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MDXG > SEC Filings for MDXG > Form 10-Q on 13-Nov-2012All Recent SEC Filings

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Form 10-Q for MIMEDX GROUP, INC.


13-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

MiMedx Group, Inc. ("MiMedx Group") is an integrated developer, manufacturer and marketer of patent-protected regenerative biomaterials and bioimplants processed from human amniotic membrane.

"Innovations in Regenerative Biomaterials" is the framework behind our mission to give physicians products and tissues to help the body heal itself. Our biomaterial platform technologies include the device technologies HydroFix® and CollaFix™, and our tissue technologies, AmnioFix® and EpiFix®. Our tissue technologies, processed from the human amniotic membrane, utilize our proprietary Purion® process that was developed by our wholly-owned subsidiary, Surgical Biologics, to produce a safe, effective and minimally manipulated implant.

Recent Events

During the period the Company raised approximately $4,933,100 from Callable Warrants issued in the October 2010 Private Placement resulting in a net cash balance of approximately $7,621,226 as of September 30, 2012.

Also during the period the Company Voided a total of approximately 3,245,000 Second Contingent Warrants issued in the October 2010 Private Placement and in connection with the Senior Secured Promissory Notes.

On July 5, 2012, the Company paid approximately $177,126 in cash and issued 893,267 shares of common stock in full payment of the Convertible Secured Promissory Notes related to the acquisition of Surgical Biologics.

Results of Operations comparison for the Three Months Ended September 30, 2012 to the Three Months Ended September 30, 2011

Revenue

Total revenue increased approximately $5,802,000 to $7,954,000 for the three months ended September 30, 2012, as compared to $2,152,000 for the three months ended September 30, 2011. The increase in revenue as compared to the prior year is due primarily to increased sales of our amniotic membrane tissue products, EpiFix® and AmnioFix®. The Company experienced strong demand in the Spine, Wound Care, Ophthalmology, Sports Medicine and Orthopedics markets. Increased demand for the Spine, Orthopedic and Sports Medicine allografts was a result of growth in business with the Company's indirect sales force which consists of independent sales agents and distributors. This growth over the prior period was driven by the addition of certain distributors as well as the continued expansion and growth of our existing distribution network. The growth in Wound and to a lesser degree Sports Medicine was driven by the addition of a direct sales force in the period focusing on Government accounts. The sales executives hired have extensive experience in the wound care sector. This is the first quarter where wound care market shipments exceeded spine, orthopedics and sports medicine since the acquisition of Surgical Biologics.


Table of Contents

Tissue Processing Costs and Cost of Products Sold

Cost of products as a percentage of revenue improved to 17.9% from 41.2% as compared to prior year. The improvement was due to the increase in revenue as well as product mix. The Company more than doubled the number of tissue processors and increased the number of recovery technicians in support of the increased demand for tissue. Processing efficiency was impacted by the need to train the new employees but is expected to improve in subsequent periods. Personnel costs represent approximately $905,000 of total manufacturing, quality assurance and regulatory spending for the three months ended September 30, 2012.

Beginning in 2012, the Company decided to allocate both depreciation expense and share-based compensation to each functional area. These expenses were reclassified in the prior year to maintain comparability. The amount of depreciation expense in cost of products sold was approximately $42,000 and $26,000, and the amount of share-based compensation in cost of products sold was $12,000 and $18,000 for the three months ended September 30, 2012 and 2011, respectively.

Research and Development Expenses

Our research and development expenses ("R&D expenses") increased approximately $277,000 or 49.4% to $839,000 during the three months ended September 30, 2012, compared to approximately $562,000 in the prior year. The increase is primarily related to increased investments in clinical trials and patent related costs. During the most recent quarter, the Company spent approximately $165,000 on clinical studies. Approximately $209,000, or 24.9%, of R&D expenses for the three months ended September 30, 2012 were attributable to personnel costs, compared to approximately $199,000 or 35.5% for the three months ended September 30, 2011. Additionally, as described above in Cost of Products Sold, beginning in 2012, we decided to allocate both depreciation expense and share-based compensation expense to other functional areas, and have reclassified prior year amounts to maintain comparability. During the three months ended September 30, 2012 and 2011, we recorded approximately $30,000 and $31,000 for depreciation expense and approximately $71,000 and $45,000 for share-based compensation expense, respectively, to research and development.

