MiMedx Group, Inc. 2018 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, ophthalmic and dental applications. The filing covers the fiscal year ended December 31, 2018 and was filed March 17, 2020. It is the company’s first periodic report since June 2018 after previously issued financial statements for multiple periods were deemed unreliable and required restatement.
The company operates as one segment, Regenerative Biomaterials. Its principal products include EpiFix, AmnioFix, EpiCord, AmnioCord and AmnioFill. Wound care products represent the majority of revenue.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net sales | $359.1 million | $321.1 million | +11.8% |
| Gross profit | $322.7 million | $285.9 million | +12.9% |
| Gross margin | 89.9% | 89.0% | +90 bps |
| Operating income (loss) | $(3.9) million | $46.2 million | Declined |
| Net income (loss) | $(30.0) million | $64.7 million | Declined |
| Basic loss per share | $(0.28) | $0.61 income | Declined |
| Adjusted EBITDA | $69.1 million | $74.0 million | Declined 6.6% |
Fourth-quarter 2018 net sales were $92.6 million, gross profit was $82.2 million and net loss was $36.2 million. Fourth-quarter gross margin was approximately 88.8%.
- SG&A increased 17.4% to $258.5 million, or 72.0% of revenue.
- Investigation, restatement and related expenses were $51.3 million, compared with none reported in 2017.
- Research and development expense decreased 11.9% to $15.8 million.
- The company recorded a $26.6 million income-tax provision and established a $27.3 million valuation allowance against deferred tax assets.
- Revenue from direct customers was $343.5 million; distributor revenue was $15.6 million.
Cash flow, liquidity and capital structure
- Cash provided by operating activities was $35.8 million, down from $62.9 million in 2017.
- Cash used in investing activities was $9.2 million, primarily for $9.4 million of property and equipment purchases.
- Cash used in financing activities was $8.9 million, including $7.6 million of share repurchases and $4.9 million of share repurchases for employee tax withholding.
- Cash and cash equivalents were $45.1 million at December 31, 2018, compared with $27.5 million at December 31, 2017.
- Working capital was $2.5 million, with current assets of $74.0 million and current liabilities of $71.5 million.
- No borrowings were outstanding under the company’s revolving credit facility at year-end. The lenders terminated their commitments in August 2018 because the company was not current with SEC filings.
- Subsequent to year-end, MiMedx borrowed $75 million under a senior secured term loan entered into June 10, 2019. The loan bears interest at LIBOR plus 8.0% or prime plus 7.0%, matures June 20, 2022 and is secured by substantially all company assets.
Material changes versus the prior comparable period
- Revenue increased 11.8%, principally from favorable insurance coverage developments, higher unit volumes, expanded direct sales capacity and collections of prior-period billings. These benefits were partly offset by negative publicity, sales-force turnover and unfavorable coverage developments late in the year.
- Operating and net profitability deteriorated substantially because of investigation and restatement costs, higher SG&A, restructuring charges and increased tax expense.
- Gross margin improved to 89.9%, aided by product mix, the 2017 divestiture of lower-margin Stability Biologics and manufacturing yield improvements.
- In December 2018, the company announced a workforce reduction of approximately 240 employees, or 24% of its workforce, and incurred $6.1 million of restructuring charges.
- The company restated 2016 results and identified revenue-recognition errors affecting earlier periods. Restated 2016 revenue was $221.7 million versus previously reported revenue of $245.0 million; restated 2016 net income was $0.4 million versus previously reported net income of $12.0 million.
- The company adopted ASC 606 in 2018 without a material change to reported results because it continued deferring revenue until cash collection, net of expected credits and returns. Amounts shipped and billed but not recorded as revenue were $51.0 million at December 31, 2018.
Guidance, outlook, risks and unusual items
- Management expected 2019 revenue to decline 25% to 28% from 2018 and gross margin to decline 5% to 6% because of reimbursement pressure, negative publicity, sales-force turnover, product discontinuations, lower volumes and higher manufacturing costs. These estimates were unaudited and subject to changes in revenue-recognition timing.
- The FDA’s 2017 guidance indicated that micronized injectable products may require regulation as Section 351 biologics rather than Section 361 HCT/Ps. Enforcement discretion was scheduled to expire in November 2020. Failure to obtain BLAs or achieve cGMP compliance could require the company to stop selling affected products and could materially reduce revenue and earnings.
- MiMedx was pursuing three IND programs for AmnioFix Injectable: plantar fasciitis, knee osteoarthritis and Achilles tendonitis. Interim analyses indicated that larger sample sizes or protocol changes were needed, and BLA approval timelines were expected to extend by several years.
- BDO issued an unqualified opinion on the consolidated financial statements but an adverse opinion on internal control over financial reporting. Management concluded that disclosure controls and internal controls were ineffective as of December 31, 2018 due to material weaknesses across the control environment, risk assessment, control activities, information and communication, and monitoring.
- The Audit Committee investigation identified improper revenue recognition, undisclosed side arrangements, revenue-management activities, misleading communications to auditors and regulators, retaliation against whistleblowers and an inappropriate tone at the top.
- The company settled SEC claims in November 2019 without admitting or denying the allegations and paid a $1.5 million civil penalty. Related litigation and government investigations remained significant, including securities class actions, shareholder derivative suits, qui tam matters and VA-related investigations.
- At December 31, 2018, loss-contingency reserves totaled $15.6 million, including $6.9 million for a potential VA Federal Supply Schedule pricing matter and $8.7 million for other employee-related matters. The company stated that potential losses beyond recorded amounts could not be estimated.
- The company concluded that it expected to continue as a going concern, but warned that covenant violations, litigation costs, regulatory actions or inability to raise capital could materially impair liquidity.
Most important facts for an investor to verify
- Whether the restated historical revenue and profit figures fully capture the effects of improper distributor arrangements and other revenue-recognition practices.
- Progress and independent testing of remediation of the material weaknesses, including whether subsequent filings receive clean control opinions.
- Actual 2019 and 2020 revenue trends versus management’s 2019 decline expectations, including the effect of reimbursement restrictions and product discontinuations.
- Status of FDA cGMP remediation, BLA submissions and the regulatory treatment and marketability of micronized injectable products.
- Compliance with the $75 million term-loan covenants, minimum liquidity requirements, interest burden and maturity/refinancing risk.
- Ultimate cash exposure from securities litigation, shareholder claims, qui tam actions, VA matters, former-employee claims and other investigations.
- Whether the company can sustain positive operating cash flow while funding legal costs, compliance investments, clinical trials and manufacturing upgrades.
- Trading liquidity and relisting prospects following Nasdaq delisting and quotation of the common stock on the OTC market.