MiMedx Group, Inc. — Form 10-Q Summary
Business Context and Reporting Period
MiMedx develops and sells placental tissue allografts for advanced wound care, burn, surgical, and potential musculoskeletal applications. The company’s primary products are derived from human placental tissue and processed using proprietary methods. This filing covers the three and six months ended June 30, 2021, compared with the corresponding 2020 periods.
On May 31, 2021, the FDA’s enforcement-discretion period ended for certain micronized and particulate products regulated under Section 351 of the Public Health Service Act. MiMedx ceased marketing those products in the United States pending potential Biologics License Application approval.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 |
|---|---|---|---|---|
| Net sales | $68.2 million | $53.6 million | $128.1 million | $115.4 million |
| Gross profit | $55.4 million | $45.4 million | $105.7 million | $97.2 million |
| Gross margin | 81.3% | 84.7% | 82.5% | 84.2% |
| Operating loss | $0.4 million | $5.9 million | $7.3 million | $19.6 million |
| Net loss | $1.8 million | $8.5 million | $10.2 million | $13.3 million |
| Net loss per common share | $0.03 | $0.08 | $0.12 | $0.12 |
| EBITDA | $1.1 million | $(4.2) million | $(4.3) million | $(16.1) million |
| Adjusted EBITDA | $2.8 million | $10.2 million | $7.6 million | $13.4 million |
Adjusted net sales, excluding collections from legacy remaining contracts, were $67.9 million in the second quarter and $127.5 million for the first six months, compared with $51.9 million and $109.2 million, respectively, in the prior-year periods.
- Advanced Wound Care sales were $59.3 million in the second quarter and $110.8 million for the first six months. Cord product sales increased to $5.9 million and $10.8 million, respectively.
- Section 351 product sales were $8.6 million in the second quarter and $16.7 million for the first six months, including sales before the May 31 regulatory cutoff.
- Cost of sales included a $1.0 million write-down of Section 351 inventory. Inventory was $10.1 million at June 30, 2021, including approximately $0.8 million of cord inventory exposed to potential regulatory risk.
- Second-quarter selling, general and administrative expense increased 43.6% to $53.6 million, including $3.8 million of proxy-contest-related consulting and advisory costs.
- Research and development expense increased 79.9% in the second quarter and 71.1% for the first six months as the company expanded clinical, preclinical, and BLA-related activities.
- Investigation, restatement, and related expense was a $2.1 million benefit in the second quarter, compared with $11.4 million of expense in the prior-year quarter. The six-month expense declined to $5.1 million from $27.0 million.
Cash Flow, Debt, and Liquidity
| Balance or Cash Flow | June 30, 2021 / Six Months Ended June 30, 2021 |
|---|---|
| Cash and cash equivalents | $85.0 million |
| Current assets | $147.7 million |
| Current liabilities | $50.6 million |
| Current ratio | 2.9 |
| Net cash used in operating activities | $5.1 million |
| Net cash used in investing activities | $2.5 million |
| Net cash used in financing activities | $3.2 million |
| Net change in cash | $10.8 million decrease |
| Long-term debt, net | $47.9 million |
The company has a $50.0 million senior secured Hayfin term loan maturing June 30, 2025, with no scheduled principal payments before maturity. The loan carried an 8.3% interest rate at June 30, 2021. The delayed-draw facility expired undrawn on June 30, 2021. MiMedx reported compliance with its financial covenants, including a maximum total net leverage ratio of 4.5x through June 30, 2021, reduced to 4.0x thereafter, and minimum liquidity of $10 million. The reported total net leverage ratio was 3.6x.
MiMedx stated that existing cash and anticipated operating cash flows are expected to fund operational liquidity needs for at least the 12 months following issuance of the report, including planned clinical, manufacturing, legal, and regulatory expenditures.
Material Changes Versus the Prior Comparable Period
- Reported second-quarter sales increased 27.1%, while adjusted net sales increased 30.6%, primarily from higher sales volume and recovery from COVID-19-related hospital access restrictions in the prior-year period.
- Six-month adjusted net sales increased 16.8%, led by 17.5% growth in Advanced Wound Care products.
- Gross margins declined because of the Section 351 inventory write-down and unfavorable production variances.
- Net loss improved year over year, but adjusted EBITDA declined substantially because of higher SG&A and R&D costs and the absence of prior-year comparability benefits from the investigation and restatement adjustments.
- Interest expense declined because the Hayfin financing replaced the prior higher-cost term loan.
- Series B preferred stock accumulated $4.1 million of unpaid dividends at June 30, 2021. The preferred stock had a carrying amount of $92.5 million and was convertible into approximately 27.0 million common shares, including accumulated dividends.
- The company recorded an out-of-period adjustment relating to restricted stock and performance stock unit accounting. Management concluded the error was not material to prior periods and stated that it did not affect total stockholders’ equity or earnings per share.
- Disclosure controls and procedures were not effective as of June 30, 2021 because previously identified material weaknesses in internal control over financial reporting remained unremediated.
Guidance, Outlook, Risks, and Unusual Items
- MiMedx intends to pursue BLAs for certain micronized products and accelerate development of AMNIOFIX Injectable for musculoskeletal indications. No BLA had been submitted for review as of the filing.
- Management expects R&D expenses to increase as clinical trials begin or expand and BLA preparation continues.
- The company received Japanese regulatory approval to market EPIFIX, but reimbursement pricing and conditions remained pending, delaying commercial launch in Japan.
- The end of FDA enforcement discretion is expected to reduce revenue from Section 351 products and may increase SG&A as a percentage of sales. Management does not expect the $1.0 million Section 351 inventory write-down to recur.
- Potential risks include failure or delay in clinical trials, inability to obtain BLA approvals, manufacturing capacity and CGMP compliance requirements, regulatory reclassification of EPICORD or AMNIOCORD, reimbursement uncertainty, COVID-19 variants, and dependence on human tissue supplies.
- MiMedx accrued $4.5 million for legal proceedings and paid $6.5 million toward legal matters during the first six months. Government investigations by the VA-OIG, DOJ-Civil, and Department of Defense OIG remained unresolved, and their outcomes could not be predicted.
- A securities class action had been dismissed, but the plaintiff sought reconsideration and leave to amend. The company also faced litigation involving former executives’ indemnification claims and other defamation and legal matters.
- The company settled a law-firm claim related to former executives, reducing its liability by $2.4 million; the settlement was paid and no continuing obligation remained.
Important Facts for Investors to Verify
- Whether the loss of Section 351 product sales after May 31, 2021 is offset by Advanced Wound Care growth and cost reductions.
- The timing, scope, and probability of BLA submissions and FDA approvals, including required clinical-trial results and manufacturing readiness.
- Whether EPICORD and AMNIOCORD continue to qualify for Section 361 regulation and whether additional FDA action could affect their sales.
- Liquidity and covenant compliance under the Hayfin term loan, including the 2025 $50 million maturity and the 4.0x post-June 2021 leverage covenant.
- The potential financial impact and resolution timing of government investigations, securities litigation, indemnification claims, and other contingencies.
- Progress in remediating material weaknesses in internal controls and the reliability of future financial reporting.
- The amount and timing of unpaid Series B preferred dividends, potential conversion dilution, and change-of-control redemption rights.