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MDXG > SEC Filings for MDXG > Form 10-Q on 8-Nov-2013All Recent SEC Filings

Show all filings for MIMEDX GROUP, INC.

Form 10-Q for MIMEDX GROUP, INC.


8-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
MiMedx Group, Inc. 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 our tissue technologies, AmnioFix® and EpiFix®. Our tissue technologies are processed from human amniotic membrane that is derived from donated placentas. Through our donor program, mothers delivering full-term Caesarean section births can elect in advance of delivery to donate the placenta in lieu of having it discarded as medical waste. We process the human amniotic membrane utilizing our proprietary PURION® process, to produce safe and effective allografts. MiMedx® is the leading supplier of amniotic tissue allografts, having supplied over


190,000 allografts to date to distributors and OEMs for application in the Wound Care, Surgical, Sports Medicine, Ophthalmic and Dental sectors of healthcare.

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 of approximately $5.3 million 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 leased approximately 80,000 square feet of office, laboratory and warehouse space in Marietta, Georgia. The building became the Company's new corporate headquarters in June. The initial term of the lease is sixty nine (69) months. Base rental payments over the term of the lease total approximately $6,700,000. Under the Lease, the Company has two standby letters of credit outstanding for approximately $500,000.
In March of 2013, the Company issued approximately 1,175,000 shares of Common Stock in final settlement of the earn-out liability of approximately $5.8 million connected with the 2011 acquisition of Surgical Biologics. On May 17, 2013, the Company and Bank of America, N.A. (the "Lender") entered into a Loan Agreement (the "Loan Agreement"). The Loan Agreement provides the Company with a secured revolving line of credit (the "Revolving Line of Credit") of up to $3,000,000, and includes a sub-limit of up to $1,000,000 for the issuance of letters of credit. The Revolving Line of Credit is secured by the Company's accounts receivable and inventory. The Company intends to utilize the Revolving Line of Credit for general corporate purposes. As of the date of this filing, the Company has not made any draws under the Revolving Line of Credit.

During the nine months ended September 30, 2013, the Company was granted one international patent for the hydrogel technology, one U.S. patent for the collagen technology, one U.S. patent for the hydrogel technology and seven U.S. patents for the amnion technology.

On September 19, 2013, the Company entered into a Supply Agreement ("Agreement") with Medtronic Sofamor Danek USA, Inc. and Spinal Graft Technologies, LLC ("SGT"), a wholly owned subsidiary of Medtronic, to provide the Company's tissue based product for spine surgeries. The initial term of the Agreement is three years.

FDA Untitled Letter
Initially, MiMedx processed its tissue allografts in only one form, which was a sheet form. In 2011, MiMedx introduced a micronized form of its sheet allografts.
The U.S. Food and Drug Administration, or FDA, has specific regulations governing human cells, tissues and cellular and tissue-based products, or HCT/Ps. An HCT/P is a product containing or consisting of human cells or tissue intended for transplantation into a human patient. If an HCT/P meets the criteria for regulation solely under Section 361 of the Public Health Service Act (so-called "361 HCT/Ps"), no FDA review for safety and effectiveness under a drug, device, or biological product marketing application is required. However, the processor of the tissue is required to register with the FDA, comply with regulations regarding labeling, record keeping, donor eligibility, and screening and testing, process the tissue in accordance with established Good Tissue Practices, and report any adverse events.
To be a 361 HCT/P, a product generally must meet all four of the following criteria:
· It must be minimally manipulated;
· It must be intended for homologous use;


Its manufacture does not involve combination with another article, except for water, crystalloids or a sterilizing, preserving or storage agent;
· and It does not have a systemic effect and is not dependent upon the metabolic activity of living cells for its primary function (unless the product is intended for reproductive use, autologous use, or use in a
· first or second degree blood relative).

