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MDXG > SEC Filings for MDXG > Form 10-Q on 11-Aug-2014All Recent SEC Filings

Show all filings for MIMEDX GROUP, INC.

Form 10-Q for MIMEDX GROUP, INC.


11-Aug-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 250,000 allografts for application in the Wound Care, Surgical, Sports Medicine, Ophthalmic and Dental sectors of healthcare.

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 has 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. Since December 2013, the Company met and had several other interactions with the FDA to discuss its first proposed Biologics License Application and in preparation for its first IND in support of that application. The Company filed its initial IND application with the FDA on July 22, 2014. The IND submission is the Company's initial submission for certain indications for use of its micronized allografts towards targeted BLAs, which the Company expects to submit at a future date. The Company also requested a transition agreement to allow it continue to market its product for certain specified uses. 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 the Company 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 its 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 June 30, 2014 to the Three Months Ended June 30, 2013
Revenue
Total revenue increased approximately $12.1 million, or 89%, to $25.6 million for the three months ended June 30, 2014, as compared to $13.5 million for the three months ended June 30, 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 10.7% from 16.3% 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 $0.9 million, or 94.7% to $1.8 million during the three months ended June 30, 2014, compared to approximately $0.9 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 June 30, 2014, increased approximately $10.3 million to $21.2 million compared to $10.9 million for the three months ended June 30, 2013. Selling expense increases were driven by costs associated with expanding the Company's 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 $8,000 during the
three months ended June 30, 2014, compared with approximately $13,000 of
financing and net interest expense during the three months ended June 30,
2013. The following table summarizes the interest charges for the three months
ended June 30, 2014 and 2013, respectively:
                                                              Three Months Ended June 30,
                                                2014                                            2013
                                 Debt           Interest                                           Interest
                               Discount          Expense        Total        Debt Discount         Expense        Total
Other                                -              8,429        8,429                  -            13,172       13,172
                             $        -       $     8,429     $  8,429     $             -       $   13,172     $ 13,172


Results of Operations Comparison for the Six Months Ended June 30, 2014 to the Six Months Ended June 30, 2013

Revenue
Total revenue increased approximately $20.0 million, or 80.0%, to $45.1 million for the six months ended June 30, 2014, as compared to $25.1 million for the six months ended June 30, 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 12.7% from 16.4% 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 $1.0 million or 46.9% to $3.2 million during the six months ended June 30, 2014, compared to approximately $2.2 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 six months ended June 30, 2014, increased approximately $17.8 million to $37.0 million compared to $19.2 million for the six months ended June 30, 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 $29,000 during the
six months ended June 30, 2014, compared with approximately $1,356,000 of
financing and net interest expense during the six months ended June 30,
2013. The decrease of approximately $1,327,000 is primarily due to the
conversion and payoff of the Company's Convertible Senior secured promissory
notes in early 2013. The following table summarizes the interest charges for the
six months ended June 30, 2014 and 2013, respectively:
                                                              Six Months Ended June 30,
                                        2014                                                  2013
                          Debt         Interest                                        Accrued       Interest
                        Discount       Expense        Total        Debt Discount      Interest       Expense          Total
Convertible Senior
secured promissory
notes                          -              -            -           1,328,439        11,571             -        1,340,010
Other                         -          29,453       29,453                  -                        16,405          16,405
                      $        -     $   29,453     $ 29,453     $     1,328,439     $  11,571     $   16,405     $ 1,356,415


Liquidity and Capital Resources
Revenue continues to increase quarter - over - quarter while management strives to maintain tight controls over spending. As of June 30, 2014, the Company had approximately $39.2 million of cash and cash equivalents. The Company reported total current assets of approximately $66.3 million and total current liabilities of approximately $9.9 million at June 30, 2014, which represents a current ratio of 6.7 as of June 30, 2014. 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. As of May 1, 2014, the Company's previously existing line of credit expired and the Company elected not to renew. There were no borrowings outstanding under the line at any time during its term.

