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MDXG > SEC Filings for MDXG > Form 10-Q on 10-May-2013All Recent SEC Filings

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Form 10-Q for MIMEDX GROUP, INC.


10-May-2013

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.


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Recent Events

During the months of January and February 2013, all holders of the Convertible Senior Secured Promissory Notes converted their interest in this obligation to shares of MiMedx common stock. The number of shares of common stock issued as a result of these transactions totaled approximately 5,272,000. In connection with this conversion, the Company expensed, during the quarter, approximately $1,328,000 of debt discount and deferred financing costs. Included in this total are approximately 532,000 shares representing the Chief Executive Officer's conversion of his Note.

On January 31, 2013, the Company entered into a lease agreement (the "Lease") under which the Company will lease approximately 80,000 square feet of office, laboratory and warehouse space in Marietta, Georgia. The building will become the Company's new corporate headquarters. The initial term of the lease is sixty nine (69) months commencing on
May 1, 2013. Base rental payments over the term of the lease total approximately $6,700,000. Under the Lease, the Company has posted a security deposit of approximately $500,000 of which $250,000 was paid after the end of the first quarter 2013.

In March of 2013, the Company issued approximately 1,175,000 shares of Common Stock in final settlement of the earn-out liability connected with the 2011 acquisition of Surgical Biologics.

During the quarter, the Company was granted one international patent for the hydrogel technology, one US patent for the collagen technology, and four US patents for the amnion technology. Additionally, we filed sixteen applications during the most recent quarter, including five non-provisional applications for the collagen technology and eleven non-provisional applications for the amnion technology.

Results of Operations Comparison for the Three Months Ended March 31, 2013 to the Three Months Ended March 31, 2012

Revenue

Total revenue increased approximately $7,851,000 to $11,557,000 for the three months ended March 31, 2013, as compared to $3,706,000 for the three months ended March 31, 2012. 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 an approximate increase of $2,551,000 or 127% in demand in the Surgical and Sports Medicine market. This growth over prior year was driven by increased use of our AmnioFix injectable products as well as additional surgical applications where the anti-scarring properties of the tissue were deemed to be beneficial. The growth in Wound Care market revenue of approximately $5,184,000 or 444% as compared to $1,169,000 in the prior year driven by the addition of a direct sales force starting in the third quarter of 2012 and continuing into the first quarter of 2013 focusing on Government accounts. The sales executives hired have extensive experience in the wound care sector and maintain direct relationships with the physicians. Sales to Government accounts are sold through a distributor who handles all of the contracting matters including invoicing and collection. This distributor is also a service disabled veteran owned small business. The Other markets category which includes our Ophthalmic and Dental tissue based products which are sold on an OEM basis as well as our HydroFix® medical device product sold through distributors increased approximately $115,000 or22% as compared to prior year.

Tissue Processing Costs and Cost of Products Sold

Cost of products sold as a percentage of revenue improved to 16.5% from 25.9% as compared to prior year. The improvement was due primarily to the increase in direct sales revenue, improved product mix and higher production rates that absorb a greater percentage of fixed manufacturing costs. Personnel costs represent approximately $1,127,000 or 59.2% of total manufacturing, quality assurance and recovery spending for the three months ended year March 31, 2013.


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Research and Development Expenses

Our research and development expenses ("R&D expenses") increased approximately $840,000 or 206.3% to $1,247,000 during the three months ended March 31, 2013, compared to approximately $407,000 in the prior year. The increase is primarily related to increased investments in clinical trials and patent related costs. Approximately $233,000, or 18.7%, of R&D expenses for the three months ended March 31, 2013 were attributable to personnel costs, compared to approximately $136,000 or 33.4% for the three months ended March 31, 2012.

Our research and development expenses consist primarily of internal personnel costs, clinical trials, fees paid to external consultants, and supplies and instruments used in our laboratories.

Selling, General and Administrative Expenses

Selling, General and Administrative expenses for the three months ended March 31, 2013, increased approximately $5,732,000 to $8,369,000 compared to $2,637,000 for the three months ended March 31, 2012. 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 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, excluding sales commissions and bonuses, represent approximately $1,571,000 or 18.8% of total Selling, General and Administrative expenses in the first quarter of 2013.

