MiMedx Group, Inc. 2016 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2016; filed March 1, 2017. The filing also reports unaudited fourth-quarter results.
Business context
MiMedx develops, processes, and markets regenerative biomaterial products derived primarily from human placental tissue, skin, bone, and amniotic fluid. Its principal markets are Wound Care and Surgical, Sports Medicine and Orthopedics (SSO). Key products include EpiFix, AmnioFix, EpiCord, AmnioCord, OrthoFlo, Physio, and products under development using CollaFix technology. The Company operates as one business segment.
MiMedx acquired Stability Biologics on January 13, 2016, expanding its surgical, spine, and orthopedic product portfolio. As of December 31, 2016, the Company had approximately 690 employees and approximately 320 sales professionals as of February 2017.
Key financial metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net sales | $245.0 million | $187.3 million | +30.8% |
| Wound Care sales | $184.0 million | $141.1 million | +30.4% |
| SSO sales | $61.0 million | $46.2 million | +32.0% |
| Gross margin | $212.6 million; 86.8% | $167.1 million; 89.2% | Margin down 240 basis points |
| Operating income | $18.4 million | $24.4 million | Down 24.3% |
| Net income | $12.0 million | $29.4 million | Down 59.3% |
| Diluted EPS | $0.11 | $0.26 | Down |
| Adjusted EBITDA | $44.4 million | $44.0 million | +0.9% |
| Net cash from operations | $25.8 million | $18.8 million | +37.3% |
Fourth-quarter 2016 sales were $69.9 million, compared with $51.8 million in the fourth quarter of 2015. Fourth-quarter net income was $5.5 million, compared with $13.4 million in the prior-year quarter.
Gross margin declined primarily because of one-time inventory costs and lower-than-expected margins on bone and skin products acquired from Stability. Research and development expense increased 42.9% to $12.0 million, while selling, general and administrative expense increased 34.9% to $180.0 million, reflecting expansion of the direct sales force, higher commissions, additional support personnel, and Stability-related costs. Share-based compensation expense was $17.8 million.
Cash flow, liquidity, debt, and balance sheet
- Cash and cash equivalents were $34.4 million at December 31, 2016, versus $28.5 million at December 31, 2015.
- Working capital was $75.8 million; the current ratio was 2.5, compared with 3.6 in the prior year.
- Operating cash flow was $25.8 million. Investing cash outflow was $11.7 million, including the Stability acquisition and capital expenditures. Financing cash outflow was $8.2 million, including share repurchases.
- The Company had no outstanding borrowings under its $50 million senior secured revolving credit facility and was in compliance with its covenants. The facility matures October 12, 2018 and includes an uncommitted incremental facility of up to $35 million.
- The credit facility requires a maximum consolidated leverage ratio of 2.50:1.00, a minimum fixed-charge coverage ratio of 2.00:1.00, and minimum liquidity of $10 million.
- MiMedx repurchased approximately 1.34 million shares for approximately $10.3 million during 2016. Approximately $9.9 million remained available under the then-current authorization at year-end; in February 2017, the total authorization was increased to $86 million.
- Total assets were $193.3 million and stockholders’ equity was $133.0 million at year-end. Total liabilities were $60.3 million, including $17.5 million of Stability-related contingent consideration.
Material changes versus the prior comparable period
- Revenue growth reflected increased direct-sales activity, more than 1,600 new customers, market-share gains, favorable pricing from a shift toward direct sales, and favorable product mix.
- The Stability acquisition added products, personnel, goodwill, intangible assets, and contingent consideration, but also produced one-time acquisition and inventory costs and reduced consolidated margins.
- Operating income and GAAP net income declined despite strong revenue growth because selling, general and administrative costs, research and development costs, acquisition-related costs, amortization, and the income tax provision increased.
- Net income in 2015 benefited from a $14.8 million deferred tax benefit associated with the release of a valuation allowance; 2016 included a $6.1 million income tax provision, making year-over-year net income comparisons less representative of underlying operating trends.
- The Company changed its VA purchasing procedures in 2016, requiring pre-authorization for certain implant purchases, creating potential sales and administrative disruption.
Guidance, outlook, risks, and unusual items
- Management expects research and development spending to remain generally consistent with current spending as a percentage of sales and believes existing cash, operating cash flow, and credit availability will fund operating and planned investing needs for at least the next year. No formal revenue or earnings guidance is provided in the filing.
- The FDA continues to question whether MiMedx micronized amniotic products qualify for regulation solely as Section 361 HCT/Ps. The Company continues marketing the products while pursuing a biologics license application. Micronized products represented approximately 10% of 2016 revenue. Potential outcomes include additional testing, labeling and manufacturing requirements, delayed approvals, removal from the market, or recall.
- MiMedx reported four pending patent infringement actions and related inter partes review proceedings. The PTAB found certain claims of two patents unpatentable; the Company did not appeal one decision and appealed the other. Several cases were expected to proceed in 2017.
- The Company disclosed former-employee litigation involving trade secrets, restrictive covenants, alleged retaliation, and related claims. Outcomes and potential financial exposure were not clearly quantified.
- Material business risks include reimbursement changes, dependence on Government accounts and distributors, competition, availability and safety of donated human tissue, FDA and healthcare fraud-and-abuse compliance, product liability, patent challenges, acquisition integration, and international expansion.
- Management identified a material weakness in internal control over financial reporting related to income-tax accounting. The independent auditor issued an adverse opinion on internal control effectiveness, although the financial-statement audit opinion was unqualified. Management began remediation and targeted completion by the end of the first quarter of 2017.
- The Stability acquisition included an earn-out based on product sales and gross profit. Its fair value was $17.45 million at year-end and may fluctuate materially based on projected revenue and other valuation assumptions.
Most important facts for investors to verify
- Whether revenue growth converts into sustained operating-margin improvement after Stability integration and continued sales-force investment.
- The status and potential commercial impact of the FDA’s position on micronized products and the Company’s BLA process.
- Progress in remediating the material weakness in tax accounting and whether additional control deficiencies emerge.
- Actual cash payments and accounting changes associated with the Stability earn-out and related-party payable.
- Exposure from patent litigation, PTAB proceedings, former-employee lawsuits, and any related legal costs or settlements.
- The effect of reimbursement policy changes, VA purchasing procedures, the AvKARE agreement expiration on June 30, 2017, and Government-account concentration.
- Cash generation after share repurchases, capital expenditures, acquisition spending, and working-capital requirements.