MiMedx Group, Inc. — Form 10-Q Summary
Business Context and Reporting Period
MiMedx Group is a single-segment biomaterials company that develops, manufactures and markets regenerative biomaterials and bioimplants, including amniotic tissue products processed through its Purion technology and device products such as HydroFix and CollaFix. This unaudited quarterly report covers the three and nine months ended September 30, 2011, compared with the corresponding 2010 periods.
The company completed its acquisition of Surgical Biologics, LLC on January 5, 2011, for an aggregate purchase price of approximately $16.4 million, consisting of cash, common stock, convertible debt and contingent consideration. The acquisition expanded the company’s amniotic tissue processing capabilities and product portfolio.
Financial Performance and Key Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Net sales | $2.152 million vs. $0.108 million | $5.125 million vs. $0.545 million |
| Gross profit | $1.309 million vs. $(0.432) million | $2.833 million vs. $(0.810) million |
| Gross margin | 60.8% vs. (399.6)% | 55.3% vs. (148.7)% |
| Operating loss | $(1.652) million vs. $(2.854) million | $(7.325) million vs. $(8.100) million |
| Net loss | $(1.766) million vs. $(2.854) million | $(7.617) million vs. $(8.693) million |
| Basic and diluted loss per share | $(0.02) vs. $(0.05) | $(0.11) vs. $(0.15) |
| Adjusted EBITDA loss | $(0.934) million vs. $(2.240) million | $(4.675) million vs. $(6.425) million |
Revenue growth was driven primarily by amniotic membrane tissue sales in the Spine, Wound Care, Ophthalmology and Orthopedics markets. Cost of products sold was 39.2% of revenue in the quarter and 44.7% for the nine-month period. Research and development expense declined to $0.485 million in the quarter and $1.996 million year to date, while selling, general and administrative expense increased to $2.476 million and $8.163 million, respectively.
Non-cash expenses included $1.002 million of amortization, $1.318 million of share-based compensation and $0.331 million of depreciation during the first nine months. The company reported no income tax expense because it has incurred cumulative losses and maintains a valuation allowance against its deferred tax assets.
Cash Flow, Liquidity and Capital Structure
| Balance or cash flow item | September 30, 2011 | December 31, 2010 or comparable period |
|---|---|---|
| Cash and cash equivalents | $0.637 million | $1.341 million |
| Total current assets | $3.003 million | $1.706 million |
| Total liabilities | $11.699 million | $1.252 million |
| Stockholders’ equity | $11.852 million | $6.101 million |
| Operating cash flow, nine months | $(5.009) million | $(6.171) million |
| Investing cash flow, nine months | $(0.884) million | $(0.149) million |
| Financing cash flow, nine months | $5.190 million | $4.096 million |
Cash declined by $0.704 million during the first nine months. Financing inflows included approximately $3.744 million from equity placements, $1.300 million borrowed under a related-party revolving secured line of credit and $0.296 million from stock-option exercises. Investing cash outflows included $0.466 million paid for the Surgical Biologics acquisition and $0.418 million for equipment.
At September 30, 2011, current liabilities included approximately $1.041 million of acquisition-related convertible debt, $1.268 million of related-party convertible line-of-credit debt, $3.850 million of current earn-out liability payable in MiMedx common stock and $1.877 million of accounts payable and accrued expenses. The company stated that current liabilities payable in cash were approximately $2.978 million after excluding the short-term stock-settled earn-out liability.
Management stated that anticipated operating cash, existing cash and a planned line of credit would fund operating needs, planned investments and debt obligations for the next twelve months. The filing also disclosed approximately $4.084 million of contractual obligations, including debt, leases, employment agreements and royalty commitments.
Material Changes Versus the Prior Comparable Period
- Revenue increased approximately 1,892% in the quarter and 840% for the nine months, reflecting the Surgical Biologics acquisition and increased tissue-product sales.
- Gross margins improved substantially as production volumes increased, although the company remained unprofitable.
- Quarterly net loss narrowed by approximately $1.089 million; the nine-month net loss narrowed by approximately $1.076 million.
- Adjusted EBITDA loss improved to $0.934 million in the quarter from $2.240 million in the prior-year quarter and declined 34% from the immediately preceding quarter.
- Total assets increased to $23.552 million from $7.352 million, primarily because of acquisition-related goodwill and intangible assets.
- Intangible assets increased to $15.424 million and goodwill increased to $4.040 million at September 30, 2011. The filing reported no goodwill impairment indicators.
- Common shares outstanding increased to approximately 74.257 million from 64.332 million at year-end 2010, excluding additional potential dilution from options, warrants and convertible instruments.
- The company closed its Tampa facility, consolidated operations in Kennesaw, Georgia, launched EpiFix and AmnioFix Nerve Wrap, received three HydroFix 510(k) clearances and expanded distribution through a VA and Department of Defense distributor.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal revenue or earnings guidance. Management expressed confidence in continued revenue growth, increasing production efficiency and improved operating leverage, but emphasized that future results depend on market acceptance, product introductions, regulatory developments and available financing.
On October 25, 2011, the Chairman and CEO committed to provide or arrange up to $1.5 million of working-capital financing, reduced by amounts obtained from other lenders. On November 14, 2011, the debt offering was increased to $2.5 million. The CEO had loaned the company $0.3 million under the revolving line as of that date.
Key risks include continuing operating losses and negative operating cash flow, dependence on external financing, substantial acquisition-related debt and earn-out obligations, potential dilution from 10.355 million stock options, 8.096 million warrants and 3.995 million contingent warrants, and the concentration of customers and distribution channels. Two customers represented approximately 33% of third-quarter revenue and two customers represented approximately 26% of accounts receivable at quarter-end.
The company also faces regulatory, clinical, intellectual-property, product-acceptance and competitive risks. Future international sales may create foreign-currency exposure, although management did not expect a material near-term impact from exchange-rate changes. No legal proceedings, defaults or off-balance-sheet arrangements were reported.
Important Facts for Investors to Verify
- Whether revenue growth and reported gross-margin improvement continue after the Surgical Biologics acquisition effects are fully reflected.
- The company’s ability to reduce operating cash burn and achieve positive operating cash flow.
- Availability and terms of the expanded $2.5 million convertible senior secured debt offering and related-party financing.
- Timing, valuation and settlement of the approximately $7.405 million Surgical Biologics earn-out liability, including potential stock dilution.
- Potential dilution from outstanding options, warrants, convertible debt and contingent warrants.
- Recoverability of the $15.424 million of intangible assets and $4.040 million of goodwill.
- Customer concentration, accounts-receivable collection and dependence on limited distribution channels.
- Regulatory clearances, clinical support, reimbursement and commercial adoption of EpiFix, AmnioFix, HydroFix and CollaFix products.