MiMedx Group, Inc. — Form 10-Q Summary
Business Context and Reporting Period
MiMedx Group, Inc. reported unaudited results for the three and six months ended June 30, 2017. The company operates in one Regenerative Biomaterials segment, serving wound care, surgical, sports medicine, orthopedic, ophthalmic and dental markets with human tissue allograft products and tissue-processing services.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2017 | Three Months Ended June 30, 2016 | Six Months Ended June 30, 2017 | Six Months Ended June 30, 2016 |
|---|---|---|---|---|
| Net sales | $76.4 million | $57.3 million | $149.0 million | $110.7 million |
| Gross margin | 88.7% | 87.1% | 88.3% | 86.1% |
| Operating income | $7.2 million | $3.6 million | $13.4 million | $5.0 million |
| Net income | $8.1 million | $2.0 million | $12.4 million | $3.2 million |
| Diluted earnings per share | $0.07 | $0.02 | $0.11 | $0.03 |
| Adjusted EBITDA | $14.2 million | $10.1 million | $26.6 million | $19.1 million |
Second-quarter sales increased 33.3% year over year, while six-month sales increased 34.6%. Wound Care revenue was $54.7 million in the quarter and $109.6 million year to date. Surgical, Sports Medicine and Orthopedics revenue was $21.7 million in the quarter and $39.4 million year to date.
- Six-month operating expenses included $8.9 million of research and development and $108.3 million of selling, general and administrative expense.
- Research and development spending rose primarily because of increased clinical-trial, animal-study, laboratory, consulting and personnel costs.
- SG&A growth reflected expansion of the direct sales organization, higher commissions, reimbursement personnel, support functions and outside legal costs.
- Share-based compensation was $9.9 million for the first six months, including $9.4 million in SG&A.
- Cash and cash equivalents were $47.5 million at June 30, 2017, compared with $34.4 million at December 31, 2016.
- Net cash provided by operating activities was $24.1 million for the first six months, compared with $6.3 million in the prior-year period.
- Investing cash usage was $2.7 million, primarily for equipment purchases. Financing cash usage was $8.2 million, including $14.7 million of share repurchases, partly offset by $9.2 million from stock-option exercises.
- Total current assets were $132.5 million and current liabilities were $51.5 million, producing a reported current ratio of 2.6.
- The company had no borrowings outstanding under its $50 million senior secured revolving credit facility and remained in compliance with its covenants. The facility also permits up to $35 million of incremental commitments, subject to conditions.
Material Changes Versus the Prior Comparable Period
- Revenue increased $19.1 million, or 33.3%, in the second quarter and $38.3 million, or 34.6%, for the first six months.
- Management attributed the six-month revenue increase primarily to approximately $44.7 million of volume from market-share gains and market expansion, favorable pricing of approximately $1.9 million, and an unfavorable product-mix impact of approximately $8.3 million.
- Gross margin improved by 160 basis points in the quarter and 220 basis points year to date, reflecting lower one-time Stability acquisition inventory costs, manufacturing efficiencies and yield improvements.
- Operating income more than doubled for the first six months, increasing from $5.0 million to $13.4 million.
- Net income increased from $3.2 million to $12.4 million for the first six months. The improvement included significant discrete tax benefits related to share-based compensation.
- The company repurchased 1.7 million shares for approximately $14.7 million during the first six months. Approximately $15.2 million remained available under the repurchase program at June 30, 2017; the board subsequently increased the authorization to $100 million on July 26, 2017.
- The company adopted ASU 2016-09. This resulted in income-tax benefits of $2.7 million for the quarter and $2.7 million for the first six months related to excess tax benefits from exercised equity awards.
Guidance, Outlook, Risks and Unusual Items
- Management stated that research and development expenses are expected to remain generally in line with current spending as a percentage of sales.
- Management expected existing cash, operating cash flow and available credit capacity to fund operational liquidity needs and planned investing activities for the next year. No formal revenue or earnings guidance was provided.
- The projected 2017 annual effective tax rate was 35.3%, but quarterly results were affected by discrete share-based compensation tax benefits.
- The company’s agreement with AvKARE expired June 30, 2017. MiMedx must repurchase AvKARE’s remaining inventory within 90 days and recorded an estimated obligation through its product-return allowance.
- The FDA continues to question whether the company’s micronized allografts qualify for regulation solely under Section 361 of the Public Health Service Act. MiMedx is pursuing a biologics license application for certain products while continuing to market them. Micronized products represented approximately 10% of 2016 revenue. Potential outcomes include additional labeling or manufacturing requirements, significant compliance costs, or a product recall.
- MiMedx is involved in former-employee litigation, trade-secret and restrictive-covenant disputes, and several patent infringement actions and inter partes review proceedings. The filing does not provide a clear estimate of potential monetary exposure.
- Management disclosed that disclosure controls were not effective because a material weakness in internal control over financial reporting related to income-tax accounting continued as of June 30, 2017. Remediation efforts included enhanced review procedures, hiring an internal tax specialist and improved documentation. Management targeted remediation by year-end 2017, subject to successful testing.
- Contractual obligations totaled approximately $11.4 million, including operating leases, software licenses, meeting-space commitments and capital lease obligations.
Important Facts for Investors to Verify
- Whether revenue growth and margin improvement continue after the reported market-share gains and favorable pricing.
- The sustainability of profitability excluding the approximately $2.7 million quarterly tax benefit and other discrete tax effects.
- Progress and final effectiveness of remediation for the material weakness in tax-related internal controls.
- FDA actions concerning micronized allografts, including any BLA, labeling, manufacturing, marketing or recall requirements.
- Outcomes and potential costs of the pending patent, former-employee and trade-secret litigation.
- The amount and timing of the AvKARE inventory repurchase obligation and the Stability earn-out liability, which was $17.6 million at June 30, 2017.
- The effect of continuing share repurchases, equity-award exercises and substantial unrecognized stock-based compensation on share count and future earnings.