MIMEDX GROUP, INC. annual report, FY2019

MiMedx Group, Inc. 2019 Form 10-K Summary

Business context and reporting period

MiMedx develops and sells human placental tissue allografts for advanced wound care, surgical, orthopedic, sports medicine, burn, ophthalmic and dental applications. The company operates in one segment, Regenerative Biomaterials, and generates substantially all revenue in the United States. This Form 10-K covers the fiscal year ended December 31, 2019 and was filed July 6, 2020. The filing also presents fourth-quarter 2019 results and material events through the filing date.

The company’s 2019 results remain affected by the Audit Committee investigation, financial restatement, revenue-recognition remediation, significant litigation and regulatory costs, workforce reductions, adverse reimbursement developments and the pending transition of certain products from Section 361 HCT/P regulation toward Section 351 biologics regulation.

Financial performance and liquidity

Metric	2019	2018	Change
Net sales	$299.3 million	$359.1 million	Down 16.7%
Gross profit	$256.2 million	$322.7 million	Down 20.6%
Gross margin	85.6%	89.9%	Down 430 basis points
Operating loss	$21.2 million	$3.9 million	Higher loss
Net loss	$25.6 million	$30.0 million	Improved by $4.4 million
Adjusted EBITDA	$42.1 million	$69.1 million	Down 39.1%
Net cash used in operating activities	$39.4 million	$35.8 million provided	Decrease of $75.2 million

Fourth-quarter 2019 net sales were $76.4 million, compared with $92.6 million in the fourth quarter of 2018. Fourth-quarter net loss was $7.5 million, compared with a $36.2 million loss in the prior-year quarter. The third quarter of 2019 included a $29.6 million revenue-recognition transition benefit, making quarterly comparisons less representative.

• Cash and cash equivalents were $69.1 million at December 31, 2019, compared with $45.1 million at December 31, 2018.
• Net working capital was $55.9 million, compared with $2.5 million in 2018; the increase primarily reflected accounts receivable recognized under the revised revenue-recognition approach and cash collections.
• Total assets were $167.2 million and total liabilities were $132.8 million at year-end. Stockholders’ equity was $34.4 million.
• The company borrowed $75.0 million under the Blue Torch term loan in June 2019. At December 31, 2019, the loan’s net carrying value was $65.7 million, consisting of $3.8 million current debt and $61.9 million long-term debt. The stated interest rate was 10.11% at year-end.
• Investing activities provided $0.5 million, including $2.7 million of note-receivable repayments, while capital expenditures were $1.8 million.
• Investigation, restatement and related expenses were $66.5 million in 2019, compared with $51.3 million in 2018.

Material changes versus the prior comparable period

• Revenue declined primarily because of unfavorable insurance coverage developments, fewer sales personnel following a workforce reduction, negative publicity related to the investigation, and discontinuation of the OrthoFlo and AmnioFix Sports Medicine product lines.
• Micronized product revenue was $42.4 million in 2019, down from $68.4 million in 2018. These products remain subject to significant regulatory risk.
• Gross margin declined because lower production volumes spread fixed overhead over fewer units, cGMP-related production costs increased and scrap levels rose.
• SG&A declined 23.3% to $198.2 million, reflecting workforce reductions, lower commissions and lower general and administrative costs. The company reported approximately $37 million of cumulative savings from its organizational realignment through December 31, 2019.
• Research and development expense declined 29.3% to $11.1 million in 2019, but management expects increased spending as additional INDs and BLAs are pursued.
• Revenue recognition changed effective October 1, 2019 for new and certain existing arrangements. Approximately $29.6 million of revenue was recognized from the transition adjustment and fourth-quarter collections. Approximately $10.3 million of unpaid customer contracts was written off because collection was no longer reasonably assured, with $1.4 million of related deferred cost of sales also written off.
• Following the 2018 workforce reduction of approximately 240 employees, or 24% of the workforce, the company had 696 employees at December 31, 2019.

