MiMedx Group, Inc. Form 10-Q Summary
Business context and reporting period
MiMedx develops and markets human placental tissue allografts for advanced wound care, surgical, orthopedic, spine, sports medicine, ophthalmic and dental applications. The Company operates in one segment, Regenerative Biomaterials, and sells through direct customers and distributors.
The filing covers the three and nine months ended September 30, 2019, although the request metadata identifies “2019 Q1.” The financial statements are unaudited. The filing was submitted as part of the Company’s effort to become current after the Audit Committee Investigation and restatement of previously issued financial information related to improper revenue recognition.
Key financial metrics
| Metric | Three months ended September 30, 2019 | Three months ended September 30, 2018 | Nine months ended September 30, 2019 | Nine months ended September 30, 2018 |
|---|---|---|---|---|
| Net sales | $88.9 million | $87.0 million | $222.9 million | $266.5 million |
| Gross profit | $75.7 million | $79.6 million | $192.5 million | $240.5 million |
| Gross margin | 85.1% | 91.5% | 86.4% | 90.3% |
| Operating income (loss) | $14.2 million | $0.4 million | $(16.3) million | $5.0 million |
| Net income (loss) | $12.4 million | $(0.2) million | $(18.1) million | $6.2 million |
| Adjusted EBITDA | $7.6 million | $22.3 million | $28.0 million | $54.3 million |
| Cash flow from operations | Not separately provided | Not separately provided | $(16.3) million | $34.3 million |
Basic and diluted earnings per share were $0.12 and $0.11, respectively, for the third quarter of 2019, compared with approximately $0.00 for the third quarter of 2018. Nine-month basic and diluted loss per share was $0.17, compared with earnings per share of $0.06 in the prior-year period.
At September 30, 2019, cash and cash equivalents were $94.1 million, total current assets were $134.0 million, and current liabilities were $73.4 million, implying a current ratio of approximately 1.8. Total liabilities were $139.7 million and stockholders’ equity was $39.6 million.
Debt consisted primarily of the Blue Torch term loan. The loan had a $75.0 million face amount, with $3.8 million classified as current and $62.2 million recorded as long-term debt, net of discount and deferred financing costs. The stated interest rate was approximately 10.33% at September 30, 2019. The loan was secured by substantially all Company assets.
Material changes versus the prior comparable period
- Third-quarter sales increased 2.2%, but nine-month sales declined 16.4%, primarily due to unfavorable insurance coverage developments, lower unit volumes, reduced sales personnel, prior-period collection effects and negative publicity associated with the investigation.
- Gross margin declined 640 basis points in the third quarter and 390 basis points for the nine-month period, primarily because lower production volumes increased manufacturing overhead per unit.
- SG&A declined 12.7% in the third quarter and 20.5% for the nine-month period, reflecting a workforce reduction of approximately 240 employees, or 24% of the workforce.
- Investigation, restatement and related expenses decreased in the third quarter by $9.0 million but increased for the nine-month period by $15.1 million to $46.4 million.
- The Company incurred $2.3 million of net interest expense for the nine-month period versus $0.3 million of net interest income in the prior-year period, primarily due to the Blue Torch borrowing.
- Operating cash flow shifted from $34.3 million provided in the prior-year period to $16.3 million used, while financing activities provided $64.0 million, including approximately $72.8 million of term-loan proceeds.
Revenue recognition and unusual items
Historical sales practices included undocumented side agreements, extended payment terms, return rights and other concessions that created uncertainty under ASC 606. Through the first two quarters of 2019, revenue generally continued to be deferred until payment was received or products were returned.
During the third quarter, the Company recorded a $21.4 million transition adjustment for certain unpaid customer arrangements where collection was considered probable within 90 days. It also wrote off approximately $10.3 million of customer contracts for which collection was no longer reasonably assured, together with $1.4 million of related deferred cost of sales. Beginning October 1, 2019, the Company determined that its remediation efforts generally supported recognizing revenue upon shipment for new and certain existing arrangements.
Management reported that the Audit Committee Investigation, restatement, legal matters and related negative publicity continued to affect sales, expenses, employee retention and financial performance. The Company also recorded a $0.4 million intangible-asset impairment for the nine-month period and received $0.3 million of other income related to a patent litigation settlement.
Guidance, outlook, liquidity and risks
Management did not provide quantified revenue or earnings guidance. It stated that existing cash, anticipated operating cash flows and financing proceeds were expected to fund operational liquidity needs and planned investing activities for the year following the filing date.
Management identified opportunities from demographic growth in advanced wound care and stated that it remained focused on research and development, cGMP compliance, investigative new drug applications and biologics license applications for micronized dHACM products. Research and development spending declined 25.0% for the nine-month period, primarily because of lower clinical trial activity.
- Disclosure controls and procedures were ineffective as of September 30, 2019 because material weaknesses in internal control over financial reporting remained unremediated.
- The common stock was suspended from Nasdaq trading in November 2018 and delisted in March 2019, limiting access to equity and debt capital markets.
- The Company faced SEC, Department of Justice, VA-OIG and other investigations, securities and derivative litigation, qui tam claims, intellectual-property disputes and indemnification obligations. Approximately $14.8 million was accrued for legal proceedings at September 30, 2019.
- The Company settled with the SEC in November 2019, paying a $1.5 million civil penalty. It also agreed in April 2020 to pay $6.5 million to resolve a Federal Supply Schedule-related qui tam matter.
- Subsequent to the reporting date, the Blue Torch loan was amended and then repaid on July 2, 2020 using proceeds from a $100 million preferred-stock issuance and a $50 million Hayfin term loan. Hayfin also provided a $25 million delayed-draw facility.
- The filing discusses COVID-19 risks, including potential effects on operations, clinical trials, healthcare systems, costs and liquidity.
Most important facts for investors to verify
- Confirm the filing’s reporting period: it covers the quarter and nine months ended September 30, 2019, not the first quarter of 2019.
- Reconcile reported revenue and cash collections to the ASC 606 transition adjustment, deferred revenue, accounts receivable and the $10.3 million customer-contract write-off.
- Assess whether revenue recognition controls and the five identified internal-control material weaknesses were remediated in subsequent filings.
- Review the effect of the sharp nine-month sales decline, lower gross margins and negative operating cash flow on sustainable earnings and liquidity.
- Verify the status, amounts and resolution costs of litigation, investigations, settlements and indemnification obligations.
- Review subsequent financing transactions, debt repayment, preferred-stock terms and the Company’s ability to satisfy Hayfin covenants.
- Evaluate the implications of Nasdaq delisting, limited capital-market access, regulatory requirements and COVID-19-related operating risks.