Business Context and Reporting Period
MiMedx Group, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2022. The company develops and sells placental tissue allografts, primarily for advanced wound care, surgical recovery and related healthcare applications. Products are derived from human placental tissue and processed using proprietary methods, including the PURION process.
Following the FDA’s May 31, 2021 expiration of enforcement discretion, MiMedx stopped marketing its micronized and particulate Section 351 products in the United States pending required regulatory approval. The company continues to market Section 361 tissue and cord products.
Financial Performance and Position
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $58.9 million | $60.0 million | Down 1.8% |
| Gross profit | $49.0 million | $50.3 million | Down 2.7% |
| Gross margin | 83.1% | 83.9% | Down 80 basis points |
| Operating loss | $9.3 million | $6.9 million | Higher loss |
| Net loss | $10.5 million | $8.4 million | Higher loss |
| Net loss available to common shareholders | $12.1 million | $9.9 million | Higher loss |
| Basic and diluted loss per share | $0.11 | $0.09 | Higher loss per share |
| Net cash used in operating activities | $10.2 million | $6.7 million | Higher use of cash |
| Adjusted EBITDA | $(1.7) million | $5.0 million | Declined $6.7 million |
Advanced Wound Care sales increased 13.4% to $58.4 million. Tissue/Other sales rose 13.5% to $52.9 million, and Cord sales rose 12.8% to $5.6 million. Section 351 sales declined 95.4%, to $0.4 million from $8.1 million, reflecting the loss of U.S. marketing rights. Direct-customer sales were $57.5 million, while distributor sales were $1.4 million.
Selling, general and administrative expense increased 9.2% to $49.6 million, primarily due to personnel, commissions and travel. Research and development expense increased 37.5% to $6.0 million as the company expanded headcount for clinical research and late-stage programs. Investigation, restatement and related expense declined 64.5% to $2.6 million.
Cash and cash equivalents were $75.7 million at March 31, 2022, compared with $87.1 million at December 31, 2021. Current assets were $135.9 million and current liabilities were $36.6 million, producing a reported current ratio of 3.7. Inventory increased to $13.2 million from $11.4 million, while accounts receivable declined to $37.7 million from $40.4 million.
Long-term debt, net, was $48.2 million, representing a $50.0 million senior secured term loan that matures June 30, 2025. The loan carried an 8.3% interest rate at March 31, 2022, with no scheduled principal payments before maturity. Series B preferred stock had a carrying value of $92.5 million and $8.8 million of accumulated, unpaid dividends that were not recorded as a balance-sheet liability.
Material Changes Versus the Prior Comparable Period
- Revenue was broadly stable overall, but the mix shifted materially from Section 351 products to Advanced Wound Care products.
- Advanced Wound Care growth largely offset the loss of U.S. Section 351 revenue.
- Gross margin decreased because of inflationary materials and labor costs, partially offset by improved yields and lower inventory write-downs.
- SG&A and research and development spending increased, resulting in a larger operating and net loss.
- Adjusted EBITDA deteriorated from positive $5.0 million to negative $1.7 million.
- Operating cash use increased by $3.5 million, primarily because of accrued compensation payments, including commissions and deferred payroll taxes.
- Investing cash use decreased to $0.1 million from $2.1 million, primarily because capital expenditures declined.
- The company amended its Hayfin loan agreement on February 28, 2022; the filing states that the amendment did not change the debt carrying amount.
Guidance, Outlook, Risks and Unusual Items
Management stated that existing cash and cash generated from operations are expected to be sufficient to meet obligations as they come due for the 12 months following the filing date. Anticipated cash needs include clinical and regulatory programs, potential international expansion, manufacturing investments and indemnification obligations involving former management members. No formal revenue or earnings guidance is provided.
Management expects SG&A as a percentage of sales to decline over the remainder of 2022 because first-quarter expenses are affected by seasonal insurance deductibles and the company expects sales to be higher in subsequent quarters. Investigation, restatement and related expenses are also expected to decrease over time, although ongoing litigation and indemnification costs remain possible.
- The company cannot market affected Section 351 products in the United States until the FDA grants the required approval, including a BLA where applicable. Future regulatory approval and commercial timing remain uncertain.
- EPICORD and AMNIOCORD could require additional regulatory clearance or approval if the FDA determines they do not qualify for Section 361 regulation. Cord inventory of $2.3 million would be exposed to potential write-down in that event.
- The Hayfin agreement requires minimum liquidity of $20 million and compliance with sales-related financial covenants. The company reported compliance at March 31, 2022, but a breach could permit acceleration of the debt.
- The company remains exposed to litigation, regulatory proceedings and indemnification obligations. It had accrued $0.3 million for legal proceedings at quarter-end and stated that actual resolution costs could differ materially.
- The securities class action was dismissed, but the lead plaintiff filed an appeal on February 25, 2022.
- COVID-19 effects had largely ameliorated and were not material to operations during the quarter, although future variants and related responses could affect operations.
- Series B preferred stock is convertible into common stock and may create substantial future dilution. Potential common shares were excluded from diluted loss per share because they were antidilutive.
Important Facts for Investors to Verify
- Whether Advanced Wound Care growth can continue to offset the largely eliminated U.S. Section 351 revenue.
- The timing, cost and probability of IND, BLA and other FDA approvals for the company’s late-stage product candidates.
- Whether operating cash use and negative Adjusted EBITDA improve sufficiently to preserve liquidity.
- Compliance with the Hayfin loan’s $20 million minimum liquidity and sales-related covenants, particularly as the 2025 maturity approaches.
- The potential dilution and economic obligations associated with the Series B preferred stock, including the $8.8 million accumulated unpaid dividend balance.
- The ultimate cost and timing of securities litigation, former-officer indemnification matters and other regulatory or legal proceedings.
- Whether inflation, labor costs, inventory levels and product yields materially affect future gross margins.