MiMedx Group, Inc. — Q1 2021 Form 10-Q Summary
Business context and reporting period
MiMedx develops and sells placental tissue allografts derived from human amniotic and umbilical cord tissue, primarily for wound care, surgical, burn, and sports medicine applications. The company is also advancing a late-stage pipeline for musculoskeletal conditions, including AmnioFix Injectable (mdHACM). This unaudited report covers the three months ended March 31, 2021, compared with the three months ended March 31, 2020.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $60.0 million | $61.7 million | Down 2.9% |
| Adjusted net sales | $59.7 million | $57.2 million | Up 4.2% |
| Gross profit | $50.3 million | $51.7 million | Down 2.7% |
| Gross margin | 83.9% | 83.8% | Up 0.1 percentage point |
| Operating loss | $6.9 million | $13.7 million | Improved $6.9 million |
| Net loss | $8.4 million | $4.8 million | Worsened $3.6 million |
| Net loss available to common stockholders | $9.9 million | $4.8 million | Worsened $5.0 million |
| Adjusted EBITDA | $4.7 million | $3.1 million | Improved $1.6 million |
| Adjusted EBITDA margin | 7.9% | 5.0% | Up 2.9 percentage points |
Reported sales included $0.3 million of revenue from legacy “Remaining Contracts,” compared with $4.5 million in the prior-year quarter. Excluding this revenue-recognition effect, adjusted sales increased primarily because of higher volume from products launched in 2020.
- Selling, general and administrative expense declined 3.3% to $45.4 million, primarily due to lower travel costs.
- Investigation, restatement and related expense declined 53.8% to $7.2 million, as restatement activities concluded in mid-2020 and certain legal expenses decreased.
- Research and development expense increased 63.7% to $4.3 million, reflecting greater clinical, consulting, personnel, and preclinical investment.
- Interest expense declined 38.3% to $1.5 million following refinancing of the prior Blue Torch debt with the Hayfin facilities.
- Cash used in operating activities was $6.7 million, compared with $12.3 million in Q1 2020. Capital expenditures and other investing uses totaled $2.1 million.
- Cash and cash equivalents were $84.7 million at March 31, 2021, down from $95.8 million at December 31, 2020.
- Working capital was approximately $94.6 million, with a current ratio of 2.7.
- Total assets were $190.8 million and total liabilities were $106.8 million. Stockholders’ deficit was $8.1 million, excluding $92.0 million of Series B convertible preferred stock classified as temporary equity.
Debt, preferred stock, and liquidity
MiMedx had $50.0 million of principal outstanding under a senior secured Hayfin term loan, presented net of financing costs and discount as $47.8 million. The loan matures June 30, 2025, carries an interest rate of 8.3% at March 31, 2021, and requires no scheduled principal payments before maturity. A committed delayed-draw facility of up to $25 million remained undrawn.
The credit facilities require a maximum total net leverage ratio of 4.5x through June 30, 2021 and 4.0x thereafter, plus minimum liquidity of $10 million. The company reported a total net leverage ratio of 3.6x and stated that it was in compliance with its covenants at March 31, 2021.
The company issued $100 million of Series B convertible preferred stock in July 2020. The preferred stock bears a cumulative dividend of 4.0% through June 30, 2021 and 6.0% thereafter. Dividends in arrears were approximately $3.0 million at March 31, 2021 and had not been paid. The preferred stock was convertible into approximately 26.8 million common shares, including accumulated dividends, at quarter-end.
Material changes versus the prior comparable period
- Reported sales decreased, but adjusted sales increased because Q1 2020 included substantially more collections under legacy contracts.
- Gross margin remained broadly stable at approximately 84%.
- Operating loss improved substantially due to lower investigation, restatement, and related costs.
- Net loss increased because Q1 2020 benefited from an $11.3 million tax benefit related to CARES Act net operating loss carrybacks; Q1 2021 had a $0.1 million tax provision.
- Adjusted EBITDA improved despite lower reported sales.
- Research and development spending increased materially as the company advanced clinical and regulatory programs.
- Cash declined by $11.1 million during the quarter, primarily from operating losses, capital expenditures, and employee tax-withholding share repurchases.
- Material weaknesses in internal control over financial reporting remained unremediated; disclosure controls were concluded to be ineffective as of March 31, 2021.
Guidance, outlook, risks, and unusual items
- The FDA confirmed that enforcement discretion for certain products regulated under Section 351 would end May 31, 2021. MiMedx expected to cease marketing micronized and particulate products after that date until applicable regulatory approvals are obtained. These products generated $8.2 million, or approximately 14%, of Q1 2021 net sales.
- Management expected the regulatory change to negatively affect operations and warned that an unmitigated impact could cause a financial covenant breach. A breach could permit acceleration of the debt, require immediate repayment, or increase the applicable interest rate.
- Management stated that existing cash and anticipated operating cash flows were expected to fund operational liquidity needs for the 12 months following the filing, including the anticipated impact of the FDA change.
- The company plans additional clinical, manufacturing, quality, IND, BLA, and CGMP investments. Research and development costs are expected to rise as clinical programs progress.
- COVID-19 continued to restrict access to hospitals and healthcare providers and affected elective procedures, sales activity, and clinical trials. The company could not reliably estimate the future effect on demand or provider payment capacity.
- MiMedx continued to face litigation, regulatory inquiries, indemnification claims, and legal costs. It had accrued $6.9 million for legal proceedings at March 31, 2021, of which $0.7 million was expected to be covered by insurance, and paid $4.4 million toward legal matters during the quarter.
- The company was cooperating with Department of Defense and Veterans Affairs-related investigations and stated that it could not predict whether those investigations would result in proceedings or liability.
- There were no material changes to the risk factors reported in the 2020 Form 10-K, and no off-balance-sheet arrangements were reported.
Most important facts for investors to verify
- Actual sales and profitability after the May 31, 2021 end of FDA enforcement discretion, particularly for micronized and particulate products.
- Compliance with the 4.0x leverage covenant after June 30, 2021 and maintenance of the $10 million minimum liquidity requirement.
- Cash burn, capital expenditures, clinical development spending, and the company’s ability to fund operations without additional financing.
- Status and potential financial impact of DOJ, VA, and Department of Defense investigations and other litigation or indemnification claims.
- Progress toward remediation of material weaknesses in internal control over financial reporting.
- Terms, accumulated dividends, potential dilution, and change-of-control rights associated with the Series B preferred stock.
- Whether adjusted EBITDA and adjusted net sales remain representative of sustainable operating performance, given the company’s non-GAAP adjustments and legacy revenue-recognition items.