Guidance, outlook, management commentary and risks

• Management expected second-quarter 2020 sales to decline 23% to 27% from $67.4 million in the second quarter of 2019, with gross margin expected at 84% to 86% and SG&A expected to decline 16% to 20%. Management cautioned that COVID-19 made 2020 forecasting particularly difficult.
• COVID-19 began affecting the business in late first-quarter 2020 through reduced hospital access, delayed elective procedures, lower patient visits and slower clinical-trial enrollment. The filing states that the pandemic did not affect 2019 results.
• The FDA’s enforcement-discretion period for certain products marketed as Section 361 HCT/Ps was scheduled to expire in November 2020. After that period, MiMedx may need to stop selling micronized and other Section 351 products until BLAs are approved.
• MiMedx had three AmnioFix Injectable IND programs: plantar fasciitis, Achilles tendonitis and knee osteoarthritis. Interim analyses indicated that larger sample sizes or other protocol changes were needed to establish statistical and clinical significance. The company expected to file a plantar-fasciitis BLA in the second half of 2021 if the relevant trials were successful, but stated approval could take several years or may not occur.
• The company planned to file INDs for AmnioFill and injectable micronized EpiFix in the second half of 2020, although clinical enrollment was not expected to begin in 2020 because of anticipated FDA and COVID-19 delays.
• FDA cGMP inspections in December 2019 resulted in nine observations at the Marietta facility and 14 observations at the Kennesaw facility. The company stated that remedial actions were complete as of the filing date, but there was no assurance that the FDA would agree or that compliance would be achieved on schedule.
• The company’s disclosure controls and internal control over financial reporting were ineffective at December 31, 2019. BDO USA, LLP issued an adverse opinion on internal control over financial reporting, citing material weaknesses in the control environment, information technology, financial reporting, revenue, inventory, income taxes, procure-to-pay processes and other controls.
• The company accrued $12.8 million for legal proceedings at December 31, 2019 and stated that losses in excess of the recorded amount were reasonably possible but could not be estimated. It also expects continuing indemnification and legal expenses.
• The company settled with the SEC for a $1.5 million civil penalty in November 2019 and agreed to pay $6.5 million to the DOJ in April 2020 concerning VA Federal Supply Schedule pricing disclosures.
• On July 2, 2020, the company issued $100 million of Series B Convertible Preferred Stock and borrowed $50 million under a new Hayfin facility with an additional committed but undrawn $25 million delayed-draw facility. Proceeds were used in part to repay and terminate the Blue Torch loan. Following the transactions, the company reported approximately $110 million of cash and $50 million of long-term debt.
• The Hayfin debt bears interest at LIBOR plus 6.75%, subject to a 1.5% LIBOR floor, and includes leverage and minimum-liquidity covenants. The Series B Preferred Stock carries cumulative dividends of 4% initially and 6% thereafter, ranks senior to common stock and is convertible at an initial $3.85 conversion price, subject to ownership and anti-dilution provisions.
• Common stock was delisted from Nasdaq effective March 8, 2019 because of delinquent SEC filings and traded on the OTC market. Management intended to seek relisting but could not guarantee that relisting would occur.

Most important facts for investors to verify

• Whether the company successfully remediated the material weaknesses and maintained effective internal controls in subsequent reporting periods.
• The final outcome and cash cost of securities class actions, derivative litigation, qui tam matters, VA-related investigations, indemnification obligations and other contingencies.
• Whether the FDA accepted the company’s cGMP remediation and whether any products were removed from the market after enforcement discretion expired.
• The status, enrollment, statistical results, filing dates and approval prospects for the AmnioFix Injectable, AmnioFill and injectable EpiFix IND/BLA programs.
• The durability of revenue after the 2019 revenue-recognition transition, including collectibility of the remaining $9.0 million of unpaid contracts at year-end.
• 2020 and subsequent-period sales trends, reimbursement changes, GPO and IDN concentration, and the continuing impact of COVID-19 on elective procedures and clinical trials.
• Compliance with Hayfin leverage and liquidity covenants, interest-rate exposure and the company’s ability to fund cGMP investments, clinical development and litigation costs.
• The potential dilution, dividend burden, governance influence and liquidation preference associated with the Series B Convertible Preferred Stock.