Zacks Small Cap Research – MDXG: Another Beat & Raise – Technologist

By John Vandermosten, CFA

NASDAQ:MDXG

READ THE FULL MDXG RESEARCH REPORT

2023 Financial and Operational Summary

MiMedx Group, Inc. (NASDAQ:MDXG) reported full year 2023 revenues of $321.5 million, representing a 20% year over year growth rate, surpassing our $320 million estimate. Pre-tax income was $30.6 million, benefiting from lower expenses on every line. A tax benefit was recognized, distorting net earnings which were still quite good. Management guided towards low double digit 2024 topline growth rate that should accelerate as the year progresses. As the company shifts away from its R&D heavy development programs, cash flow will remain at elevated levels. The adjusted EBITDA margin reached 24% in 4Q:23 and 18% for the year. It is expected to continue its >20% trajectory into 2024. Based on the better-than-expected revenue trends to date, we tick up our 2024 estimate to reflect end of year momentum and contribution from new product launches.

During the earnings call, MiMedx’ leadership outlined future growth opportunities in a number of areas. Expansion of the company’s skin substitute portfolio beyond amniotic tissue into xenografts or synthetics continues to be a primary area of interest. The company continues to hint at the potential for an acquisition that might satisfy this objective. Tailwinds from the launch of Epieffect into private office and the build of business in Japan helped revenues expand and should continue to contribute to revenue growth in 2024.

Financial Results

2023 results were reported in a press release, filing of Form 10-K and a conference call with management which provided an opportunity for analyst Q&A after market close on February 28, 2024.

For the year ending December 31, 2023, compared to the one ending December 31, 2022:

➢ Reported revenues were $321.5 million, up 20% from $267.8 million, Other revenues grew fastest at 41% while private office increased 24%. Hospital sales grew the most in dollar terms (up $23.8 million year over year), rising 15% over prior year levels. Management cited strong commercial execution, an evolving Medicare reimbursement landscape, the addition of new customers and sales increases in Japan for the overall expansion in revenues;

➢ Gross margin rose by 100 basis points to 83.0% from 82.0% steadily increasing as the year progressed. A higher proportion of sales with lower manufacturing costs as well as increased throughput efficiencies drove the improvement;

➢ SG&A was $211.1 million, rising 1.1% from $208.8 million reflecting expense leverage. The $2.4 million rise was attributable to higher sales commissions and increased stock-based compensation partially offset by a decrease in administrative expenses, including severance related to the former CEO;

➢ R&D expenses were $12.7 million, decreasing 45% from $22.8 million. The decline was attributed to the shuttering of the Regenerative Medicine segment;

➢ Restructuring expense of $3.5 million reflects wind down expenses related to the dissolution of the Regenerative Medicine business unit related to clinical trial regulatory obligations. These amounts do not appear on MiMedx’ adjusted financials as they are considered discontinued operations;

➢ Investigation, restatement and related expenses totaled $5.2 million vs $12.2 million;

➢ Interest expense was ($6.5) million versus ($5.0) million due to higher interest rates;

➢ A tax provision benefit of $36.8 million was recognized vs. an expense of ($206,000) reflecting the reversal of a valuation allowance. This recognizes deferred tax assets that can be used to offset to cash taxes in coming periods;

➢ Net income from continuing operations was $67.4 million versus a loss of ($20.0) million, or $0.48 per share versus ($0.24) per share.

As of December 31, 2023, cash stood at $82.0 million, compared to $66.0 million at year end 2022 on free cash flow of $32.8 million. Debt was carried on the balance sheet at $48.0 million. However, several transactions took place that eliminated the $48 million Hayfin credit facility and replaced it with a revolving credit facility and term loan of which $50 million was drawn. Due to strong cash generation in the quarter, MiMedx repaid $30 million of the revolving credit facility during 1Q:24 and has guided investors to a debt balance of $18 million as of 1Q:24 end. 2024 adjusted EBITDA, as calculated by MiMedx, adds back costs incurred related to investigations, restatement, restructuring and share based compensation. It was $58.5 million for 2023 which compares to prior year adjusted EBITDA of $7.0 million. Free cash flow was $32.8 million in 2023 compared with a cash burn of ($20.6) million in 2022. Before year end, the Series B Convertibles were triggered to be converted to equity. 30 million shares were added to the share balance and the Series B Convertibles were terminated.

Conversion of Series B Convertible Preferred Stock

In a December 28th press release, MiMedx announced that 95,000 shares of Series B Convertible Preferred Stock were converted into common equity shares of the company. The convertibles were issued in July 2020 to an affiliate of EW Healthcare Partners and certain funds managed by Hayfin Capital Management. Terms of the security allowed it to be converted by the holder at any price above $3.85. Conversion is required after July 2, 2023 if MiMedx shares trade above $7.70 for 20 out of 30 trading days. By late December, the forced conversion requirement was reached and approximately 30 million shares have been added to equity shares outstanding. In addition to simplifying the balance sheet, this transaction allows MiMedx to avoid the payment of the stock dividend that has accrued over the last three years.

Capital Structure

Following the conversion of its Series B Convertible Preferred Stock at the end of 2023, MiMedx announced new credit facilities that are expected to reduce interest costs and provide capital which may be deployed in merger and acquisition activity. As we have noted in other channels, transaction activity in the wound care space is alive and well.² With anticipated free cash flow this year and access to additional financing, we think that MiMedx is on the hunt. A January 22nd press release highlighted the details of a refinancing that obtained new senior secured credit facilities of $95 million that are due January 2029. The arrangement consists of a $75 million revolving credit facility and a $20 million term loan facility. A syndicate of banks including Citizens and Bank of America participated in the funding. As of the date of the release, MiMedx had drawn $20 million in the term loan and $30 million in revolving loans, using the proceeds to repay the Hayfin Capital debt which was set to mature in June 2024.

Milestones

➢ Conversion of Series B Convertible Preferred Stock – December 2023

➢ Attendance at TD Cowen Health Care Conference – March 2024

➢ Axiofill Request for Designation initial response from FDA – end of 1Q:24

➢ Evaluation of new products and relationships – 2024

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