On May 12, 2014, MiMedx Group, Inc. (the "Company") announced that its Board of Directors had authorized the repurchase of up to $10 million of its common stock from time to time, through December 31, 2014. The timing and amount of repurchases, if any, will depend upon the Company's stock price, economic and market conditions, regulatory requirements, and other corporate considerations. The Company may initiate, suspend or discontinue purchases under the stock repurchase program at any time. From the date of its initial authorization through June 30, 2014, the Company has repurchased approximately 784,000 shares under this authorization with an approximate cost of $4,540,000 excluding broker commissions.

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 June 30, 2014:
                                                    Less than
Contractual Obligations                TOTAL          1 year       1-3 years      3-5 years
Capital lease obligations           $   305,481    $   113,505    $   177,148    $    14,828
Operating lease obligations           6,495,207      1,184,225      2,982,613      2,328,369
Charitable contribution obligations     350,000        350,000              -              -
                                    $ 7,150,688    $ 1,647,730    $ 3,159,761    $ 2,343,197

Discussion of cash flows

Net cash from operations during the three months ended June 30, 2014 increased approximately $1.9 million to approximately $1.2 million compared to $.7 million used in operating activities during the three months ended June 30, 2013, primarily due to a decrease in the Net Loss and the increase in adjustments to Net loss for share-based compensation. Net cash used in investing activities during the three months ended June 30, 2014 decreased approximately $.5 million to $.8 million compared to $1.3 million used during the comparative period in 2013, primarily due to decreased purchases of equipment and decreased patent application costs. Net cash used in financing activities of $4.2 million during the three months ended June 30, 2014 increased approximately $4.7 million compared to $.5 million of cash flows received from financing activities for the three months ended June 30, 2013, primarily due to $4.6 million of stock repurchases during the quarter.
Net cash used in operations during the six months ended June 30, 2014, decreased approximately $2.4 million to approximately $0.5 million compared to $2.9 million used in operating activities for the six months ended June 30, 2013, primarily attributable to the decrease in the Net loss and the increase in adjustments to Net loss for share-based compensation of approximately $2.7 million somewhat offset by the decrease in adjustments to net income for the amortization of debt discount and deferred financing costs of approximately $1.3 million.
Net cash used in investing activities during the six months ended June 30, 2014, and 2013 was at $1.4 million. Funds were used to purchase equipment to expand production capacity and capitalize patent application costs.
Net cash used in financing activities during the six months ended June 30, 2014, increased approximately $4.7 million to $3.0 million compared to $1.7 million of cash flows received from financing activities during the six months ended June 30, 2013. Cash flows used in financing activities during the six months include approximately $4.6 million for stock repurchases, offset by $0.8 million from the exercise of warrants and $0.9 million from the exercise of stock options. For the six months ended June 30, 2013, the Company received approximately $1.2 million from the exercise of warrants and approximately $0.5 million from the exercise of stock options.


Due to the material amount of non-cash related items included in the Company results of operations, the Company reports an Adjusted EBITDA metric which provides management with a clearer view of operational use of cash (see the table below). The Company's Adjusted EBITDA for the three months ended June 30, 2014 was approximately $2.9 million which is an improvement of $1.7 million as compared to the three months ended June 30, 2013. The improvement was the result of a lower net loss for the period and the adjustment for higher share-based compensation. The Company's Adjusted EBITDA for the first six months of 2014 was approximately $4.9 million, which is an improvement of approximately $2.6 million as compared to the prior year first six months This improvement was the result of a lower net loss for the period driven by higher revenue and gross margin and the adjustment for higher share-based compensation.
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 GAAP. The following table presents a reconciliation of Adjusted EBITDA to the most closely related financial measure reported under GAAP for the six months ended June 30, 2014 and 2013, respectively.

                                                                                       Six Months Ended
                                               Three Months Ended June 30,                 June 30,
                                                  2014              2013             2014             2013
Net Loss (Per GAAP)                         $     (390,159 )    $  (757,389 )   $ (1,312,231 )   $ (2,377,797 )

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                          8,429           13,172           29,453           27,976
Depreciation Expense                               287,850          139,184          550,981          237,934
Amortization Expense                               231,959          267,638          463,290          530,234
Share - Based Compensation                       2,766,352        1,502,447        5,138,716        2,487,239
Income (Loss) Before Interest, Taxes,
Depreciation, Amortization and Share-Based
Compensation                                $    2,894,398      $ 1,165,052     $  4,870,209     $  2,284,300

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 covered by this report, 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.


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