Business Context and Reporting Period
MiMedx Group, Inc. is a placental biologics company focused primarily on advanced wound care and surgical recovery products in the United States, with international activity including Japan. This unaudited Form 10-Q covers the three and six months ended June 30, 2023, compared with the corresponding 2022 periods.
On June 20, 2023, MiMedx announced that it would disband its Regenerative Medicine business unit, suspend its knee osteoarthritis clinical trial program, and discontinue pursuing FDA approval for its mDHACM injectable product at this time. The company is concentrating on its Wound & Surgical business.
Key Financial Metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $81.3 million | $66.9 million | $152.9 million | $125.8 million |
| Gross profit | $67.7 million | $55.1 million | $126.9 million | $104.0 million |
| Gross margin | 83.3% | 82.3% | 83.0% | 82.7% |
| Operating income (loss) | $2.8 million | $(9.6) million | $(0.6) million | $(18.9) million |
| Net income (loss) | $1.2 million | $(10.9) million | $(3.8) million | $(21.4) million |
| Net loss available to common shareholders | $(0.5) million | $(12.5) million | $(7.2) million | $(24.6) million |
| GAAP net margin | 1.5% | (16.2)% | (2.5)% | (17.0)% |
| Adjusted EBITDA | $14.1 million | $(1.0) million | $19.6 million | $(2.7) million |
| Adjusted EBITDA margin | 17.4% | (1.4)% | 12.8% | (2.1)% |
Q2 sales increased 21.5% year over year, while six-month sales increased 21.6%. Wound & Surgical generated $80.5 million of Q2 sales and $151.1 million for the first six months. Advanced Wound Care represented substantially all reported product revenue; Section 351 revenue was $19 thousand in Q2 and $485 thousand year to date.
Six-month operating cash flow was $3.7 million, compared with $(13.2) million in the prior-year period. Capital expenditures and other investing uses were $1.0 million, resulting in a $2.7 million increase in cash during the first six months. Cash and cash equivalents totaled $68.7 million at June 30, 2023, compared with $66.0 million at December 31, 2022.
Total current assets were $141.2 million and current liabilities were $44.5 million, representing a reported current ratio of 3.2. Accounts receivable increased to $49.0 million and inventory increased to $16.8 million from $43.1 million and $13.2 million, respectively, at year-end 2022.
Long-term debt, net, was $48.8 million, representing a $50.0 million senior secured Hayfin term loan that matures June 30, 2025. The loan carried a 12.1% interest rate at June 30, 2023. The company reported compliance with all applicable financial covenants. Interest expense increased to $3.2 million for the first six months from $2.3 million in the prior-year period.
Material Changes Versus the Prior Comparable Period
- Revenue growth was broad-based: Q2 Hospital sales rose 16.7%, Private Office sales rose 24.7%, and Other sales rose 37.9%. Management attributed growth to new products, commercial execution, new customers, and EPIFIX sales in Japan.
- Gross margin improved by 100 basis points in Q2 and 30 basis points for the first six months, reflecting yield improvements and favorable sales mix.
- Q2 SG&A declined 6.9%, and six-month SG&A declined approximately 1%, reflecting lower professional-service costs, personnel costs, and bad debt expense, partly offset by higher commissions and travel.
- Research and development expense increased 54.2% in Q2 and 30.6% year to date, primarily due to $2.1 million of severance related to the Regenerative Medicine restructuring and clinical-trial spending incurred before the program was suspended.
- Operating results improved materially, but the six-month period remained slightly loss-making because of restructuring charges, investigation and restatement costs, share-based compensation, and interest expense.
- Q2 restructuring expense totaled $3.3 million, comprising approximately $2.1 million of clinical-trial asset impairments, $0.6 million of contract wind-down costs, and $0.5 million of Regenerative Medicine goodwill impairment.
- Investigation, restatement, and related expense declined to $1.0 million in Q2 and $4.7 million for the first six months, versus $3.2 million and $5.8 million, respectively, in the prior-year periods.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management stated that existing cash and cash generated from operations are expected to be sufficient to meet obligations over the 12 months following the filing date. Expected cash requirements include product investment, regulatory and international expansion costs, clinical-trial wind-down costs, and severance payments. The filing does not provide formal revenue or earnings guidance.
Management expects Regenerative Medicine wind-down activities to materially conclude in the second half of 2023 and expects research and development expense to decline in future quarters. The Nordic Agreement with Nordic Bioscience was terminated; the company remains responsible for eligible services and noncancelable obligations incurred through termination and for certain regulatory obligations relating to enrolled trial participants.
The Hayfin loan is subject to minimum net-sales and liquidity covenants, negative covenants, and events of default. A covenant breach could permit acceleration of the full principal balance and applicable premiums. The company also faces interest-rate risk: a 100-basis-point change in SOFR, above the contractual floor, would change annual interest expense by approximately $0.5 million.
Series B Convertible Preferred Stock has a $92.5 million carrying value, accumulates dividends at 6.0% annually, and had $17.2 million of unpaid accumulated dividends at June 30, 2023. It was convertible into approximately 30.4 million common shares, creating significant potential dilution. The filing also reports $31.6 million of unrecognized equity-award compensation expense.
Material legal matters include the securities class action, for which the appellate court affirmed dismissal in July 2023 but a petition for rehearing en banc remained pending as of the filing, and Welker v. MiMedx, in which the company’s motion to dismiss was pending. The company stated that it had not accrued potential losses related to legal matters as of June 30, 2023, although it had accrued $5.2 million of legal and settlement costs within accrued expenses.
Other unusual items include the $0.5 million goodwill impairment, $2.1 million clinical-trial asset impairment, $2.1 million restructuring-related severance, $8.4 million of six-month share-based compensation, and $4.7 million of investigation, restatement, and related costs.
Important Facts for Investors to Verify
- Verify whether Wound & Surgical revenue growth and the 83% gross-margin range are sustainable after the Regenerative Medicine wind-down.
- Assess the company’s ability to refinance or repay the $50.0 million Hayfin term loan at its June 2025 maturity, particularly given the 12.1% interest rate and covenant requirements.
- Track operating cash flow, working-capital requirements, accounts receivable collections, and inventory growth relative to sales.
- Evaluate the impact of the $17.2 million unpaid Series B preferred dividends and potential conversion of approximately 30.4 million shares.
- Monitor remaining clinical-trial termination costs, severance obligations, and any reimbursement or claims under the terminated Nordic Agreement.
- Review developments in the securities class action, Welker litigation, former-officer indemnification matters, and other regulatory or legal proceedings.
- Consider the effect of recurring share-based compensation and other adjustments when interpreting Adjusted EBITDA, which is a non-GAAP measure.