MiMedx Group, Inc. 2014 Form 10-K Summary
Business context and reporting period
MiMedx develops, processes and markets regenerative biomaterial products derived from donated human amniotic membrane, primarily under the EpiFix and AmnioFix brands. Products serve wound care, surgical, sports medicine, ophthalmic and dental markets. Tissue-based products represented 100% of 2014 revenue. The fiscal year ended December 31, 2014; the filing was signed March 13, 2015.
The company operated as one reportable segment and was focused primarily on the U.S. market. Its direct sales force expanded to more than 180 professionals by February 2015, and the company had 386 employees at December 31, 2014.
Key financial metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net sales | $118.2 million | $59.2 million | +100% |
| Gross margin | $105.6 million | $49.9 million | +112% |
| Gross margin percentage | 89.3% | 84.2% | +5.1 percentage points |
| Operating income (loss) | $7.1 million | $(2.6) million | Improved by $9.7 million |
| Operating margin | 6.0% | (4.5)% | Improved |
| Net income (loss) | $6.2 million | $(4.1) million | Improved by $10.3 million |
| Diluted earnings per share | $0.05 | $(0.04) | Improved |
| Adjusted EBITDA | $20.7 million | $5.5 million | + $15.2 million |
| Net cash from operating activities | $16.8 million | $(0.3) million | Improved by $17.1 million |
Cost of products sold declined to 10.7% of revenue from 15.8%, reflecting higher direct-sales volume, favorable product mix and improved production absorption. Research and development expense increased 46% to $7.1 million, while selling, general and administrative expense increased 96% to $90.5 million. Stock-based compensation rose to $11.5 million from $6.0 million.
Fourth-quarter 2014 sales were $39.6 million, gross margin was $36.0 million and net income was $3.8 million, compared with fourth-quarter 2013 sales of $18.0 million, gross margin of $14.9 million and a net loss of $1.4 million.
Liquidity, cash flow and capital structure
- Cash and cash equivalents were $46.6 million at December 31, 2014.
- Short-term investments were $5.8 million, with an additional $3.3 million of investments maturing in 2016.
- Working capital was $67.3 million, compared with $55.8 million in 2013; the current ratio was 4.6.
- Total liabilities were $19.9 million and long-term liabilities were $1.5 million. The company had no borrowings outstanding under its $3.0 million revolving credit facility, which expired in May 2014 and was not renewed.
- Cash used in investing activities was $12.2 million, primarily for equipment, patent costs and FDIC-insured certificates of deposit.
- Cash used in financing activities was $2.1 million, including $5.6 million of share repurchases, partly offset by $3.5 million from stock option and warrant exercises.
- Contractual obligations totaled approximately $7.4 million, principally operating leases, capital leases, charitable contributions and meeting-space commitments.
Material changes versus the prior comparable period
- Revenue doubled, driven primarily by higher EpiFix wound-care sales in commercial and government accounts.
- The company moved from operating losses to positive operating income and net income.
- Government accounts represented 34% of 2014 revenue, down from 56% in 2013. AvKARE, the government-account distributor, represented 34% of revenue and 33% of accounts receivable.
- The company entered a non-exclusive distribution agreement with Zimmer for AmnioFix under the AmnioRepair private-label brand. Its Medtronic distribution relationship continued.
- Manufacturing capacity expanded through a larger Marietta facility; the Kennesaw facility remained available as a secondary processing site.
- EpiFix’s Medicare pass-through reimbursement status expired at the end of 2014. Beginning in 2014, hospital outpatient and ambulatory surgery reimbursement was generally subject to bundled payment methodology.
- The company repurchased approximately 940,000 shares for $5.6 million during 2014. The board later increased the repurchase authorization from $10 million to $20 million; approximately $12.3 million was spent under the plan from January 1, 2015 through the filing date.
Guidance, outlook, risks and unusual items
Management did not provide formal revenue or earnings guidance. Management stated that existing cash, investments and anticipated operating cash flow should fund operational needs and planned investing activities for the next year. The company continued investing in its direct sales force, reimbursement support, clinical studies, manufacturing capacity and information technology.
- FDA regulation of micronized products: The FDA continues to assert that the company’s micronized allografts may be more than minimally manipulated and may require biologics licensing rather than regulation solely as Section 361 HCT/Ps. Micronized products represented approximately 14% of 2014 revenue. The company filed an IND in 2014 and expected to begin a Phase IIB trial in the first half of 2015, but the FDA could impose restrictions, require a BLA or require a recall.
- Government investigation: In the fourth quarter, the company received an OIG subpoena concerning sales and marketing activities. The investigation was in an early stage, and the company could not estimate potential fines, damages, restitution or penalties.
- Litigation: The company was defending securities class actions related to FDA disclosures and the OIG subpoena, as well as patent infringement litigation. Defendants in patent cases asserted non-infringement and invalidity and sought inter partes review of certain patents.
- Reimbursement risk: Revenue depends substantially on Medicare, private-payer and health-system coverage. Micronized products had limited commercial and state Medicaid coverage, and hospital products are often bundled into procedure or DRG payments.
- Concentration and execution risk: Government-account sales, distributor relationships, donated placenta supply, physician adoption, competition, regulatory compliance and the company’s ability to manage rapid sales-force expansion remain material risks.
- Tax item: The company maintained a $16.2 million valuation allowance against deferred tax assets and indicated that some or all of the allowance might be released in 2015 if profitability and visibility improved, which could materially affect reported tax expense.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. Management and the auditor concluded that internal control over financial reporting was effective as of December 31, 2014.
Important facts for investors to verify
- Whether FDA actions or final guidance change the ability to market micronized products and the related 14% revenue exposure.
- The status and potential financial exposure of the OIG investigation and related shareholder litigation.
- The sustainability of 2014’s rapid revenue growth, 89.3% gross margin and positive operating cash flow after substantial sales-force and infrastructure investment.
- The effect of bundled Medicare reimbursement and the expiration of EpiFix pass-through status on pricing, volume and margins.
- Reliance on government accounts and AvKARE, including the transition to the company’s own Federal Supply Schedule contract.
- Progress and costs of the planned Phase IIB clinical trial and any future BLA applications.
- Potential dilution from approximately 16.5 million outstanding stock options, remaining warrants and other equity compensation.
- Whether the deferred tax valuation allowance is released and how that affects 2015 earnings.