MiMedx Group, Inc. Form 10-Q Summary
Reporting period: Three months ended March 31, 2020. The supplied metadata identifies “2019 Q3,” but the filing is the Company’s first-quarter 2020 Form 10-Q, filed July 6, 2020.
Business Context and Reporting Status
MiMedx develops and sells human placental tissue allografts for advanced wound care, surgical, orthopedic, spine, sports medicine, ophthalmic, dental and related applications. The Company operates as one Regenerative Biomaterials segment and primarily serves the U.S. market through direct customers and distributors.
The filing follows a significant accounting investigation and restatement involving prior-period revenue recognition. The Company had not filed periodic reports after October 2017 until filing its 2018 Form 10-K on March 17, 2020. Management reported that disclosure controls and internal control over financial reporting remained ineffective as of March 31, 2020 because of material weaknesses.
Financial Highlights
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $61.7 million | $66.6 million | Down 7.2% |
| Gross profit | $51.7 million | $59.1 million | Down 12.6% |
| Gross margin | 84% | 89% | Down 5 percentage points |
| Operating loss | $13.7 million | $13.4 million | Loss widened modestly |
| Net loss | $4.8 million | $13.3 million | Improved by $8.5 million |
| Basic and diluted loss per share | $0.04 loss | $0.12 loss | Improved |
| Adjusted EBITDA | $3.1 million | $10.9 million | Down $7.8 million |
| Cash used in operating activities | $12.3 million | $15.3 million | Use improved by $3.0 million |
Net sales were primarily recognized on an “as-shipped” basis in 2020, compared with a “cash-receipts” basis in 2019. Direct-customer sales were $59.9 million and distributor sales were $1.8 million.
Cost of sales increased to $10.0 million from $7.4 million, reflecting higher quality standards associated with current Good Manufacturing Practices and investments in Biologic License Application programs. Selling, general and administrative expense declined 7.7% to $46.9 million, while investigation, restatement and related expense declined 13.9% to $15.6 million.
The reported net loss benefited from an $11.3 million income tax benefit under the CARES Act, relating primarily to net operating loss carrybacks and an expected federal tax refund. Without this discrete tax benefit, reported net profitability would have been materially weaker.
Cash, Debt and Liquidity
- Cash and cash equivalents were $53.5 million at March 31, 2020, compared with $69.1 million at December 31, 2019.
- Current assets were $115.9 million and current liabilities were $63.7 million, representing a current ratio of approximately 1.8.
- Debt consisted primarily of the Blue Torch term loan, with a net carrying value of $65.4 million, including $3.8 million classified as current, at March 31, 2020. The loan’s stated interest rate was 9.95% at quarter-end.
- Cash used in investing activities was $1.1 million, including $1.0 million of equipment purchases. Cash used in financing activities was $2.2 million, including $0.9 million of term-loan repayments and $1.5 million of employee tax-withholding share repurchases.
- On April 22, 2020, the Blue Torch facility was amended to relax leverage and minimum-liquidity covenants. The interest rate increased to LIBOR plus 9% and the Company incurred an approximately $0.7 million amendment fee.
- On April 24, 2020, the Company received a $10.0 million PPP loan and repaid it in full on May 11, 2020.
- On July 2, 2020, the Company issued $100 million of Series B convertible preferred stock and borrowed $50 million under a new Hayfin senior secured term loan, with an additional $25 million committed but undrawn facility. Proceeds were used in part to repay the Blue Torch loan, including $72.0 million of principal, accrued interest and a $1.4 million prepayment premium.
Material Changes Versus the Prior Comparable Period
- Revenue declined 7.2%, primarily because COVID-19 reduced shipment levels during the second half of March.
- Gross margin fell from 89% to 84% because of higher cGMP-related quality costs and BLA investments.
- Operating expenses declined overall, including lower investigation, restatement and legal-related costs, but remained substantial.
- Interest expense increased significantly because of the Blue Torch term loan; net interest changed from $0.2 million of income to $2.4 million of expense.
- Operating cash outflow improved but remained negative at $12.3 million.
- Adjusted EBITDA declined from $10.9 million to $3.1 million, despite the improvement in GAAP net loss caused largely by the CARES Act tax benefit.
- Revenue recognition remained subject to heightened judgment. At March 31, 2020, approximately $4.5 million of remaining-contract amounts had not met the Company’s contract criteria and would be recognized when collected. Approximately $10.3 million of other existing contracts had not been recognized because collectibility was not considered probable.
Guidance, Outlook, Risks and Unusual Items
Management did not provide quantitative revenue or earnings guidance. It expects to continue investing in cGMP-compliant manufacturing, clinical and regulatory programs, including BLA efforts for micronized dHACM products.
COVID-19 restricted access to hospitals and healthcare providers, reduced elective procedures and adversely affected sales beginning late in the first quarter. Manufacturing and tissue sourcing were described as only modestly affected through mitigation measures, including additional donor hospitals, third-party tissue providers and safety-stock inventory. Management stated that future demand remains difficult to forecast because of potential further infection waves and renewed restrictions.
Management implemented expense controls, including canceled discretionary spending, vendor discounts, deferred merit increases and temporary salary reductions. These actions were estimated to save approximately $9.0 million through June 30, 2020, although margins could remain temporarily pressured until sales recover.
Material risks include ongoing litigation and investigations, regulatory compliance and potential product restrictions, reimbursement changes, supply of donated tissue, cGMP and FDA requirements, clinical and BLA execution, variable-rate debt, COVID-19 effects, and the continuing remediation of material weaknesses. The Company had accrued approximately $12.8 million for specified legal proceedings at March 31, 2020 and stated that ultimate outcomes could differ materially from recorded reserves.
The Company reported that it expected existing cash, operating cash flows and the July financing transactions to support operating and investing needs for the following year, but continued negative operating cash flow, litigation exposure and regulatory spending remain important liquidity considerations.
Investor Verification Checklist
- Verify the effect of the change from cash-receipts revenue recognition in 2019 to primarily as-shipped recognition in 2020, including the $4.5 million of remaining contracts and $10.3 million of unrecognized contracts.
- Assess recurring operating performance excluding the $11.3 million CARES Act tax benefit and other investigation, restatement and nonrecurring adjustments.
- Review subsequent financing terms, including the preferred stock’s conversion and economic features, Hayfin covenants, interest rate exposure and the repayment of the Blue Torch facility.
- Monitor COVID-19 effects on elective procedures, hospital access, tissue sourcing, sales activity and cash generation.
- Track the remediation of material weaknesses in internal controls and the reliability of future filings.
- Review pending securities, derivative, qui tam, regulatory and intellectual-property matters and compare accrued reserves with potential exposure.
- Confirm the Company’s ability to fund cGMP investments, BLA programs, litigation obligations and debt service while maintaining required liquidity.