MiMedx believes that all of its tissue products qualify as 361 HCT/P's, however, on August 28, 2013, the FDA issued an Untitled Letter alleging that the Company's micronized allografts do not meet the minimal manipulation criteria for regulation solely under Section 361 of the Public Health Service Act due to the "micronization process which alters the original, relevant characteristics of the structural tissue, relating to the tissue's utility for reconstruction, repair or replacement." The Untitled Letter concluded that, as a result, MiMedx would need a biologics license to lawfully market the micronized products. Importantly, the Untitled Letter did not specify which relevant characteristics the FDA believes are altered by the micronization process. As explained on the FDA's website, an "Untitled Letter is an initial correspondence with regulated industry that cites violations that do not meet the threshold of regulatory significance for a Warning Letter." The Company was surprised by the Untitled Letter, considering the FDA conducted a directed inspection of our facility in July 2012, one of the express purposes of which was to determine the status of the Company's AmnioFix® injectable product. The inspection report indicated that "information regarding the firms AmnioFix® Injectable product, which was rolled out August 2011, was collected and forwarded to CBER for review. The information collected included advertising, packaging, process procedures and studies conducted related to the product." Following that inspection, the inspector advised the Company that CBER had completed its review and had no findings or further questions and, therefore, the inspection was classified as NAI, or No Action Indicated. The formal establishment inspection report confirming the NAI conclusion was issued on December 4, 2012.
On October 28, 2013, the Company met with the FDA to present the reasons it believes its micronized products do qualify as 361 HCT/Ps. The FDA acknowledged that our presentation included new information that they would review and consider, and they committed to responding in a timely fashion. We hope that, upon further analysis, the FDA will agree with our position. In all events, we are committed to continuing to work with the Agency to agree on a regulatory solution to ensure that our micronized products are available for patients who can benefit from their clinical effectiveness. If, ultimately, it is determined that our injectable products as currently marketed are not 361 HCT/Ps, in order to continue marketing our injectable products, we could have to do one or more of the following: change the labeling for the injectable products, modify the products or our processes, or go through the process of obtaining an approved biologics license for the injectable products. Any of the foregoing could create additional efforts and financial resources. If it is determined that we must obtain a biologics license for the injectable products, obtaining a biologics license requires substantial time, effort and financial resources and there is no assurance that any approvals for our injectable products will be granted on a timely basis, or at all. Further, unless we are permitted to continue to market our injectable products while we pursue a biologics license, we would have to discontinue marketing of those products. It is also possible that we would have to recall injectable products already on the market, though in light of the FDA's actions in other situations with other HCT/P manufacturers, and the absence of any adverse reactions reported for our product, we consider the possibility of a recall to be remote.


Results of Operations Comparison for the Three Months Ended September 30, 2013 to the Three Months Ended September 30, 2012 Revenue
Total revenue increased approximately $8.1 million, or 103%, to $16.1 million for the three months ended September 30, 2013, as compared to $8.0 million for the three months ended September 30, 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®.
Wound Care market revenue increased by approximately $4.3 million, or 89%, to $9.2 million as compared to $4.9 million in the prior year. Growth was driven by increased revenue in both government and commercial accounts. Beginning in mid-February, the Company expanded its direct sales personnel for the commercial market. The sales executives hired generally have extensive experience in the wound care sector and maintain direct relationships with the physicians. During the quarter, the Company hired an additional nine direct sales personnel primarily for commercial accounts. Sales to government accounts are sold through a distributor that handles all contracting matters, including invoicing and collection. This distributor is also a service disabled veteran owned small business. MiMedx sales personnel manage the physician relationships with the various government accounts.
Surgical and Sports Medicine revenue increased approximately $3.4 million, or 129%, to $6.1 million as compared to $2.7 million in the prior year. The growth was driven by increased use of our AmnioFix ® products in both government and commercial accounts in various sports medicine and surgical applications. The Other markets category, which includes our Ophthalmic and Dental tissue based products that are sold on an OEM basis as well as our HydroFix® medical device product sold through distributors, increased approximately $0.4 million, or 100%, to $0.8 million as compared to $0.4 million in the prior year.

Tissue Processing Costs and Cost of Products Sold Cost of products sold as a percentage of revenue improved to 13.1% from 17.9% 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.

Research and Development Expenses
Our research and development expenses ("R&D expenses") increased approximately $0.5 million, or 53.5%, to $1.3 million during the three months ended September 30, 2013, compared to approximately $0.8 million in the prior year. The increase is primarily related to increased investments in clinical trials, personnel costs, lab supplies, and testing costs.

