MiMedx Group, Inc. 2020 Q2 Form 10-Q Summary
Business context and reporting period
MiMedx develops and distributes human placental tissue allografts for advanced wound care and therapeutic biologics applications across wound care, surgical, orthopedic, spine, sports medicine, ophthalmic and dental markets. The filing covers the three and six months ended June 30, 2020, compared with the corresponding 2019 periods. Results are affected by COVID-19, ongoing legal and regulatory matters, and remediation of historical revenue-recognition and internal-control issues.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $53.6 million | $67.4 million | $115.4 million | $134.0 million |
| Gross profit | $45.4 million | $57.7 million | $97.2 million | $116.8 million |
| Gross margin | 84.7% | 85.5% | 84.2% | 87.2% |
| Operating loss | $5.9 million | $17.1 million | $19.6 million | $30.5 million |
| Net loss | $8.5 million | $17.2 million | $13.3 million | $30.5 million |
| Net loss per share | $0.08 | $0.16 | $0.12 | $0.29 |
| Adjusted EBITDA | $10.2 million | $9.5 million | $13.4 million | $20.4 million |
| Adjusted EBITDA margin | 19.1% | 14.1% | 11.6% | 15.2% |
Cash and cash equivalents were $48.2 million at June 30, 2020, compared with $69.1 million at December 31, 2019. Working capital was $43.9 million, with current assets of $107.6 million and current liabilities of $63.7 million. Net cash used in operating activities was $15.4 million for the six months, versus $13.1 million in the prior-year period. Investing cash use was $1.6 million, primarily for equipment and patent costs. Financing cash use was $3.9 million, compared with $65.7 million of financing cash provided in 2019.
Debt reported at June 30 consisted primarily of the Blue Torch term loan, with a net carrying value of $65.2 million, including current and long-term portions. The loan bore interest at LIBOR plus 9.0% after an April 2020 amendment. The company also received and repaid a $10.0 million Paycheck Protection Program loan in full during May 2020.
Material changes versus the prior comparable period
- Q2 revenue declined 20.4% and six-month revenue declined 13.9%, primarily due to COVID-19-related restrictions on hospital access, elective procedures and patient visits.
- Direct-customer sales declined to $52.8 million in Q2 from $65.2 million; distributor sales declined to $0.9 million from $2.2 million.
- Gross margin decreased for the six-month period to 84.2% from 87.2%, reflecting higher cGMP-related costs, operational scrap, lower yields and unfavorable product mix.
- SG&A declined 26.3% in Q2 and 17.0% for the six months, aided by lower salaries, commissions, travel, legal, consulting and accounting costs.
- Investigation, restatement and related expense declined to $11.4 million in Q2 and $27.0 million for the six months, partly reflecting $5.0 million of insurance recoveries and lower investigation costs.
- Interest expense increased substantially because the Blue Torch term loan was outstanding for the full 2020 periods.
- The company changed its revenue-recognition pattern effective October 1, 2019. The 2019 comparison primarily reflects cash-receipts recognition, while 2020 revenue is generally recognized upon shipment or implantation. Approximately $2.8 million of invoiced amounts remained unrecognized at June 30, 2020, with $0.4 million of associated deferred cost of sales recorded in other current assets.
Guidance, outlook, risks and unusual items
No formal revenue or earnings guidance is provided. Management expects to continue investing in clinical research, additional INDs, BLA programs for certain micronized products, and cGMP compliance. Research and development expense is expected to increase over time as these programs advance.
COVID-19 disrupted sales and clinical-trial activity, although management reported only a modest effect on sourcing and manufacturing as of the filing date. Management implemented salary reductions, deferred merit increases, reduced discretionary spending and negotiated vendor discounts, estimating approximately $9.0 million of savings through June 30, 2020. Further waves of COVID-19, renewed limits on elective procedures, reduced hospital access, supply interruptions or lower provider demand could materially affect results.
On July 2, 2020, subsequent to quarter-end, MiMedx issued $100.0 million of Series B convertible preferred stock and obtained a $50.0 million senior secured Hayfin term loan plus a committed, undrawn $25.0 million delayed-draw facility. The Hayfin facilities mature July 2, 2025, bear interest at LIBOR plus 6.75% subject to specified step-downs, and include leverage and minimum-liquidity covenants. MiMedx used proceeds to repay approximately $72.0 million of Blue Torch principal and accrued amounts and paid a $1.4 million prepayment premium.
The FDA extended its enforcement-discretion period for certain micronized products to May 31, 2021. Continued marketing, BLA requirements, cGMP compliance and potential changes in FDA treatment remain significant regulatory risks.
Legal and regulatory matters remain material. The company accrued $5.8 million for legal proceedings at June 30, 2020 and paid $7.0 million for legal settlements during the first six months, including $6.5 million to resolve a False Claims Act matter. The company continues to face securities litigation, derivative actions, government investigations, qui tam litigation, intellectual-property claims and other disputes.
Management concluded that disclosure controls and procedures were not effective as of June 30, 2020 because of unremediated material weaknesses in internal control over financial reporting. Remediation continued during 2020, with a goal of full remediation during the year, but the filing does not establish that the weaknesses had been remediated.
Important facts for investors to verify
- Reconcile revenue trends using the different 2019 cash-receipts and 2020 as-shipped revenue-recognition methods, including the $2.8 million of remaining unrecognized billings.
- Assess post-quarter-end capitalization, including the preferred stock terms, cumulative dividend rates, conversion features and potential dilution.
- Review Hayfin leverage, liquidity and other covenant requirements and the company’s ability to fund continuing operating cash burn.
- Monitor COVID-19 effects on elective procedures, hospital access, clinical trials, product demand and placental-tissue sourcing.
- Track FDA enforcement-discretion expiration, BLA and IND progress, and costs required for cGMP compliance.
- Evaluate the potential financial impact and timing of outstanding litigation, government investigations, settlements and indemnification obligations.
- Confirm whether the identified internal-control material weaknesses have been fully remediated in subsequent filings.