Our research and development expenses consist primarily of internal personnel costs, fees paid to external consultants, and supplies and instruments used in our laboratories. During the quarter, the Company was granted 1 US patent for the hydrogel technology and 2 European patents for the collagen technology. Additionally, we filed 11 applications during the most recent quarter, including 1 non-provisional application for collagen technology, 6 non-provisional applications for amnion technology, and 4 provisional applications for amnion.

Selling, General and Administrative Expenses

Selling, General and Administrative expenses for the three months ended September 30, 2012, increased approximately $3,850,000 to $6,206,000 compared to $2,356,000 for the three months ended September 30, 2011. Selling expense increases were driven by costs associated with building our direct sales organization for government accounts and to a lesser degree our commercial direct sales organization as well as increased commissions due to higher sales volume. Increased spending on support costs related to medical reimbursement including our 24-hour reimbursement hotline, our information technology infrastructure to help manage the growth of the business, increased share based compensation expense and a provision for anticipated costs associated with its management incentive program. Selling, general and administrative expenses consist of personnel costs, professional fees, sales commissions, sales training costs, industry trade show fees and expenses, product promotions and product literature costs, facilities costs and other sales, marketing and administrative costs, depreciation and amortization, and share-based compensation. Personnel costs represent approximately $3,228,000 or 52.0% of total Selling, General and Administrative expenses in the third quarter of 2012.

Historically, the Company has reported depreciation and share-based compensation expense as part of selling, general and administrative expense. The Company decided to report these expenses in each functional area in order to more accurately present all of the costs attributable to each functional area. During the three months ended September 30, 2012 and 2011, we recorded a total of approximately $123,000 and $99,000 in depreciation expense allocated to each functional area per the table below. The overall $24,000 increase in depreciation was attributable to purchases of production equipment to support the revenue growth. We depreciate our assets on a straight-line basis, principally over five to seven years.


Table of Contents

The following table shows the allocation of depreciation for the three months ended September 30, 2012 and 2011, to operating departments:

                                             Three Months Ended September 30,
    Depreciation expense included in:           2012                   2011
    Cost of products sold                 $          41,760       $        25,594
    Research and development                         29,804                31,480
    Selling, general and administrative              51,370                41,915
                                          $         122,934       $        98,989

Share-based compensation for the three months ended September 30, 2012 and 2011, was approximately $670,000 and $286,000, respectively, an increase of approximately $384,000 or 134.3%. Increased employee stock option grants reflecting management's philosophy of aligning employee compensation with investor objectives was the primary reason for the increase in expense. The following table shows the allocation of share-based compensation for the three and nine months ended September 30, 2012 and 2011, to operating departments:

                                              Three Months Ended September 30,
   Share-based compensation included in:         2012                   2011
   Cost of products sold                   $         11,643       $         17,549
   Research and development                          70,754                 44,830
   Selling, General and administrative              587,072                223,359
                                           $        669,469       $        285,738

We recorded approximately $450,000 and $334,000 in amortization expense related to intangible assets in the three months ending September 30, 2012 and 2011, respectively. The increase in amortization expense in the most recent quarter was a result of initiating amortization expense related to the acquired Research and Development costs associated with our micronized EpiFix® product. After completing the developmental stage, we began selling the micronized product in early 2012, and recorded amortization expense of $90,000 during the most recent quarter. We amortize our intangible assets over a period of three to fourteen years, which we believe represents the remaining useful lives of the patents underlying the licensing rights and intellectual property. We do not amortize goodwill but we test at least annually our goodwill for impairment and periodically evaluate other intangibles for impairment based on events or changes in circumstances as they occur.

Intangible Asset Impairment

We tested for impairment of the Intangible Assets related to the Licenses for SaluMedica LLC. Spine Repair and Polyvinyl Alcohol Cryogel as of September 30, 2012 using an undiscounted cash flow methodology. The impairment was the result of the HydroFix product line experiencing slower than projected growth in each of its markets.

