MiMedx Group, Inc. — Form 10-Q Summary
Business Context and Reporting Period
MiMedx develops, processes, and markets regenerative biomaterial products and tissue-processing services for wound care, surgical, sports medicine, orthopedic, spine, ophthalmic, dental, and burn applications. The company operates in one reportable segment, Regenerative Biomaterials. This filing covers the three and nine months ended September 30, 2016; financial statements are unaudited and prepared under U.S. GAAP.
Financial Performance and Position
| Metric | Three Months 2016 | Three Months 2015 | Nine Months 2016 | Nine Months 2015 |
|---|---|---|---|---|
| Net sales | $64.4 million | $49.0 million | $175.1 million | $135.5 million |
| Gross margin | $56.4 million | $44.0 million | $151.8 million | $120.2 million |
| Gross margin percentage | 87.6% | 89.8% | 86.7% | 88.8% |
| Operating income | $4.7 million | $6.7 million | $9.7 million | $16.6 million |
| Net income | $3.3 million | $6.6 million | $6.5 million | $16.1 million |
| Diluted EPS | $0.03 | $0.06 | $0.06 | $0.14 |
| Adjusted EBITDA | $11.4 million | $11.8 million | $30.5 million | $31.1 million |
Revenue increased 31% in the quarter and 29% year to date. Third-quarter Wound Care revenue rose 39% to $49.8 million, while surgical, sports medicine, and orthopedic revenue rose 10% to $14.6 million. Nine-month Wound Care revenue increased 29.7% to $131.2 million, and SSO revenue increased approximately 28% to $43.9 million.
Gross margin percentages declined primarily because of Stability integration costs, product mix, and purchase-accounting inventory step-up amortization of $0.2 million in the quarter and $1.6 million year to date. Excluding the inventory step-up, reported cost of goods sold was 12.0% of revenue in the quarter and 12.4% year to date.
Operating expenses increased substantially, including higher selling costs, commissions, share-based compensation, sales-force expansion, research and development, legal expenses, infrastructure spending, and Stability operating costs. The nine-month effective tax rate was 31.5%, compared with 3.2% in the prior-year period, primarily because the 2015 period benefited from a $15.4 million deferred-tax valuation allowance release. Management projected an approximately 41% annual effective tax rate for 2016.
At September 30, 2016, cash and cash equivalents were $18.3 million, compared with $28.5 million at December 31, 2015. Current assets were $106.3 million and current liabilities were $41.6 million, representing a current ratio of approximately 2.6. The company had no outstanding borrowings under its $50 million senior secured revolving credit facility, which also permits an uncommitted incremental facility of up to $35 million. The company was in compliance with its financial covenants, including minimum liquidity of $10 million.
Nine-month operating cash flow was $9.1 million, compared with $14.5 million in 2015. Investing cash outflow was $10.4 million, including $7.6 million for the Stability acquisition and $5.3 million for equipment purchases. Financing cash outflow was $8.8 million, including approximately $11.3 million of share repurchases, partially offset by $2.5 million from stock-option exercises. Cash declined by $10.1 million during the period.
Material Changes Versus the Prior Comparable Period
- Revenue growth was strong, but operating income declined 30% in the quarter and 41% year to date because operating expenses grew faster than sales.
- Net income declined 49% in the quarter and 60% year to date; diluted EPS fell from $0.06 to $0.03 for the quarter and from $0.14 to $0.06 year to date.
- Adjusted EBITDA declined approximately 4% in both the quarter and nine-month period, reflecting increased investments to support growth.
- The January 2016 acquisition of Stability added acquired operations, goodwill, intangible assets, inventory step-up amortization, and a contingent earn-out liability. The preliminary purchase price was $36.3 million, including a $25.6 million fair value for the earn-out.
- Goodwill increased to $27.0 million from $4.0 million at year-end 2015, and net intangible assets increased to $27.2 million from $10.8 million.
- The company repurchased 1.34 million shares for approximately $10.3 million during the first nine months. Approximately $3.9 million remained available under the repurchase authorization at September 30, 2016.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management stated that existing cash, anticipated operating and financing cash flows, and availability under the credit facility should fund operating liquidity needs and planned investing activities for the next year. The filing does not provide formal revenue or earnings guidance.
- The FDA continued to question whether the company’s micronized allografts qualify for regulation solely under Section 361 of the Public Health Service Act. The company is pursuing a biologics license application for certain products while continuing to market them. Potential outcomes include additional labeling or manufacturing requirements, significant compliance costs, or restrictions or recall of micronized products. Micronized products represented approximately 12% of 2015 revenue.
- The company is involved in several patent infringement actions and related inter partes review proceedings. The PTAB found challenged claims of two patents unpatentable in 2016; MiMedx appealed the decision involving one patent. Several district court cases were expected to proceed to trial in 2017.
- The Stability earn-out is a Level 3 liability based on projected sales and expenses and will be remeasured quarterly. Changes in estimates could materially affect earnings.
- Unusual items include $1.1 million of Stability acquisition-related costs, $1.6 million of inventory fair-value step-up amortization, and $13.8 million of share-based compensation in the first nine months.
- Future contractual commitments included approximately $9.8 million of lease, meeting-space, and charitable commitments, excluding the separately presented contractual-obligations schedule items.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Reconcile reported revenue growth with the substantially lower operating income, net income, and operating cash flow.
- Assess the sustainability of margins after Stability integration and the completion of purchase-accounting inventory step-up amortization.
- Monitor the $25.6 million contingent Stability earn-out and the potential impact of quarterly fair-value changes.
- Evaluate FDA actions regarding micronized products, including possible BLA, labeling, cGMP, marketing, or recall requirements.
- Review outcomes and appeal status of the patent litigation and PTAB proceedings.
- Confirm liquidity, covenant compliance, credit-facility availability, and the effect of continued stock repurchases on cash balances.
- Consider the effect of the approximately 41% projected 2016 effective tax rate compared with the unusually low 2015 rate.