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 September 30, 2013, increased approximately $7.0 million to $12.7 million compared to $5.7 million for the three months ended September 30, 2012. Selling expense increases were driven by costs associated with building our direct sales organization, increased commissions due to higher sales volume, and increased marketing costs for trade shows and promotions. Additional spending increases included spending on support costs related to medical reimbursement, including our reimbursement hotline; our information technology infrastructure to help manage the growth of the business; and increased share-based compensation expense as well as a provision for anticipated costs associated with the 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.

Net Interest Expense
We recorded financing and net interest expense of approximately $5,000 during
the three months ended September 30, 2013, compared with approximately $146,000
of financing and net interest expense during the three months ended September
30, 2012. The decrease of approximately $141,000 is primarily due to the
conversion and payoff of debt. The following table summarizes the interest
charges for the three months ended September 30, 2013 and 2012:
                                                                Three Months Ended September 30,
                                              2013                                                              2012
                    Debt                                Interest                                         Accrued        Interest
                  Discount       Accrued Interest        Expense        Total        Debt Discount       Interest        Expense         Total
Convertible
line of credit
with related
party           $         -     $               -     $         -     $      -     $       181,224     $   16,384     $         -     $ 197,608
Converted debt
related to
acquisition               -                     -              -             -               3,821            585              -          4,406
Convertible
Senior secured
promissory
notes                     -                     -              -             -             248,855        126,028              -        374,883
Deferred
financing
related to
senior secured
promissory
notes                     -                     -              -             -               5,164             -               -          5,164
Other                    -                     -            4,527        4,527                  -              -            2,585         2,585
                $         -     $               -     $     4,527     $  4,527     $       439,064     $  142,997     $     2,585     $ 584,646


Results of Operations Comparison for the Nine Months Ended September 30, 2013 to the Nine Months Ended September 30, 2012

Revenue
Total revenue increased approximately $24.6 million, or 149%, to $41.2 million for the nine months ended September 30, 2013, as compared to $16.6 million for the nine months ended September 30, 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®.
Wound Care market revenue increased by approximately $16.4 million, or 259%, to $22.8 million as compared to $6.4 million in the prior year. Growth was driven by increased revenue in both government and commercial accounts. In the first half of 2012, the Company sold through existing distributors. The Company made the strategic decision to hire a direct sales force beginning early in the third quarter of 2012, initially focused on government accounts. In January 2013, the Medicare Q code for Epifix® became effective. The Company continued its expansion of its direct sales personnel for the commercial market. The sales executives hired have generally extensive experience in the wound care sector and maintain direct relationships with physicians. Sales to government accounts are sold through a distributor that handles all contracting matters, including invoicing and collection. This distributor is also a service disabled veteran owned small business. MiMedx sales personnel manage the physician relationships with the various government accounts.
Surgical and Sports Medicine revenue increased approximately $8.0 million, or 95%, to $16.3 million as compared to $8.3 million in the prior year. The growth was driven by increased use of our AmnioFix® products in both government and commercial accounts in various sports medicine and surgical applications. The Other markets category, which includes our Ophthalmic and Dental tissue based products sold on an OEM basis as well as our HydroFix® medical device product sold through distributors, increased approximately $0.3 million or 15% as compared to the prior year.
Tissue Processing Costs and Cost of Products Sold Cost of products sold as a percentage of revenue improved to 15.1% from 21.2% 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. Research and Development Expenses
Our research and development expenses ("R&D expenses") increased approximately $1.7 million, or 98%, to $3.5 million during the nine months ended September 30, 2013, compared to approximately $1.8 million in the prior year. The increase is primarily related to increased investments in clinical trials, personnel costs, lab supplies, and testing costs.

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 nine months ended September 30, 2013, increased approximately $20.5 million to $31.9 million compared to $11.4 million for the nine months ended September 30, 2012. Selling expense increases were driven by costs associated with building our direct sales organization for government and commercial accounts as well as increased commissions due to higher sales volume. Additional spending increases included spending on support costs related to medical reimbursement, including our reimbursement hotline; our information technology infrastructure to help manage the growth of the business; and increased share-based compensation expense and a provision for anticipated costs associated with the 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.

