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MDXG > SEC Filings for MDXG > Form 10-Q on 12-May-2014All Recent SEC Filings

Show all filings for MIMEDX GROUP, INC.

Form 10-Q for MIMEDX GROUP, INC.


12-May-2014

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 the Company's mission to give physicians products and tissues to help the body heal itself. The Company's biomaterial platform technologies include its tissue technologies, AmnioFix® and EpiFix®. The Company's tissue technologies are processed from human amniotic membrane that is derived from donated placentas. Through MiMedx's 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. MiMedx processes the human amniotic membrane utilizing its proprietary Purion® Process, to produce safe and effective allografts. MiMedx® is the leading supplier of amniotic tissue allografts, having supplied over 225,000 allografts for application in the Wound Care, Surgical, Sports Medicine, Ophthalmic and Dental sectors of healthcare.

Recent Events
FDA Untitled Letter
As described in detail in Item 1 Financial Statements- Note 12, on August 28, 2013 the FDA issued an Untitled Letter alleging that the Company's micronized allografts do not meet the criteria for regulation solely under Section 361 of the Public Health Service Act and that, as a result, MiMedx would need a biologics license to lawfully market the micronized products. While the Company responded that it does not agree with the Agency's position, it understands the Agency's interest in further regulating this emerging technology. Accordingly, the Company proposed to the FDA that it will pursue the Investigational New Drug ("IND") and Biologics License Application ("BLA") process for certain micronized products, and, in parallel, also proposed to enter into negotiations with the FDA on a plan to transition the micronized products to licensed biological products and continue to market the micronized products under specific conditions. The Company had its first Pre-IND meeting at the FDA on March 13, 2014. During the meeting, the Company presented a series of questions focused on detailed plans for its first BLA for its micronized tissue and reviewed some of the Company's data. The FDA was extremely helpful in answering the Company's questions and providing additional information related to this complex process. The Company anticipates a second meeting to finalize study protocols and review additional information. There is no guarantee that the FDA will agree to a transition plan or allow the Company to continue to market its micronized products while it pursues one or more BLAs. If they do allow the Company to continue to market its micronized products, they may impose conditions, such as labeling restrictions and compliance with Current Good Manufacturing Practices ("cGMP"). It is also possible that the Company will be required to recall our micronized products. Revenues from micronized products make up about 15% of projected revenues in 2014.
Following the publication of the Untitled Letter from the FDA regarding the Company's injectable products in September 2013, the trading price of the Company's stock dropped sharply and several purported class action lawsuits were filed against the Company and certain of its executive officers asserting violations of the Securities Act of 1933 and the Securities Exchange Act of 1934 with respect to various statements and alleged omissions related to the Company's belief that FDA approval was not required to market its products, including its micronized products. These cases have now all been removed to, and consolidated in, the United States District Court for the Northern District of Georgia. By order dated December 9, 2013, the Court approved the appointment of a lead plaintiff and a lead counsel. A Consolidated Amended Class Action Complaint, containing substantially the same causes of action and claims for relief as the initial complaints, was filed on January 27, 2014. On February 26, 2014, the Company filed a Motion to Dismiss on various grounds. The plaintiff filed a Reply Memorandum of Law in opposition to the Company's Motion to Dismiss on March 28, 2014. On April 14, 2014, the Company filed a Reply Memorandum of Law in further support of its Motion to Dismiss. The Company currently believes that the outcome of this litigation will not have a material adverse impact on the Company's financial position or results of operations.


Results of Operations Comparison for the Three Months Ended March 31, 2014 to the Three Months Ended March 31, 2013
Revenue
Total revenue increased approximately $8.0 million, or 69%, to $19.6 million for the three months ended March 31, 2014, as compared to $11.6 million for the three months ended March 31, 2013. The increase in revenue as compared to the prior year is due primarily to increased wound care sales of EpiFix® in both commercial and government accounts.

Tissue Processing Costs and Cost of Products Sold Cost of products sold as a percentage of revenue improved to 15.2% from 16.5% 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
The Company's research and development expenses ("R&D expenses") increased approximately $0.2 million, or 11.5%, to $1.4 million during the three months ended March 31, 2014, compared to approximately $1.2 million in the prior year. The increase is primarily related to increased investments in clinical trials, and personnel costs.

Research and development expenses consist primarily of internal personnel costs, expenses of clinical trials, fees paid to external consultants, and the cost of supplies and instruments used in the Company's laboratories.

Selling, General and Administrative Expenses Selling, General and Administrative expenses for the three months ended March 31, 2014, increased approximately $7.5 million to $15.9 million compared to $8.4 million for the three months ended March 31, 2013. Selling expense increases were driven by costs associated with building a direct sales organization, and increased commissions due to higher sales volume. Additional spending increases included spending on support costs related to medical reimbursement, including the Company's reimbursement hotline; information technology infrastructure to help manage the growth of the business; and increased share-based compensation expense. Selling, General and Administrative expenses consist of personnel costs, professional fees, sales commissions, sales training costs, industry trade show fees and expenses, product promotion and product literature costs, facilities costs and other sales, marketing and administrative costs, depreciation and amortization, and share-based compensation.