Because our test indicated that the carrying value of the assets related to HydroFix exceeded its fair value, an impairment loss of approximately $1,799,000 was recognized and the intangible asset carrying amount was adjusted to its new basis. The Impairment was reported as a separate line item in the Condensed Consolidated Statement of Operations and included in the reported Loss From Operations.

All other intangible assets will be tested as of December 31, 2012 as per the date of our regular annual testing.

Fair value Adjustment of Earnout Liability

As of September 30, 2012, the Company evaluated the 2012 contingent liability associated with the acquisition of Surgical Biologics, LLC. Based upon operating results for the nine months ended September 30, 2012, and an estimate of fourth quarter tissue related revenue, the Company recorded a fair value adjustment of $1,320,000 and increased the 2012 earn-out liability to $5,545,280.


Table of Contents

Net Interest Expense

We recorded financing and net interest expense of approximately $585,000 during
the three months ended September 30, 2012, compared with approximately $113,000
of financing and net interest expense during the three months ended September
30, 2011. The increase of approximately $472,000 is primarily due to interest
related to our Convertible Senior Secured Promissory Notes, which were issued
during the last quarter of 2011. The following table summarizes the interest
charges for the three months ended September 30, 2012 and 2011:

                                                                    Three Months Ended September 30,
                                                  2012                                                           2011
                         Amortization                     Interest                     Amortization                       Interest
                            of Debt         Accrued       Expense,                       of Debt           Accrued        Expense,
                           Discount        Interest         net           Total          Discount          Interest         net           Total
Convertible Line of
Credit with Related
Party                   $      181,224     $  16,384     $        -     $ 197,608     $       11,084     $    16,384     $        -     $  27,468
Convertible Debt
related to
acquisition                      3,821           585              -         4,406             69,605          12,603              -        82,208
Convertible Senior
Secured Promissory
Notes                          248,854       126,027              -       374,881                  -               -              -             -
Deferred financing
related to Senior
Secured Promissory
Notes                            5,164             -              -         5,164                  -               -              -             -
Other                                -             -          2,586         2,586                  -               -          3,690         3,690
                        $      439,063     $ 142,996     $    2,586     $ 584,645     $       80,689     $    28,987     $    3,690     $ 113,366

Results of Operations comparison for the Nine Months Ended September 30, 2012 to the Nine Months Ended September 30, 2011

Revenue

Total revenue increased approximately $11,419,000 to $16,544,000 for the nine months ended September 30, 2012, as compared to $5,125,000 for the nine months ended September 30, 2011. The increase in revenue as compared to the prior year is due primarily to increased sales of our amniotic membrane tissue products, EpiFix® and AmnioFix®. The Company experienced strong demand in the Spine, Wound Care, Ophthalmology, Sports Medicine and Orthopedics markets. Increased demand for the Spine, Orthopedic and Sports Medicine allografts was a result of growth in business with the Company's indirect sales force which consists of independent sales agents and distributors. This growth over the prior period was driven by the addition of certain distributors as well as the continued expansion and growth of our existing distribution network. The growth in Wound and to a lesser degree Sports Medicine was driven by the addition of a direct sales force in the period focusing on Government accounts. The sales executives hired have extensive experience in the wound care sector. On a year to date basis, the Spine, Orthopedics and Sports Medicine market shipments exceed shipments into the wound care market.

Tissue Processing Costs and Cost of Products Sold

Cost of products as a percentage of revenue improved to 21.2% from 47.6% as compared to prior year. The improvement was due primarily to the increase in revenue and product mix. During the second quarter the Company increased its clean room capacity from one line to three lines. In the third quarter that Company more than doubled the number of tissue processors to fully staff the new production lines. The expansion of production capacity was driven by increased demand for processed tissue. The new hires were given extensive training during the third quarter resulting in increasing daily processing rates over the course of the quarter. It is anticipated that production efficiencies will improve in subsequent quarters for these new hires. Personnel costs represent approximately $1,918,000 or 54.8% of total manufacturing, quality assurance and regulatory spending for the nine months ended September 30, 2012.

