MiMedx Group, Inc. — Form 10-Q Summary
Business context and reporting period
MiMedx is a single-segment developer, manufacturer and marketer of regenerative biomaterials and bioimplants, including products processed from human amniotic membrane. This report covers the three and six months ended June 30, 2011, with comparative periods ended June 30, 2010. The company acquired Surgical Biologics, LLC on January 5, 2011, expanding its amniotic tissue-processing and distribution capabilities.
Financial performance and position
| Metric | Three months ended June 30, 2011 | Six months ended June 30, 2011 |
|---|---|---|
| Net sales | $1.929 million | $2.973 million |
| Cost of products sold | $0.789 million | $1.448 million |
| Gross profit | $1.140 million | $1.525 million |
| Gross margin | 59.1% | 51.3% |
| Loss from operations | $(2.416) million | $(5.673) million |
| Operating margin | (125.2%) | (190.8%) |
| Net loss | $(2.504) million | $(5.851) million |
| Basic and diluted loss per share | $(0.03) | $(0.08) |
- Second-quarter revenue increased 499% from $0.322 million in the prior-year quarter and 84.9% from the first quarter of 2011. Six-month revenue increased 580.3% from $0.437 million in the prior-year period.
- Gross margin improved substantially from negative margins in 2010, when cost of products sold exceeded revenue. Management attributed the improvement primarily to higher sales and production volumes.
- Six-month research and development expense was $1.510 million, up from $1.325 million, while selling, general and administrative expense was $5.687 million, up from $3.543 million.
- Non-GAAP loss before interest, taxes, depreciation, amortization and share-based compensation was $(1.423) million for the second quarter and $(3.751) million for the six months. The filing identifies this as a management measure rather than a GAAP performance measure.
- Cash and cash equivalents were $1.614 million at June 30, 2011, compared with $1.341 million at December 31, 2010. Total current assets were $3.623 million and total current liabilities were $5.564 million, including $3.850 million of earn-out liability payable in MiMedx stock.
- After excluding the stock-settled short-term earn-out liability, management reported approximately $1.714 million of current liabilities payable in cash and a current ratio of approximately 2.1.
- Operating cash flow was $(3.920) million for the six months, compared with $(3.901) million in the prior-year period. Investing cash flow was $(0.610) million, including $0.466 million paid for the Surgical Biologics acquisition. Financing cash flow was $4.803 million.
- At June 30, 2011, liabilities included $0.959 million of acquisition-related convertible debt, $1.241 million under a convertible line of credit with the chairman and CEO, $0.055 million of notes payable and $7.405 million of earn-out liability, of which $3.850 million was classified as current.
Material changes versus prior comparable periods
- The Surgical Biologics acquisition contributed significant revenue growth and added customer relationships, patents and know-how, licenses, trademarks and in-process research and development. The acquisition was valued at approximately $16.425 million, including $7.088 million of MiMedx stock, $1.250 million of convertible notes, $0.500 million of cash and $7.405 million of contingent earn-out consideration.
- Goodwill increased to $4.040 million from $0.858 million, and net intangible assets increased to $15.758 million from $3.929 million. Acquisition-related amortization increased six-month expense by approximately $0.334 million.
- Shares outstanding increased to 73.647 million at June 30, 2011 from 64.332 million at December 31, 2010. The increase included 5.250 million shares issued for the Surgical Biologics acquisition, 3.633 million shares sold in a private placement and 0.407 million shares issued upon conversion of debt.
- Second-quarter cost of products sold declined to 40.9% of revenue from 63.1% in the first quarter and 135.4% in the prior-year quarter. Six-month cost of products sold was 48.7% of revenue versus 186.6% in the prior-year period.
- The company launched EpiFix and AmnioFix Nerve Wrap, received three 510(k) clearances for HydroFix products and began consolidating operations by closing its Tampa facility on July 1, 2011.
Guidance, outlook, risks and unusual items
- Management stated that second-quarter revenue was in line with expectations and expected higher production volumes to support further gross-margin improvement. No formal full-year revenue or earnings guidance was provided.
- Management believed cash from operations, existing cash and the related-party credit facility would fund operating needs, planned investing activities and debt payments for the next twelve months. This expectation is subject to continued sales growth and access to financing.
- The company raised approximately $2.421 million through a private placement during the quarter and borrowed $1.300 million under a revolving secured line of credit with its chairman and CEO. The credit facility had no additional availability after considering the private placement and borrowings, although the company could repay and reborrow subject to the agreement.
- Material liquidity risks include recurring operating cash burn, continuing net losses, debt maturities, contingent earn-out obligations, dependence on equity financing and reliance on a related-party lender.
- Two customers represented approximately 44% of second-quarter revenue, and two customers represented approximately 30% of accounts receivable at June 30, 2011. This concentration creates customer, collection and distribution-channel risk.
- The company had approximately $21.009 million of potentially dilutive securities excluded from diluted EPS because they were anti-dilutive, including options, warrants, the related-party convertible line of credit and acquisition-related convertible debt.
- Contractual obligations totaled approximately $3.739 million, including convertible debt, employment agreements, operating leases, royalties and notes payable. A new facility lease entered into July 1, 2011 added estimated future payments of approximately $443,000.
- The filing reports no material legal proceedings, no defaults under senior securities and no off-balance-sheet arrangements. Management reported effective disclosure controls as of June 30, 2011.
Important facts for investors to verify
- Whether revenue growth from Surgical Biologics and amniotic tissue products is sustainable and converts into positive operating and free cash flow.
- The timing, calculation and ultimate settlement of the approximately $7.405 million Surgical Biologics earn-out, including the potential share dilution.
- Debt maturity dates, conversion terms, collateral arrangements and related-party financing terms.
- The effect of 10.435 million outstanding options, 8.024 million warrants and 3.923 million contingent warrants on future dilution.
- Customer concentration, accounts receivable collectability and the ability to broaden distribution channels.
- Regulatory, clinical, patent and commercialization progress for EpiFix, AmnioFix, HydroFix and CollaFix products.
- Potential impairment of goodwill and intangible assets, which totaled approximately $19.799 million at June 30, 2011.