Net Interest Expense

We recorded financing and net interest expense of approximately $1,343,000 during the three months ended March 31, 2013, compared with approximately $462,000 of financing and net interest expense during the three months ended March 31, 2012. The increase of approximately $881,000 is primarily due to the acceleration of debt discount related to the conversion of 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 March 31, 2013 and 2012:

                                                                     Three Months Ended March 31,
                                                 2013                                                            2012
                         Debt          Accrued        Interest                                            Accrued        Interest
                       Discount        Interest        Expense          Total         Debt Discount       Interest        Expense         Total
Convertible line of
credit with related
party                 $         -     $        -     $         -     $         -     $        11,423     $   16,205     $         -     $  27,628
Converted debt
related to
acquisition                     -              -               -               -              80,353         10,521               -        90,874
Convertible Senior
secured promissory
notes                   1,328,439         11,571               -       1,340,010             213,954        123,288               -       337,242
Deferred financing
related to senior
secured promissory
notes                           -              -               -               -               4,747              -               -         4,747
Other                           -              -           3,233           3,233                   -              -           1,796         1,796
                      $ 1,328,439     $   11,571     $     3,233     $ 1,343,243     $       310,477     $  150,014     $     1,796     $ 462,287

Liquidity and Capital Resources

Revenue continues to increase quarter over quarter while management maintains tight controls over spending. As of March 31, 2013, the Company had approximately $5,725,000 of cash and cash equivalents. The Company reported total current assets of approximately $20,689,000 and total current liabilities of approximately $5,971,000 at March 31, 2013. The current ratio for the period decreased to 3.5 as compared to 3.6 as of December 31, 2012. Management believes that its anticipated cash from operating and financing activities and existing cash and cash equivalents will enable the Company to meet its operational liquidity needs and fund its planned investing activities for the next year.


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Contractual Obligations

Contractual obligations associated with our ongoing business activities are
expected to result in cash payments in future periods. The table below
summarizes the amounts and estimated timing of these future cash payments as of
March 31, 2013:

                                              Less than                                    More than
  Contractual Obligations        TOTAL          1 year       1-3 years      3-5 years       5 years

Capital lease obligations     $   160,980         22,816         69,423         66,558          2,183
Operating lease obligations       375,820        243,630        132,190              -              -
Royalty payments                  550,000              -        100,000        100,000        350,000
                              $ 1,086,800        266,446        301,613        166,558        352,183

Discussion of cash flows

Net cash used in operations during the three months ended March 31, 2013, increased approximately $810,000 to $2,098,000 compared to $1,288,000 used in operating activities for the three months ended March 31, 2012, primarily attributable to increases in accounts receivable and inventory offset by increases in accrued compensation and accrued expenses.

Net cash used in investing activities during the three months ended March 31, 2013, increased approximately $27,000 to $74,000 compared to $47,000 used in investing activities for the three month period ended March 31, 2013. The increase was due to increased purchases of property and equipment.

Net cash flows from financing activities during the three months ended March 31, 2013 increased approximately $898,000 to $1,142,000 compared to $244,000 during the three months ended March 31, 2012. Cash flows from financing activities during the current quarter include approximately $925,000 received from the exercise of warrants, approximately $232,000 received from the exercise of stock options, and $15,000 in payments on capital lease obligations for equipment.

Due to the material amount of non-cash related items included in the Company results of operations, the Company has developed an Adjusted EBITDA metric which provides management with a clearer view of operational use of cash (see the table below). The Adjusted EBITDA for the first quarter of 2013 was approximately $1,119,000 which is an improvement of approximately $805,000 as compared to the prior year quarter. This improvement was the result of increased revenue and improved gross margins.

We use various numerical measures in investor conference calls, investor meetings and other forums which are or may be considered "Non-GAAP financial measures" under Regulation G. We have provided below for your reference, supplemental financial disclosure for these measures, including the most directly comparable GAAP measure and an associated reconciliation.


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The following table provides reconciliation of reported Net Loss on a GAAP basis to Adjusted EBITDA defined as Earnings before Interest, Taxes, Depreciation, Amortization and Share-Based Compensation:

                                                                 Three Months Ended March 31,
                                                                    2013                2012
Net Loss (Per GAAP)                                            $    (1,620,408 )    $ (1,093,652 )

Add back:
Income Taxes                                                            50,275                 -
Financing expense associated with beneficial conversion of
note payable issued in conjunction with acquisition                          -            80,353
Financing expense associated with beneficial conversion of
Line of Credit with Related Party                                            -            11,423
Financing expense associated with beneficial conversion of
Senior Secured Promissory Notes                                      1,328,439           218,701
Other interest expense, net                                             14,804           151,810
Depreciation Expense                                                    98,751           110,388
Amortization Expense                                                   262,596           333,977
Share Based Compensation                                               984,792           500,985
Earnings/(Loss) Before Interest, Taxes, Depreciation,
Amortization and Share-Based Compensation                      $     1,119,249      $    313,985

Critical Accounting Policies

In preparing our financial statements we follow accounting principles generally accepted in the United States, which require us to make certain estimates and apply judgments that affect our financial position and results of operations. We continually review our accounting policies and financial information disclosures. A summary of our significant accounting policies that require the use of estimates and judgments in preparing the financial statements was provided in our Annual Report on Form 10-K for the year ended December 31, 2012. During the first three months of fiscal 2013, there were no material changes to the accounting policies and assumptions previously disclosed.

Recent Accounting Pronouncements
For the effect of recent accounting pronouncements, see Item 1 Financial Statements - Note 2.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

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