MiMedx Group, Inc. — Form 10-Q Summary
Business Context and Reporting Period
MiMedx develops and sells human placental tissue allografts for advanced wound care, surgical, orthopedic, spine, sports medicine, ophthalmic and dental applications. The company operates in one segment, Regenerative Biomaterials, with direct-customer and distributor channels.
The filing covers the three and six months ended June 30, 2019. The report was filed July 6, 2020 as part of the company’s effort to become current with SEC reporting after failing to file periodic reports following October 2017. Previously issued financial statements for multiple periods were determined to be unreliable because of revenue-recognition irregularities and required restatement.
Financial Performance and Position
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Net sales | $67.4 million, down 29.3% | $134.0 million, down 25.4% |
| Gross profit | $57.7 million | $116.8 million |
| Gross margin | 85.5%, versus 90.3% | 87.2%, versus 89.6% |
| Operating income (loss) | $(17.1) million | $(30.5) million |
| Net income (loss) | $(17.2) million, or $(0.16) per share | $(30.5) million, or $(0.29) per share |
| Adjusted EBITDA | $9.5 million | $20.4 million |
| Cash flow from operations | Not separately provided | $(13.1) million, versus $30.9 million provided |
At June 30, 2019, cash and cash equivalents were $96.9 million, compared with $45.1 million at December 31, 2018. Current assets were $122.5 million and current liabilities were $78.1 million, producing a current ratio of approximately 1.6. Total assets were $170.3 million and stockholders’ equity was $24.7 million.
The company borrowed $75.0 million under a Blue Torch term loan in June 2019. The loan carried an interest rate of 10.33% at June 30, 2019, was secured by substantially all company assets, and had a net carrying value of $66.8 million, including current and long-term portions. The company paid $6.0 million of financing costs and discounts during the first six months.
Cash provided by financing activities was $65.7 million, principally from the term loan. Investing activities used $0.8 million, primarily for equipment and patent costs. Inventory declined to $15.0 million from $16.0 million, while the inventory obsolescence reserve increased to $1.1 million from $0.6 million.
Material Changes Versus the Prior Comparable Period
- Revenue declined $28.0 million in the second quarter and $45.6 million year to date, primarily due to unfavorable insurance coverage developments, fewer units sold, reduced sales staffing and negative publicity associated with the investigation and restatement.
- Gross margin fell 480 basis points in the quarter and 240 basis points year to date because lower production volumes increased manufacturing overhead per unit.
- SG&A declined 25.1% in the quarter and 24.0% year to date following a workforce reduction of approximately 240 employees, or 24% of the workforce, with approximately half from the sales organization.
- Investigation, restatement and related expenses increased to $21.0 million in the quarter and $39.1 million year to date, versus $12.9 million and $15.0 million, respectively, in the prior-year periods.
- The company shifted from profitability to significant losses, while operating cash flow changed from $30.9 million provided to $13.1 million used year to date.
- The company adopted the new lease standard on January 1, 2019 and recognized a right-of-use asset and lease liabilities. It also recorded $0.4 million of intangible-asset impairment in the first six months and additional patent write-downs related to abandonment.
Guidance, Outlook, Risks and Unusual Items
Management did not provide quantitative revenue or earnings guidance. Management expects the advanced wound-care market to benefit from aging, obesity and diabetes trends, but expects additional costs for cGMP compliance, clinical development, investigational new drug applications and biologics license applications for certain micronized products.
The company stated that its customer arrangements were affected by undocumented side agreements, extended payment terms, return rights and other concessions. As a result, revenue was generally recognized only when product was returned or payment was received, rather than upon shipment. This accounting conclusion reflects continuing uncertainty surrounding revenue quality, collectability and internal controls.
Disclosure controls and procedures were ineffective as of June 30, 2019. Management reported unremediated material weaknesses in internal control over financial reporting. The company also remained exposed to substantial litigation, regulatory investigations, legal fees, settlements and indemnification obligations. Accrued expenses included $19.4 million of legal costs, $9.6 million of settlement costs, $6.9 million related to a Veterans Affairs pricing adjustment and $3.2 million for estimated returns. Approximately $16.4 million was accrued for specified legal proceedings.
The company’s common stock was suspended from Nasdaq in November 2018 and delisted in March 2019, limiting access to capital markets. Management nevertheless stated that cash, operating and financing activities were expected to support liquidity needs for the twelve months following issuance of the financial statements.
Subsequent events disclosed in the filing include the April 2020 amendment of the Blue Torch loan, the July 2020 repayment of approximately $72.0 million of principal and accrued interest plus a $1.4 million prepayment premium, a $100.0 million Series B preferred-stock financing, and a $50.0 million Hayfin term loan with an additional $25.0 million delayed-draw facility. The filing also disclosed COVID-19 effects, a $10.0 million PPP loan that was repaid, and an estimated $11.3 million federal tax refund from net operating-loss carrybacks.
Most Important Facts to Verify
- Reconcile the reported 2019 results to the company’s restated historical financial statements and confirm the continuing impact of revenue-recognition issues.
- Review the nature, timing and ultimate cost of pending securities, derivative, qui tam, regulatory, intellectual-property and former-employee litigation.
- Assess whether internal-control material weaknesses were remediated and whether future filings remain subject to delay or restatement risk.
- Verify the terms, covenants, repayment and replacement financing of the Blue Torch debt, including the July 2020 repayment and Hayfin facility.
- Evaluate liquidity after the reported operating cash burn, legal and compliance costs, debt service, COVID-19 impacts and delisting-related limitations on capital access.
- Confirm the status of FDA enforcement discretion, cGMP compliance, clinical programs and planned BLA submissions for micronized products.