Net Interest Expense
The Company recorded net interest expense of approximately $21,000 during the
three months ended March 31, 2014, compared with approximately $1,343,000 of
financing and net interest expense during the three months ended March 31,
2013. The decrease of approximately $1,322,000 is primarily due to the
conversion and payoff of debt. The following table summarizes the interest
charges for the three months ended March 31, 2014 and 2013, respectively:
                                                                   Three Months Ended March 31,
                                             2014                                                               2013
                    Debt                                Interest                                        Accrued        Interest
                  Discount       Accrued Interest       Expense        Total        Debt Discount       Interest        Expense          Total
Convertible
Senior Secured
Promissory
Notes           $         -     $               -     $        -     $      -     $     1,328,439     $   11,571     $         -     $ 1,340,010
Other                    -                     -          21,024       21,024                  -              -            3,233           3,233
                $         -     $               -     $   21,024     $ 21,024     $     1,328,439     $   11,571     $     3,233     $ 1,343,243


Liquidity and Capital Resources
Revenue continues to increase quarter - over - quarter while management maintains tight controls over spending. As of March 31, 2014, the Company had approximately $43.0 million of cash and cash equivalents. The Company reported total current assets of approximately $67.9 million and total current liabilities of approximately $9.6 million at March 31, 2014, which represents a current ratio of 7.1 as of March 31, 2014. Management believes that its anticipated cash from operating and financing activities, existing cash and cash equivalents, as well as its $3 million line of credit 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 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, 2014:

                                            Less than
Contractual Obligations        TOTAL          1 year       1-3 years      3-5 years
Capital lease obligations   $   332,900    $   111,962    $   200,073    $    20,865
Operating lease obligations   6,236,002        994,518      2,659,072      2,582,412
                            $ 6,568,902    $ 1,106,480    $ 2,859,145    $ 2,603,277

Discussion of cash flows
Net cash used in operations during the three months ended March 31, 2014, decreased approximately $0.5 million to $1.6 million compared to $2.1 million used in operating activities for the three months ended March 31, 2013, primarily attributable to the decrease in the Net loss offset by the increase in working capital.
Net cash used in investing activities during the three months ended March 31, 2014, increased approximately $0.5 million to $0.6 million compared to $0.1 million used in investing activities for the three months ended March 31, 2013. The increase was due to purchases of plant and equipment related to the relocation to a new facility with expanded production capacity and capitalization of patent application costs.
Net cash flows from financing activities during the three months ended March 31, 2014, increased approximately $0.1million to $1.2 million compared to $1.1 million during the three months ended March 31, 2013. Cash flows from financing activities during the current quarter include approximately $.8 million received from the exercise of warrants compared to approximately $.9 million received from the exercise of warrants during the first three months of 2013 and approximately $.4 million received from the exercise of stock options compared to $0.2 million received from the exercise of stock options during the first three months of 2013.
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 2014 was approximately $2.0 million which is an improvement of approximately $.9 million as compared to the prior year first quarter. This improvement was the result of a lower net loss for the period and higher share - based compensation expenses in 2014.
Adjusted EBITDA is a non-GAAP measure. Non-GAAP financial measures are commonly used in the industry and are presented because management believes they provide relevant and useful information to investors. However, there are limitations to using these non-GAAP financial measures. Adjusted EBITDA is not indicative of cash provided or used by operating activities and may differ from comparable information provided by other companies. Adjusted EBITDA should not be considered in isolation, as an alternative to, or more meaningful than measures of financial performance determined in accordance with U.S. GAAP. The following table presents a reconciliation of Adjusted EBITDA to the most closely related financial measure reported under GAAP for the three months ended March 31, 2014 and 2013, respectively.


                                                               Three Months Ended March 31,
                                                                  2014               2013
Net Loss (Per GAAP)                                         $     (922,072 )    $ (1,620,408 )

Add back:
Income Taxes                                                        10,033            50,275
Financing expense associated with beneficial conversion of
Senior Secured Promissory Notes                                          -         1,328,439
Other Interest Expense, net                                         21,024            14,804
Depreciation Expense                                               263,131            98,751
Amortization Expense                                               231,331           262,596
Share - Based Compensation                                       2,372,364           984,792
Income (Loss) Before Interest, Taxes, Depreciation,
Amortization and Share-Based Compensation                   $    1,975,811      $  1,119,249

Critical Accounting Policies
In preparing financial statements, the Company follows accounting principles generally accepted in the United States, which require the Company to make certain estimates and apply judgments that affect its financial position and results of operations. Management continually reviews the Company's accounting policies and financial information disclosures. A summary of significant accounting policies that require the use of estimates and judgments in preparing the financial statements was provided in the Company's Annual Report on Form 10-K for the year ended December 31, 2013. During the quarter, 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
The Company has no off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk Not applicable.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Company carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this report. This evaluation was carried out under the supervision and with the participation of Company management, including its Chief Executive Officer and Principal Financial Officer. Based upon that evaluation, the Company's Chief Executive Officer and Principal Financial Officer concluded that the Company's controls and procedures were effective as of the end of the period covered by this report. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in the Company's reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in the Company's reports filed under the Exchange Act is accumulated and communicated to management, including the Company's Chief Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding disclosures.
Changes in Internal Control over Financial Reporting There was no change in the Company's internal control over financial reporting that occurred during the three months ended March 31, 2014, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.


Limitations on the Effectiveness of Controls The Company has confidence in its internal controls and procedures. Nevertheless, management, including the Company's Chief Executive Officer and Principal Financial Officer, does not expect that the Company's disclosure procedures and controls or its internal controls will prevent all errors or intentional fraud. An internal control system, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of such internal controls are met. Further, the design of an internal control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all internal control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

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