, labeling or cGMP requirements, and recall exposure.
- Assess whether operating cash flow turns consistently positive after working-capital investment and stock-based compensation adjustments.
- Evaluate the sustainability of high selling, general and administrative spending, clinical-trial investment and share-based compensation.
- Review the effect of the stock-repurchase program on liquidity, share count and capital allocation.
- Track the consolidated securities litigation and patent infringement cases, including potential costs, injunctions or counterclaims.
- Reconcile the company’s non-GAAP Adjusted EBITDA with GAAP net loss and cash flow; Adjusted EBITDA was not equivalent to cash generated from operations.