MiMedx Group, Inc. — Form 10-Q Summary
Business context and reporting period
MiMedx develops, manufactures and markets regenerative biomaterials and bioimplants, including amniotic tissue products such as EpiFix and AmnioFix, and device technologies including HydroFix and CollaFix. The company operates in one Biomaterials segment. This filing covers the unaudited three months ended March 31, 2013, compared with the three months ended March 31, 2012.
Financial results and key metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $11.56 million | $3.71 million | Up approximately 212% |
| Gross margin | $9.65 million; 83.5% | $2.75 million; 74.1% | Improved approximately 9.4 percentage points |
| Operating income (loss) | $(0.23) million | $(0.63) million | Improved $0.40 million |
| Net income (loss) | $(1.62) million | $(1.09) million | Loss increased $0.53 million |
| Net loss per share | $(0.02) | $(0.01) | Based on weighted-average shares of 93.1 million and 74.9 million |
| Cash flow from operations | $(2.10) million | $(1.29) million | Cash use increased $0.81 million |
| Adjusted EBITDA | $1.12 million | $0.31 million | Improved $0.81 million |
Cost of sales declined to 16.5% of revenue from 25.9%, reflecting higher direct sales, improved product mix and greater absorption of fixed manufacturing costs. Research and development expense increased 206% to $1.25 million, primarily due to clinical trials and patent-related costs. Selling, general and administrative expense increased 217% to $8.37 million, driven by sales-force expansion, reimbursement support, infrastructure, commissions, share-based compensation and anticipated management incentive costs.
Cash and cash equivalents were $5.73 million at March 31, 2013, compared with $6.75 million at December 31, 2012. Current assets were $20.69 million and current liabilities were $5.97 million, producing a reported current ratio of approximately 3.5. Accounts receivable increased to $9.82 million and inventory increased to $3.96 million. Management stated that existing cash and anticipated operating and financing cash flows were expected to fund operating and planned investing needs for the following twelve months.
All convertible senior secured promissory notes were converted into approximately 5.27 million common shares during January and February 2013. Accordingly, reported debt and the related earn-out liability were zero at March 31, 2013, although the debt conversion caused approximately $1.33 million of accelerated non-cash debt-discount and financing-cost expense. Capital lease obligations and other contractual commitments remained outstanding.
Material changes versus the prior comparable period
- Revenue growth was led by amniotic tissue products, including approximately $5.18 million of additional Wound Care revenue and approximately $2.55 million of additional Surgical and Sports Medicine revenue.
- Gross margin expanded materially, but increased operating investments prevented positive GAAP operating income.
- Net loss worsened despite improved operating loss because of the $1.33 million non-cash debt-conversion charge and higher income tax provision.
- Operating cash use increased primarily because accounts receivable, inventory and prepaid expenses increased.
- Approximately 1.18 million shares were issued to settle the Surgical Biologics acquisition earn-out, and approximately 785,000 shares were issued through warrant exercises for approximately $0.92 million of cash proceeds.
- Shares outstanding increased to approximately 95.8 million at March 31, 2013 from approximately 88.4 million at December 31, 2012.
Guidance, outlook, risks and unusual items
The filing does not provide a clear numerical revenue, earnings or cash-flow guidance forecast. Management reported continued quarter-over-quarter revenue growth, spending controls and confidence that available and anticipated funding would satisfy operational liquidity needs for the next year.
The company entered into a 69-month lease for approximately 80,000 square feet of office, laboratory and warehouse space beginning May 1, 2013. Base rent over the term was approximately $6.7 million, and the required security deposit totaled approximately $500,000, including $250,000 paid after quarter-end.
Customer concentration is significant: two customers represented approximately 75% of first-quarter revenue and 76% of accounts receivable at March 31, 2013. The company reported no legal proceedings, no material changes to previously disclosed risk factors other than customer concentration, and no off-balance-sheet arrangements. The company had approximately $43.1 million of federal net operating loss carryforwards and maintained a full valuation allowance against deferred tax assets.
Management stated that disclosure controls were effective and that there were no material changes to internal control over financial reporting. Forward-looking statements remain subject to industry conditions, product adoption, regulatory or clinical delays, and the company's financial condition.
Important facts for investors to verify
- Whether rapid revenue growth, particularly in Wound Care and Government accounts, is sustainable and sufficiently diversified.
- Collection of the substantially increased accounts receivable balance and the financial condition of the two major customers.
- Whether inventory growth is supported by demand and does not result in additional obsolescence charges.
- The effect of the new facility lease and other contractual commitments on future cash requirements.
- The company's ability to reach sustained GAAP profitability after elevated sales, infrastructure, research and development and compensation spending.
- The dilutive effect of approximately 16.0 million outstanding stock options and 2.3 million outstanding warrants, in addition to shares already issued for debt conversion and the earn-out.
- Execution of the company's stated liquidity plan given quarterly operating cash use of approximately $2.1 million.