MiMedx Group, Inc. — Form 10-Q Summary
Business Context and Reporting Period
MiMedx develops, manufactures 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.
This report covers the three months ended March 31, 2019. The filing was submitted while the company was attempting to become current after not filing periodic reports after October 2017. Previously issued financial statements for multiple periods were deemed unreliable and required restatement because of revenue-recognition irregularities and undisclosed side agreements.
Financial Performance and Position
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $66.6 million | $84.1 million | Down 20.9% |
| Gross profit | $59.1 million | $74.8 million | Down 20.9% |
| Gross margin | 88.9% | 88.9% | Flat |
| Operating income (loss) | $(13.4) million | $3.0 million | Decline of $16.4 million |
| Net income (loss) | $(13.3) million | $4.6 million | Decline of $17.9 million |
| Basic and diluted EPS | $(0.12) | $0.04 | Unfavorable change |
| Adjusted EBITDA | $10.9 million | $11.5 million | Down 5.4% |
| Cash used in operating activities | $(15.3) million | $10.2 million provided | Down $25.5 million |
Gross margin was approximately 89%, while operating and net margins were approximately negative 20%. Selling, general and administrative expense declined 22.8% to $50.9 million following a workforce reduction of approximately 240 employees, or 24% of the workforce. Investigation, restatement and related costs increased to $18.1 million from $2.1 million. Research and development expense declined to $2.9 million.
Cash and cash equivalents were $28.4 million at March 31, 2019, compared with $45.1 million at December 31, 2018. Current assets were $57.2 million and current liabilities were $64.3 million, resulting in negative working capital of approximately $7.2 million. Inventory was $16.4 million. Total assets were $107.4 million and stockholders’ equity was $38.4 million.
The company had no borrowings outstanding under its former $50 million revolving credit facility, but the lenders terminated their commitments in August 2018 because of the company’s failure to file periodic reports. The June 2019 Blue Torch term loan described in subsequent events was not outstanding as of March 31, 2019.
Material Changes Versus the Prior Comparable Period
- Revenue declined $17.6 million, primarily because of fewer units sold, unfavorable insurance-coverage developments, reduced sales personnel and negative publicity associated with the investigation.
- Operating results shifted from income to significant losses, driven principally by lower revenue and $18.1 million of investigation, restatement and related expenses.
- Operating cash flow changed from $10.2 million provided to $15.3 million used, reflecting the net loss and unfavorable changes in accounts payable and accrued compensation.
- Capital expenditures declined to $0.6 million from $3.1 million, and investing cash use declined to $0.4 million from $3.1 million.
- Financing cash use declined to $1.0 million from $8.1 million; Q1 2019 activity primarily reflected $1.0 million of shares withheld for employee tax obligations, whereas Q1 2018 included stock repurchases and option-exercise proceeds.
- The company adopted the new lease standard on January 1, 2019, recording a $4.1 million right-of-use asset and lease liabilities of approximately $4.9 million.
- The company recorded $0.4 million of intangible-asset impairment and approximately $0.8 million of patent and patent-in-process write-downs due to abandonment.
Guidance, Outlook, Risks and Unusual Items
Management stated that existing cash and anticipated operating and financing resources were expected to fund operational liquidity needs and planned investing activities for the twelve months following issuance of the financial statements. No specific revenue or earnings guidance was provided.
Management expected continued investment in cGMP compliance, clinical and regulatory programs, investigational new drug applications and biologic license applications for micronized dHACM products. The company identified potential long-term demand from aging, obesity and diabetes trends affecting chronic wounds.
- Revenue recognition remained subject to significant uncertainty because of historical side agreements, extended payment terms, return rights and collectability concerns. Revenue was recognized when uncertainties were resolved, generally upon customer payment or product return.
- Disclosure controls and procedures were ineffective as of March 31, 2019 because of unremediated material weaknesses in internal control over financial reporting.
- The company faced substantial litigation, regulatory investigations and indemnification obligations. Accrued expenses included $14.3 million of legal costs and $9.6 million of settlement costs; approximately $16.4 million was accrued for legal proceedings.
- The SEC investigation resulted in a $1.5 million civil penalty paid in November 2019. The company also disclosed ongoing Department of Justice, VA-OIG, shareholder, securities-class-action, qui tam, employment, defamation and intellectual-property matters.
- The company’s common stock was suspended from Nasdaq in November 2018 and delisted in March 2019, materially limiting access to capital markets and potentially reducing shareholder liquidity.
- Subsequent events included a $75 million Blue Torch term loan in June 2019, later repaid in July 2020; a $100 million Series B preferred-stock investment and $50 million Hayfin term loan funded in July 2020; and a $10 million PPP loan received and repaid in 2020. These transactions were not available liquidity at March 31, 2019.
- The filing states that COVID-19 adversely affected the business from late March 2020 onward and could materially affect operations, clinical trials, healthcare systems, results and liquidity.
Investor Verification Checklist
- Verify the restated historical financial statements and the resolution of the revenue-recognition issues, including the treatment of customer returns, concessions and collectability.
- Assess whether material weaknesses in internal controls were remediated and whether subsequent filings were timely and reliable.
- Reconcile the company’s liquidity plan with operating cash burn, negative working capital, legal obligations and the availability and terms of subsequent financing.
- Review the status, reserves and potential exposure of SEC, DOJ, VA-OIG, qui tam, securities-class-action and shareholder litigation matters.
- Evaluate the effect of delisting, restricted capital-market access and any later relisting efforts on financing capacity and shareholder liquidity.
- Confirm the sustainability of reported adjusted EBITDA, particularly the exclusion of investigation, restatement, impairment and share-based compensation costs.
- Assess regulatory and reimbursement risks for micronized products, including FDA enforcement discretion, cGMP compliance and planned BLA programs.