MiMedx(MDXG) - 2019 Q1 - Quarterly Report

Part I - Financial Information Item 1. Financial Statements The Q1 2019 financial statements show a $13.3 million net loss due to lower sales and high investigation costs, with subsequent financing activities undertaken to improve liquidity - The company's previously issued financial statements for fiscal years 2012-2016 and interim periods in 2017 were restated due to accounting irregularities in revenue recognition[8] - Due to an inappropriate 'tone at the top', the company recognized revenue upon cash receipt rather than product shipment under ASC 606[37][38] Condensed Consolidated Balance Sheets Total assets decreased to $107.4 million and stockholders' equity fell to $38.4 million, driven by a reduction in cash and the quarterly net loss Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $28,381 | $45,118 | | Total current assets | $57,187 | $74,049 | | Total assets | $107,442 | $122,844 | | Liabilities & Equity | | | | Total current liabilities | $64,347 | $71,547 | | Total liabilities | $69,090 | $73,189 | | Total stockholders' equity | $38,352 | $49,655 | Condensed Consolidated Statements of Operations The company reported a net loss of $13.3 million in Q1 2019, a sharp reversal from a $4.6 million net income in Q1 2018 due to lower sales and surging investigation expenses Q1 2019 vs. Q1 2018 Statement of Operations (in thousands) | Metric | Q1 2019 | Q1 2018 | | :--- | :--- | :--- | | Net sales | $66,555 | $84,149 | | Gross margin | $59,137 | $74,791 | | Selling, general and administrative | $50,862 | $65,910 | | Investigation, restatement and related | $18,107 | $2,113 | | Operating (loss) income | $(13,413) | $2,971 | | Net (loss) income | $(13,273) | $4,619 | | Net (loss) income per share - diluted | $(0.12) | $0.04 | Condensed Consolidated Statements of Stockholders' Equity Total stockholders' equity decreased by $11.3 million to $38.4 million, primarily driven by the net loss for the quarter - The net loss of $13.3 million was the primary driver for the decrease in total stockholders' equity during the first quarter of 2019[19] Condensed Consolidated Statements of Cash Flows Operating activities resulted in a net cash use of $15.3 million, a significant reversal from the prior year, leading to a $16.7 million decrease in total cash Q1 2019 vs. Q1 2018 Cash Flow Summary (in thousands) | Cash Flow Activity | Q1 2019 | Q1 2018 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(15,260) | $10,176 | | Net cash used in investing activities | $(433) | $(3,107) | | Net cash used in financing activities | $(1,044) | $(8,091) | | Net change in cash | $(16,737) | $(1,022) | | Cash and cash equivalents, end of period | $28,381 | $26,454 | Notes to the Condensed Consolidated Financial Statements Notes detail the company's business, a critical change in revenue recognition policy, legal proceedings, and significant subsequent financing events to secure liquidity - The company operates in one business segment, Regenerative Biomaterials, focusing on human placental tissue allografts for various healthcare sectors, primarily in the United States[24][25] - As of March 31, 2019, the company has accrued approximately $16.4 million related to various legal proceedings[103] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 20.9% revenue decline to insurance issues and negative publicity, while expressing confidence in future liquidity due to post-quarter financing - The company's business suffered from significant legal fees, fines, and penalties stemming from the Audit Committee Investigation, which also created challenges in sales and employee retention[128] - The company plans to continue investing in R&D, focusing on advancing its Biologic License Application (BLA) programs for its micronized dHACM product[130] Results of Operations Net sales fell 20.9% to $66.6 million, and despite a 22.8% drop in SG&A expenses, a $16.0 million increase in investigation costs drove the company to a net loss Q1 2019 vs Q1 2018 Key Operational Changes (in thousands) | Metric | 2019 | 2018 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $66,555 | $84,149 | $(17,594) | (20.9)% | | Selling, general and administrative | $50,862 | $65,910 | $(15,048) | (22.8)% | | Investigation, restatement and related | $18,107 | $2,113 | $15,994 | 756.9% | | Net (loss) income | $(13,273) | $4,619 | $(17,892) | (387.4)% | Liquidity and Capital Resources With current liabilities exceeding current assets and its stock delisted, the company secured major financing in 2019 and 2020 to ensure operational funding - On July 2, 2020, the company significantly improved its capital structure by issuing $100 million of Series B Preferred Stock and entering a new $75 million loan facility[118][119] - Proceeds from the July 2020 financing were used to repay a previous $72.0 million term loan, including a $1.4 million prepayment penalty[122] - The company's common stock was delisted from The Nasdaq Capital Market in March 2019, significantly limiting its ability to access capital markets[145] Non-GAAP Financial Measures The company reported a non-GAAP Adjusted EBITDA of $10.9 million after excluding $18.1 million in investigation costs and other non-recurring items from its GAAP net loss Reconciliation of GAAP Net (Loss) Income to Adjusted EBITDA (in thousands) | Metric | Q1 2019 | Q1 2018 | | :--- | :--- | :--- | | Net (loss) income | $(13,273) | $4,619 | | EBITDA | $(11,514) | $4,444 | | Adjusted EBITDA | $10,865 | $11,488 | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company states it had no material market risk exposure to its financial position, results of operations, or cash flows as of March 31, 2019 - As of March 31, 2019, the company determined there was no material market risk exposure[170] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were not effective as of March 31, 2019, due to unremediated material weaknesses in internal control - The CEO and CFO concluded that the company's disclosure controls and procedures were not effective as of March 31, 2019[172] - The ineffectiveness was attributed to unremediated material weaknesses in all five components of the COSO internal control framework, as described in the 2018 Form 10-K[173][174] Part II - Other Information Item 1. Legal Proceedings The company is party to various claims and lawsuits, with detailed information referenced in Note 13 of the Condensed Consolidated Financial Statements - This section incorporates by reference the detailed discussion of legal matters found in Note 13 of the financial statements[178] Item 1A. Risk Factors This section incorporates by reference the risk factors detailed in the company's Annual Report on Form 10-K for the year ended December 31, 2019 - Risk factors are not detailed in this report but are incorporated by reference from the 2019 Form 10-K[179] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 336,674 shares solely to cover employee tax obligations from vested restricted stock and made no unregistered sales of equity Stock Repurchases for Q1 2019 | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | Jan 2019 | 12,134 | $1.94 | | Feb 2019 | 323,860 | $3.15 | | Mar 2019 | 680 | $3.18 | | Total | 336,674 | $3.10 | - All shares repurchased during the quarter were surrendered by employees to satisfy tax withholding obligations upon the vesting of restricted stock[182] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities Item 4. Mine Safety Disclosures This item is not applicable to the company Item 5. Other Information The company reported no other information for this item Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including CEO/CFO certifications and XBRL data files