Beginning in 2012, the Company decided to allocate both depreciation expense and share-based compensation to each functional area. These expenses were reclassified in the prior year to maintain comparability. The amount of depreciation expense in cost of products sold was approximately $115,000 and $78,000, and the amount of share-based compensation in cost of products sold was $65,000 and $72,000 for the nine months ended September 30, 2012 and 2011, respectively.


Table of Contents

Research and Development Expenses

Our research and development expenses ("R&D expenses") decreased approximately $567,000 or 24.5% to $1,749,000 during the nine months ended September 30, 2012, compared to approximately $2,316,000 in the prior year. The decrease is primarily related to the closure of our Tampa research facility in mid-2011, along with decreased spending on animal studies for our CollaFix™ and HydroFix® products. Approximately $542,000, or 31.0%, of R&D expenses for the nine months ended September 30, 2012 were attributable to personnel costs, compared to approximately $620,000 or 26.8% for the nine months ended September 30, 2011. Development and testing costs were approximately $94,000 and $497,000 for the nine months ended September 30, 2012 and 2011, respectively. This decrease of approximately $403,000 is a result of lower costs in animal studies related to our CollaFix™ and HydroFix® products. Additionally, as described above in Cost of Products Sold, beginning in 2012, we decided to allocate both depreciation expense and share-based compensation expense to other functional areas, and have reclassified prior year amounts to maintain comparability. During the nine months ended September 30, 2012 and 2011, we recorded approximately $90,000 and $91,000 for depreciation expense, respectively, and approximately $218,000 and $229,000 for share-based compensation expense, respectively, to research and development.

Our research and development expenses consist primarily of internal personnel costs, fees paid to external consultants, and supplies and instruments used in our laboratories. During the current year, the Company filed 3 international patent applications for the amniotic tissue technology and 1 international patent application for the collagen technology. The Company also filed 11 US patent applications, including 6 non-provisional applications for the amnion technology, 4 provisional applications for the amnion technology and 1 non-provisional application for the collagen technology. Additionally, during the current year the Company was granted 3 US patents for the hydrogel technology, 1 US patent for the collagen technology, and 2 European patents for the collagen technology.

Selling, General and Administrative Expenses

Selling, General and Administrative expenses for the nine months ended September 30, 2012, increased approximately $4,868,000 or 63.3% to $12,561,000 compared to $7,693,000 for the nine months ended September 30, 2011. Selling expense increases were driven by costs associated with building our direct sales organization for government accounts and to a lesser degree our commercial direct sales organization as well as increased commissions due to higher sales volume. Increased spending on support costs related to medical reimbursement including our 24-hour reimbursement hotline, our information technology infrastructure to help manage the growth of the business, increased share based compensation expense and a provision for anticipated costs associated with its management incentive program. General and administrative expenses consist of personnel costs, professional fees, sales commissions, sales training costs, industry trade show fees and expenses, product promotions and product literature costs, facilities costs and other sales, marketing and administrative costs, depreciation and amortization, and share-based compensation. Personnel costs represent approximately $5,459,000 or 43.5% of total Selling, General and Administrative expenses in the nine months ended September 30, 2012, compared to approximately $2,335,000 or 30.4% in the nine months ended September 30, 2011.

Historically, the Company has reported depreciation and share-based compensation expense as part of selling, general and administrative expense. The Company decided to report these expenses in each functional area in order to more accurately present all of the costs attributable to each functional area. During the nine months ended September 30, 2012 and 2011, we recorded a total of approximately $354,000 and $331,000 in depreciation expense allocated to each functional area per the table below. The overall $23,000 increase in depreciation was attributable to the purchase of additional production and office equipment and leasehold build-out to support our revenue growth and additional staff. We depreciate our assets on a straight-line basis, principally over five to seven years.


