MiMedx Group, Inc. — Q1 2012 Form 10-Q Summary
Business context and reporting period
MiMedx Group develops, manufactures, and markets regenerative biomaterials and bioimplants, including products processed from human amniotic membrane through its Surgical Biologics subsidiary. The filing covers the three months ended March 31, 2012, with comparative results for the three months ended March 31, 2011. The company reports one business segment: Biomaterials.
During the quarter, the company received the CE Mark for CollaFix Surgical Mesh CD, its first CollaFix product to receive that designation.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $3.706 million | $1.043 million | +$2.663 million, approximately +255% |
| Gross profit | $2.747 million | $0.333 million | +$2.414 million |
| Gross margin | 74.1% | 31.9% | +42.2 percentage points |
| Loss from operations | $(0.631) million | $(3.256) million | Improved by $2.625 million |
| Operating margin | (17.0)% | (312.1)% | Improved |
| Net loss | $(1.094) million | $(3.348) million | Improved by $2.254 million |
| Net loss per share | $(0.01) | $(0.05) | Improved |
| Net cash used in operations | $(1.288) million | $(1.790) million | Improved by $0.502 million |
| Adjusted EBITDA | $0.314 million | $(2.318) million | Improved by $2.632 million |
Cost of products sold was $958,855, or 25.9% of revenue, compared with 68.1% in the prior-year quarter. Research and development expense declined 57.7% to $407,072, while selling, general and administrative expense increased 13.1% to $2.971 million. Other expense increased to approximately $462,000, including $218,701 of financing expense associated with senior secured promissory note discounts and $243,586 of net interest expense.
At March 31, 2012, cash and cash equivalents were $3.021 million, compared with $4.112 million at December 31, 2011. Total current assets were $7.048 million and total current liabilities were $6.796 million, including $3.185 million of earn-out liability payable in common stock. Management characterized current liabilities payable in cash as approximately $3.611 million after excluding the short-term stock-settled earn-out.
Total liabilities were $14.364 million and stockholders’ equity was $12.497 million. Debt included an approximately $809,000 related-party convertible line of credit, approximately $970,000 of acquisition-related convertible debt, and $3.019 million of net convertible senior secured promissory notes. The debt instruments had aggregate stated principal amounts of approximately $6.3 million for the related-party line and senior notes, plus the acquisition-related debt.
Material changes versus the prior comparable period
- Revenue increased primarily because of higher sales of amniotic membrane tissue, with strong demand in Spine, Wound Care, Ophthalmology, and Orthopedics.
- Gross margin improved substantially as revenue grew faster than product costs.
- R&D spending declined because of the mid-2011 closure of the Tampa research facility and lower animal-study spending for CollaFix and HydroFix.
- SG&A increased as the company expanded its regional account-management and distribution organization, increased commissions, and expanded reimbursement and clinical-support activities.
- Operating cash use improved, but the company remained loss-making and cash-flow negative.
- Financing expense increased because of the $5.0 million convertible senior secured note financing completed in late 2011 and additional debt discounts related to contingent warrants and beneficial conversion features.
- Shares outstanding increased during the quarter through option and warrant exercises and the issuance of 167,086 shares for accrued director fees. Weighted-average shares used in diluted EPS increased to 74.9 million from 70.3 million.
Guidance, outlook, risks, contingencies, and unusual items
The filing does not provide formal revenue or earnings guidance. Management stated that revenue was continuing to increase quarter over quarter and that spending controls, anticipated operating cash flow, existing cash, and available borrowing capacity were expected to support operating needs, planned investments, and debt payments for the next twelve months.
Significant obligations included approximately $3.148 million due within one year under the contractual-obligations schedule, including the related-party convertible line of credit, acquisition-related convertible debt, employment obligations, operating leases, and royalties. The related-party line of credit had a stated principal amount of $1.3 million, was due December 31, 2012, and could be extended to December 31, 2013 for a $65,000 extension fee. The $5.0 million senior secured notes mature December 31, 2013 and carry a 5% interest rate, with an additional 5% payment potentially due on amounts outstanding at December 31, 2012.
The company’s acquisition-related earn-out liability was approximately $7.410 million and was payable in MiMedx common stock. On April 30, 2012, after quarter-end, the company issued 2,632,576 shares valued at approximately $3.185 million for the current portion of the earn-out related to the Surgical Biologics acquisition.
Customer and distribution concentration is material: three customers represented approximately 46% of first-quarter revenue, and two customers represented approximately 31% of accounts receivable at March 31, 2012. The company also relies on independent distributors and representatives, creating channel and collection risk.
Other risks include continued operating losses, negative operating cash flow, dependence on product acceptance and regulatory developments, potential dilution from options, warrants, and convertible debt, debt secured by intellectual property, and possible impairment of goodwill or intangible assets. The company disclosed no legal proceedings, no defaults, and no off-balance-sheet arrangements. Management concluded that disclosure controls and procedures were effective as of March 31, 2012.
Important facts for investors to verify
- Whether the sharp revenue growth and 74.1% gross margin were sustained in subsequent quarters.
- Actual cash generation versus management’s expectation that operations and existing resources would fund the next twelve months.
- Refinancing, repayment, or extension of the $1.3 million related-party line and other debt obligations.
- The effect of the April 30, 2012 stock issuance on dilution and the remaining Surgical Biologics earn-out.
- Exposure to the three customers representing 46% of quarterly revenue and the two customers representing 31% of receivables.
- Potential dilution from 12.517 million outstanding options, 7.892 million outstanding warrants, convertible instruments, and contingent warrants.
- Progress toward regulatory approvals, commercialization, reimbursement support, and market adoption of CollaFix, HydroFix, AmnioFix, and EpiFix products.