Net Interest Expense


We recorded financing and net interest expense of approximately $1.4 million during the nine months ended September 30, 2013, compared with approximately $1.7 million of financing and net interest expense during the nine months ended September 30, 2012. The following table summarizes the interest charges for the nine months ended September 30, 2013, and 2012:

                                                               Nine Months Ended September 30,
                                           2013                                                             2012
                    Debt          Accrued        Interest                                           Accrued        Interest
                  Discount        Interest       Expense          Total         Debt Discount       Interest        Expense          Total
Convertible
line of credit
with related
party           $         -     $        -             -      $         -     $       343,527     $   48,794              -      $   392,321
Converted debt
related to
acquisition               -              -             -                -             170,509         21,078              -          191,587
Convertible
Senior secured
promissory
notes             1,328,439         11,571             -        1,340,010             693,553        373,974              -        1,067,527
Deferred
financing
related to
senior secured
promissory
notes                     -             -              -                -              14,701             -               -           14,701
Other                    -              -          20,932          20,932                  -              -            7,350           7,350
                $ 1,328,439     $   11,571     $   20,932     $ 1,360,942     $     1,222,290     $  443,846     $     7,350     $ 1,673,486

Liquidity and Capital Resources
Revenue continues to increase quarter over quarter while management maintains tight controls over spending. As of September 30, 2013, the Company had approximately $6.1 million of cash and cash equivalents. The Company reported total current assets of approximately $25.8 million and total current liabilities of approximately $8.3 million at September 30, 2013, which represents a current ratio of 3.1 as of September 30, 2013. 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.

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
September 30, 2013:
                                           Less than                              More than
Contractual Obligations        TOTAL         1 year     1-3 years    3-5 years     5 years
Capital lease obligations   $   145,995       32,776       72,325       40,894            -
Operating lease obligations $ 6,624,284      784,771    2,580,737    2,780,450      478,326
                            $ 6,770,279      817,547    2,653,062    2,821,344      478,326


Discussion of cash flows
Net cash used in operations during the nine months ended September 30, 2013, decreased approximately $1.4 million to $1.1 million compared to $2.5 million used in operating activities for the nine months ended September 30, 2012, primarily attributable to the decrease in the Net Loss somewhat offset by the increase in working capital.

Net cash used in investing activities during the nine months ended September 30, 2013, increased approximately $2.1 million to $2.5 million compared to $0.4 million used in investing activities for the nine month period ended September 30, 2012. The increase was due to purchases of plant and equipment related to our relocation to a new facility with expanded production capacity and capitalization of patent application costs.
Net cash flows from financing activities during the nine months ended September 30, 2013, decreased approximately $3.4 million to $3.0 million compared to $6.4 million during the nine months ended September 30, 2012. Cash flows from financing activities during the past three quarters include approximately $1.5 million received from the exercise of warrants compared to approximately $5.9 million received from the exercise of warrants during the first nine months of 2012 and approximately $1.5 million received from the exercise of stock options compared to $0.9 million received from the exercise of stock options during the first nine months of 2012.
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 three quarters of 2013 was approximately $4.1 million which is an improvement of approximately $2.2 million as compared to the prior year three quarters. This improvement was the result of a lower net loss for the period.
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 disclosures for these measures, including the most directly comparable GAAP measure and an associated reconciliation.
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                Nine Months Ended
                                                 September 30,                     September 30,
                                             2013             2012             2013             2012
Net Loss (Per GAAP)                      $  (307,118 )   $ (4,219,372 )   $ (2,684,915 )   $ (6,057,092 )

Add back:
Income Taxes                                  46,700                -           96,975                -
Financing expense associated with
beneficial conversion of note payable
issued in conjunction with acquisition             -            3,821                -          170,509
Financing expense associated with
beneficial conversion of Line of Credit
with Related Party                                 -          181,224                -          343,527
Financing expense associated with
beneficial conversion of Senior Secured
Promissory Notes                                   -          254,019        1,328,439          708,254
Other interest expense, net                    4,527          145,582           32,503          451,196
Depreciation Expense and loss on fixed
asset disposal                               184,590          122,934          422,524          354,425
Amortization Expense                         259,575          449,692          789,809        1,117,646
Share Based Compensation                   1,667,766          669,469        4,155,005        1,755,669
Impairment of Intangible Assets                    -        1,798,495                -        1,798,495
Fair Value Adjustment of Earn-out
Liability                                          -        1,320,000                -        1,320,000
Earnings Before Interest, Taxes,
Depreciation, Amortization and
Share-Based Compensation                 $ 1,856,040     $    725,864     $  4,140,340     $  1,962,629


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 . . .

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