MiMedx(MDXG) - 2023 Q2 - Quarterly Report

Part I - FINANCIAL INFORMATION Item 1. Financial Statements Unaudited statements show significant Q2 revenue growth, a return to profitability, and a strategic shift away from Regenerative Medicine Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $68,652 | $65,950 | | Accounts receivable, net | $48,963 | $43,084 | | Inventory | $16,815 | $13,183 | | Total current assets | $141,223 | $134,198 | | Total assets | $176,378 | $171,430 | | Liabilities & Equity | | | | Total current liabilities | $44,460 | $43,557 | | Long term debt, net | $48,838 | $48,594 | | Total liabilities | $96,550 | $96,924 | | Total stockholders' deficit | $(12,666) | $(17,988) | - Total assets increased to $176.4 million as of June 30, 2023, from $171.4 million at year-end 2022, driven by increases in cash, accounts receivable, and inventory[17] - The company's stockholders' deficit improved, decreasing from $(18.0) million at the end of 2022 to $(12.7) million as of June 30, 2023[17] Condensed Consolidated Statements of Operations Q2 2023 vs Q2 2022 Performance (in thousands) | Metric | Q2 2023 | Q2 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Net sales | $81,257 | $66,883 | +21.5% | | Gross profit | $67,674 | $55,060 | +22.9% | | Operating income (loss) | $2,788 | $(9,636) | N/A | | Net income (loss) | $1,200 | $(10,868) | N/A | H1 2023 vs H1 2022 Performance (in thousands) | Metric | H1 2023 | H1 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Net sales | $152,933 | $125,777 | +21.6% | | Gross profit | $126,931 | $104,018 | +22.0% | | Operating income (loss) | $(590) | $(18,936) | +96.9% | | Net income (loss) | $(3,783) | $(21,357) | +82.3% | - The company reported restructuring expenses of $3.3 million in Q2 2023, which were not present in the prior year, related to the disbanding of its Regenerative Medicine business unit[19] Condensed Consolidated Statements of Cash Flows Cash Flow Summary for Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $3,727 | $(13,228) | | Net cash used in investing activities | $(1,025) | $(577) | | Net cash used in financing activities | $0 | $(776) | | Net change in cash | $2,702 | $(14,581) | - Cash flow from operating activities showed a significant improvement, generating $3.7 million in the first six months of 2023 compared to a use of $13.2 million in the same period of 2022[25] Notes to the Condensed Consolidated Financial Statements Key notes detail the discontinuation of the Regenerative Medicine unit, strong revenue growth, and segment performance dominated by the Wound & Surgical business - On June 20, 2023, the company announced it would disband its Regenerative Medicine business unit and suspend its Knee Osteoarthritis (KOA) clinical trial program to focus on its core Wound & Surgical business[27][102] Net Sales by Site of Service (in thousands) | Site of Service | Q2 2023 | Q2 2022 | YoY Growth | | :--- | :--- | :--- | :--- | | Hospital | $46,588 | $39,926 | 16.7% | | Private Office | $23,750 | $19,039 | 24.7% | | Other | $10,919 | $7,918 | 37.9% | Net Sales by Product Class (in thousands) | Product Class | Q2 2023 | Q2 2022 | | :--- | :--- | :--- | | Advanced Wound Care (Tissue/Other & Cord) | $81,238 | $66,163 | | Section 351 | $19 | $720 | - The company recorded a $3.3 million restructuring charge in Q2 2023, which includes a $2.1 million impairment of clinical trial assets, a $0.5 million goodwill impairment for the Regenerative Medicine unit, and $0.6 million in contract termination costs[102][105][106][107] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes strong Q2 sales growth to commercial execution and a strategic shift to the profitable Wound & Surgical business Results of Operations - Q2 2023 net sales increased 21.5% to $81.3 million from $66.9 million in Q2 2022, driven by growth in all care settings, particularly a 24.7% increase in the Private Office setting and a 37.9% increase in Other settings, which includes sales in Japan[120][121] - Gross profit margin improved to 83.3% in Q2 2023 from 82.3% in Q2 2022, attributed to yield improvements and a favorable sales mix[123] - Selling, General and Administrative (SG&A) expense decreased by 6.9% in Q2 2023 compared to Q2 2022, mainly due to lower professional service costs, personnel costs, and bad debt expense[124] - Research and Development (R&D) expense increased 54.2% in Q2 2023, primarily due to $2.1 million in severance expenses related to the disbanding of the Regenerative Medicine business unit and is expected to decrease in future quarters[125] Segment Performance - The Wound & Surgical segment's net sales grew 21.7% to $80.5 million in Q2 2023, with its segment contribution margin expanding significantly to 34.3% from 21.4% in Q2 2022[131][134] - The Regenerative Medicine segment incurred a segment contribution loss of $10.1 million in Q2 2023, driven by $6.9 million in R&D expenses and $3.3 million in restructuring charges following the decision to disband the unit[135][136][137] Non-GAAP Financial Measures Reconciliation of Net Income (Loss) to Adjusted EBITDA (in thousands) | Metric | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 | | :--- | :--- | :--- | :--- | :--- | | Net income (loss) | $1,200 | $(10,868) | $(3,783) | $(21,357) | | EBITDA | $3,634 | $(8,605) | $1,159 | $(16,874) | | Adjusted EBITDA | $14,102 | $(959) | $19,645 | $(2,678) | | Adjusted EBITDA margin | 17.4% | (1.4)% | 12.8% | (2.1)% | - Adjusted EBITDA is calculated by excluding items such as depreciation, amortization, interest, taxes, investigation costs, share-based compensation, and expenses related to the disbanding of the Regenerative Medicine business unit[168][169] Liquidity and Capital Resources - As of June 30, 2023, the company had $68.7 million in cash and cash equivalents and a current ratio of 3.2, with management believing existing cash is sufficient to meet obligations for at least the next 12 months[176] - The company has a $50 million senior secured term loan maturing on June 30, 2025, with an interest rate of 12.1% as of June 30, 2023, and was in compliance with all financial covenants[177][178][180] - Accumulated but unpaid dividends on the Series B Preferred Stock totaled $17.2 million as of June 30, 2023[185] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk exposure stems from interest rate fluctuations on its variable-rate $50 million Term Loan - A 100 basis point (1%) change in the SOFR rate would impact the company's annual interest expense by approximately $0.5 million, assuming the rate remains above the 1.5% floor[201] Controls and Procedures Management concluded that disclosure controls and procedures were effective with no material changes to internal controls during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of the end of the reporting period[203] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[204] Part II - OTHER INFORMATION Legal Proceedings The company is involved in ordinary course legal proceedings, with a key securities class action dismissal affirmed on appeal - In the Securities Class Action, the 11th Circuit Court of Appeals affirmed the District Court's dismissal of the case on July 10, 2023, with a petition for rehearing pending[87] - In the 'Welker v. MiMedx, et. al.' lawsuit alleging violations of the Georgia RICO Act, the company has filed a motion to dismiss, which is currently pending[88] Risk Factors No material changes to the company's risk factors have occurred since its 2022 Annual Report on Form 10-K - The company reports no material changes to its risk factors from those previously disclosed in the 2022 Form 10-K[207] Other Items (Items 2-6) This section confirms no material activity for Items 2-5 and lists the exhibits filed with the report - Items 2, 3, 4, and 5 are reported as 'None' or 'Not applicable,' indicating no activity in these areas during the quarter[208][209][210][211] - Item 6 lists the exhibits filed with the Form 10-Q, including certifications by the CEO and CFO and amendments to loan agreements[213]