Table of Contents

The following table shows the allocation of depreciation for the nine months ended September 30, 2012 and 2011, to operating departments:

                                              Nine Months Ended September 30,
    Depreciation expense included in:           2012                   2011
    Cost of products sold                 $        114,729       $         78,350
    Research and development                        90,491                 90,694
    Selling, general and administrative            149,206                161,808
                                          $        354,426       $        330,852

Share-based compensation for the nine months ended September 30, 2012 and 2011, was approximately $1,756,000 and $1,317,000, respectively, an increase of approximately $439,000 or 33.3%. Increased employee stock option grants reflecting management's philosophy of aligning employee compensation with investor objectives was the primary reason for the increase in expense. The following table shows the allocation of share-based compensation for the nine months ended September 30, 2012 and 2011, to operating departments:

                                               Nine Months Ended September 30,
   Share-based compensation included in:         2012                   2011
   Cost of products sold                   $         65,132       $         71,570
   Research and development                         217,885                229,401
   Selling, General and administrative            1,472,652              1,016,443
                                           $      1,755,669       $      1,317,414

We recorded approximately $1,118,000 and $1,002,000 in amortization expense related to intangible assets in the nine months ending September 30, 2012 and 2011, respectively. The increase of approximately $116,000 is the result of additional amortization recognized in the current year related to our development costs of our micronized EpiFix® product that we began selling in early 2012. We amortize our intangible assets over a period of three to fourteen years, which we believe represents the remaining useful lives of the patents underlying the licensing rights and intellectual property. We do not amortize goodwill but we test at least annually our goodwill for impairment and periodically evaluate other intangibles for impairment based on events or changes in circumstances as they occur.

Intangible Asset Impairment

We tested for impairment of the Intangible Assets related to the Licenses for SaluMedica LLC. Spine Repair and Polyvinyl Alcohol Cryogel as of September 30, 2012 using an undiscounted cash flow methodology. The impairment was the result of the HydroFix product line experiencing slower than projected growth in each of its markets.

Because our test indicated that the carrying value of the assets related to HydroFix exceeded its fair value, an impairment loss of approximately $1,799,000 was recognized and the intangible asset carrying amount was adjusted to its new basis. The Impairment was reported as a separate line item in the Statement of Operations and included in the reported Loss From Operations.

All other Intangible assets will be tested as of December 31, 2012 as per the date of our regular annual testing.

Fair value Adjustment of Earnout Liability

As of September 30, 2012, the Company evaluated the 2012 contingent liability associated with the acquisition of Surgical Biologics, LLC. Based upon operating results for the nine months ended September 30, 2012, and an estimate of fourth quarter tissue related revenue, the Company recorded a fair value adjustment of $1,320,000 and increased the 2012 earn-out liability to $5,545,280.

Net Interest Expense

We recorded financing and net interest expense of approximately $1,673,000 during the nine months ended September 30, 2012, compared with approximately $292,000 of financing and net interest expense during the nine months ended September 30, 2011. The increase of approximately $1,382,000 is primarily due to interest related to our Convertible Senior Secured Promissory Notes, which were issued during the last quarter of 2011. The following table summarizes the interest charges for each of the nine months ended September 30, 2012 and 2012:


Table of Contents

                                                                      Nine Months Ended September 30,
                                                   2012                                                            2011
                         Amortization                     Interest                       Amortization                      Interest
                           of Debt          Accrued       Expense,                         of Debt          Accrued         Expense,
                           Discount        Interest          net           Total           Discount         Interest          net           Total
Convertible Line of
Credit with Related
Party                   $      343,527     $  48,794     $        -     $   392,321     $       22,002     $   26,342     $         -     $  48,344
Convertible Debt
related to
acquisition                    170,509        21,078              -         191,587            192,204         36,712               -       228,916
Convertible Senior
Secured Promissory
Notes                          693,552       373,973              -       1,067,525                  -              -               -             -
Deferred financing
related to Senior
Secured Promissory
Notes                           14,701             -              -          14,701                  -              -               -             -
Other                                -             -          7,351           7,351                  -              -          14,391        14,391
                        $    1,222,289     $ 443,845     $    7,351     $ 1,673,485     $      214,206     $   63,054     $    14,391     $ 291,651

Liquidity and Capital Resources

. . .

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